Innovative Bank Passing, but Innovation Remains
Who will make risky loans to Southern California entrepreneurs and small business now that Imperial Bancorp is being acquired by Comerica Inc.?
The Detroit-based banking company, after all, is a much larger concern that boasts a “strong credit culture.” And words like that generally denote a tight-fisted approach to banking that can be hard on small businesses looking for unconventional financing. Or a savvy banker who will spring an overdraft Friday to carry the business through the weekend.
Imperial, from its founding 37 years ago by two shopping-center developers, has specialized in unconventional, risky loans. “We financed Yahoo Inc. in the early days,” Chairman George Graziadio says proudly. “We made loans to Jerry Yang [Yahoo’s co-founder] for equipment leasing and receivables.”
Lending to high-tech start-ups was not conventional behavior when Imperial, and a few other banks, developed ways to do it. Simply put, Imperial collected warrants on the borrower’s stock as well as interest on the loans. The warrants gave the bank an ownership stake that they could cash out if the company went public. Frequently, the payoffs more than compensated for the risks.
Will such innovative lending vanish along with Imperial’s independence? Not really. For one thing, Comerica on Wednesday underscored that it will continue Imperial’s practice of lending to emerging growth companies, reports analyst Charlotte Chamberlain of Jefferies & Co. in Los Angeles.
But there are factors behind Imperial’s decision to sell itself that indicate a sterner atmosphere emerging in banking and finance.
First, however, understand that everybody lends to small business in Southern California today, from Bank of America and Wells Fargo to Union Bank and Sanwa Bank, the latter two being subsidiaries of giant banks in Japan.
Out-of-state banks--Mellon from Pittsburgh, Fleet from Boston and Comerica from Detroit--have been setting up shop in this vibrant region for several years. Comerica already had built up $5 billion in California assets before moving to acquire Imperial.
And scores of smaller banks specialize in small-business lending, some in Chinese, Korean and other ethnic communities, others reaching out to broader markets.
City National of Beverly Hills, a onetime lender to the movie colony, has grown into an $8-billion assets leader in lending to entrepreneurial businesses throughout Southern California.
East-West Bank, a bank with $2 billion in assets, based in San Marino and in the Chinese community, is now backed by large brokerage and investment houses and is moving into the non-ethnic broader market.
Banks such as City National, East-West and Imperial don’t simply lend to small companies. They develop expertise in financing the specialized needs of firms in food processing, foreign trade, health care and other activities.
In recent months, such specialization has brought the banks growing profits and the approval of Wall Street investors, who have boosted stock prices of relatively small Southern California financial institutions.
The investors see local banks as potential acquisition targets for banks elsewhere wanting to buy into California’s growth. And they watch for loan quality.
“Investors like East-West and United Commercial [another Chinese community bank] because their loan portfolios are conservative,” says analyst Derek Derman of Wedbush Morgan Securities, a Los Angeles investment firm.
But Wall Street investors can be nervous overseers. Earlier this year, the stock market severely punished Imperial--sinking it to $13.50 a share--because bad loan problems cropped up in the second quarter.
In recent weeks, say local bankers, major Wall Street investors have urged Imperial’s Chairman Graziadio to sell the bank. The investors feared that a slowing economy nationally and locally would cause trouble for Imperial’s customers and lead to loans going bad.
Faced with the possibility of another stock price swoon, Graziadio agreed to sell to Comerica. And nervous Wall Street knocked 8% off Comerica’s stock Wednesday.
But investors are overdoing their fears. “It was a very good time for Imperial to sell, because the economy is slowing,” says banker Don M. Griffith, a veteran of First Interstate and Bank of America who is now chairman of First Coastal Bank in El Segundo. “And it was a good opportunity for Comerica to acquire a bank with a lot of talented people at a good price.”
If the economy does turn stormy, Comerica, at $41 billion in assets, has the heft to withstand bad weather. Graziadio meanwhile will remain to lead Comerica’s California operations for three years.
But who will take on the role of unconventional lender to the region’s entrepreneurs? It will probably be a combination of private-placement equity investment, coupled with loans from banks, says an expert. In other words, a new edition of the pattern Imperial Bank started 37 years ago.
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California Premium
Wall Street has boosted shares of small California financial institutions recently because of the state’s good business climate and also in hopes they’ll attract acquisition offers from out of state.
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Company (institution) Year-to-date gain Silicon Valley Bancshares (Silicon Valley Bank) 169.0% Downey Financial Corp. (Downey S&L;) 157.0 Golden State Bancorp (Cal Fed) 114.0 East West Bancorp (East-West Bank) 100.6 GBC Bancorp (General Bank) 82.0 City National Corp. (City National Bank) 32.8
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Source: Bloomberg News
