The two most profitable banking companies with assets in the $202 million-to-$273 million range are taking very different steps to achieve their success.

At National Mercantile Bank in Los Angeles, CEO Scott Montgomery has done a great job over the past five years. In 1995, when he arrived, the bank, founded in 1992, was in poor shape. Montgomery's job was to turn it around. It now ranks No. 1 in profitability in its size class.

"We've gone from being a not very good bank to this last year, when we added almost $10 million to our capital," Montgomery says. "A lot has changed in the last five years."

The pro-gress is clear. National Mercantile places 93rd out of 100 on our three-year profitability ranking, and 32nd in the five-year table.

But Montgomery has plunged the bank into areas that some experts deem to be fairly risky — health care and entertainment. In both industries, many far larger banks have taken large losses.

Montgomery acknowledges that the bank is not large enough to lend to the Sonys or MGMs (loans to which, of course, almost bankrupted the once mighty Credit Lyonnais of France). Instead, National Mercantile focuses on smaller independent film and television producers. It also funds such ancillary services as the audio mixes, post-production houses and music companies.

Asked about the risks in the business, Montgomery says the bank applies "very thorough cash-flow and collateral criteria. We approach the loans as we would approach any commercial loan. The person heading the entertainment division has 24 years of experience in lending to the industry."

The bank began focusing on health care only a year ago, another field known to be extremely risky. Montgomery says National Mercantile steers clear of HMOs, where "the risk is greatest." Some areas in health care are doing very well, he says. "We count among our borrowers individual practice associations, where four or five or so doctors join together in a business. Some of these ventures have even stopped taking medical insurance, or will only accept it for payment of half of the cost of service." The officer who heads the unit has 10 years of experience in loans to this area, says Montgomery.

National Mercantile's other key businesses include business lending, private banking and community-based nonprofits.

The niche approach was part of Montgomery's turnaround strategy. "I've been in the business for 32 years and I've had the chance to run several community banks," he says.

Recently, the bank started focusing on community-based nonprofits, which Montgomery says are a good source of stable funding. They often have building campaigns, and the funds from those campaigns wind up in the bank as deposits. It's "a deposit play, not a loan play."

The No. 2-ranked Eufaula BancCorp is based in Eufaula, AL. It is the holding company for two banks — Southern Bank of Commerce and First America Bank, which is in the Florida panhandle town of Santa Rosa Beach.

Its ranking was helped by the sale of two branches last year, which boosted its return on equity to 16.8%, and which helped it achieve seventh place in per-share earnings growth.

"We deal with the small business customers that have usually been passed over by the large regional banks," says Charlie Schaeffer, president of Southern Bank of Commerce, which was founded in 1926. "These customers are simply not on the radar of a SunTrust or a SouthTrust or AmSouth. But it's a very profitable business for us."

Schaeffer says the bank responds quickly to loan requests. "We get back to a small business loan request very, very quickly — within 24 to 48 hours, and can make a fast decision even on the most complicated deals."

He attributes that to the lack of bureaucracy and the fact "we don't have to go through several layers of authority to get a loan approved." Together, the presidents of both banks can authorize loans of up to $1 million.

Southern Bank has offices in Eufaula and Montgomery, Alabama's capital, which has a very stable

economy because the state government is based there. In addition, Montgomery's been growing. "Eufaula is quieter," says Schaeffer, "but we have a good industrial base, and tourism is one of our big industries — we have a large lake and old antebellum homes that draw tourists."

The Florida bank prospers from a boom in construction in the panhandle, he says.

Like most small bankers, Schaeffer says the biggest challenge he faces is maintaining and growing deposits. "It's slow. Rates are low and it's hard to attract CD money. All these nonbanks like Merrill Lynch are out there. It's difficult, it's a real challenge."

The rate drops by the Fed squeezed the bank's margins, but Schaeffer expects that the margins will grow again as it reprices.

"This is my hometown," says Schaeffer. "I grew up in Eufaula. I'm 44 years old. I got out of college and went to work for SouthTrust. In 1992, I came to Eufaula BancCorp, where I was senior loan officer until being made president in 1997."

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