The executives at American Business Bank in Los Angeles do not think of American as a community bank.
"We're more like a regional bank," said Donald P. Johnson, American's president and chief executive. "It's just that we haven't gotten big enough to be called that yet."
Since its opening in 1998 the $504 million-asset American has practically ignored the small businesses that most start-ups target. It has focused mainly on middle-market companies with revenue of $5 million to $150 million, offering not just loans but cash management, treasury, and international trade finance services.
It has taken this route because its top managers, all veteran middle-market bankers, believed they had the expertise and following to concentrate right away on larger companies. They had all worked together at what was widely considered one of the most successful Los Angeles banks specializing in this niche: 1st Business Bank, which was sold in 1997 to Mellon.
To get around its lending limits as a start-up, American Business Bank participated with other banks on large loans. The limits are rarely an issue now, and besides, it focuses as much on providing services as on lending.
"There are 30,000 middle-market companies in our market, where relationships with their banker matter more than transactions," Mr. Johnson said. "Our relationship managers go out to these companies and spend six months to as long as three years getting to know them, so that they'll move their entire relationship here."
This approach is apparently working. American Business Bank's earnings and assets have increased by 30% or more in each of the last three years, with net income rising 65% in 2004, to $3.4 million.
Of course, other start-up community banks could emphasize middle-market customers. But most executives at such banks are from community banks that stuck to a small-business approach even when they went after larger customers in later years, because management believed that was where the bank could thrive. Also, their tight lending limits preclude their lending to companies with larger borrowing needs.
Richard A. Soukup, a partner with the Chicago accounting and consulting firm Grant Thornton LLP, said community banks typically will not begin courting middle-market until they reach several hundred million dollars of assets, if at all.
Over all, he said, American Business Bank does not have much competition in this niche from other community banks. Moreover, he said, "they've got a competitive advantage over the larger banks because they're most likely the only ones who can offer the high-touch service and agility of a community bank."
Gary Kaplan said that was why Resource Sales and Marketing LLC in Calabasas, Calif., switched its business six years ago from Bank of America Corp. to American Business Bank.
Mr. Kaplan is the owner of Resource Sales, which sells frozen poultry to restaurant distributors. For most of the year it can operate with a limited credit line, but once a year it needs to extend it by about $500,000 so it can lock in favorable prices on chickens.
"At Bank of America, if you wanted to extend yourself beyond your line of credit, there was a lot of red tape you had to cut through, and I was just not comfortable doing business like that," Mr. Kaplan said. At American Business Bank, "all it takes is one phone call, and I get verbal approval right away."
Campbell Chaney, an analyst at Sanders Morris Harris Group in San Francisco, said big banks like Bank of America and Citibank tend not to assign bankers to personally handle accounts of business with revenue below a certain amount. Those thresholds vary, Mr. Chaney said, but are generally much higher than the revenues of American Business Bank's customer base.
However, American Business Bank may have to work harder to compete with regional banks that do have bankers personally handling the accounts of middle-market customers. These rivals include Union Bank of California, a unit of the $51.3 billion-asset UnionBanCal Corp. (which is mostly owned by Mitsubishi Tokyo Financial Group); Bank of the West, a subsidiary of BNP Paribas' $54.6 billion-asset BancWest Corp.; and City National Bank, a unit of the $14.4 billion-asset City National Corp. in Los Angeles.
But the top managers' experience at the $1.2 billion-asset 1st Business is an ace up American's sleeve, Mr. Chaney said.
"1st Business Bank has always been held in very high repute, because they were so successful over the years transacting business in that middle market," Mr. Chaney said. "These guys that came out of that bank have a very blue-chip reputation."
Their talent and contacts helped American Business Bank start making a profit in March 2000, said David Harvey, the founder and manager of Hot Creek Capital LLC, a hedge fund based in Reno that invests in community banks. The team's ability to recruit prominent Los Angeles businesspeople as investors has also helped American Business Bank.
"Their shareholders are some of the most prosperous and important people in L.A., and so companies want to bank there, because of the networking opportunities," Mr. Harvey said.
American's third-quarter net income rose 64%, to $1.5 million. Loans grew 15%, to $168 million, though American does not make near as many loans as other banks its size. Its ratio of net loans and leases to deposits was 36.35% as of June 30; the average ratio is 86.10% for banks its size, according to the Federal Deposit Insurance Corp.
American Business Bank's loan-to-deposit ratio mirrors that of other banks that strictly focus on middle-market customers, said Edward Carpenter, the chairman and CEO of Carpenter & Co., an Irvine, Calif., investment bank that specializes in financial institutions.
Most of these customers are established companies with modest borrowing needs. But every now and then they seek credit-line extensions above $500,000 or commercial real estate loans in the $1 million to $2 million range to buy their own buildings.
On rare occasions when the loan requests exceed American Business Bank's lending limits, American will participate with larger banks as the lead bank to make the loan.
Another way banks catering to middle-market companies make money is by charging service fees for cash management, international trade finance, 401(k) plan management. They also help themselves by getting good interest rate spreads, because middle-market companies tend to keep a lot of money in their accounts.
Indeed, Mr. Johnson said American's average account balance is $1 million. Since more than a third of its deposits are in non-interest-bearing accounts, the bank's cost of funding ratio is very low - it was 0.69% at midyear, versus 1.80% for its peers. Its net interest margin was 3.90%.
American has been able to generate solid earnings with fewer loans on its books because it has less than 60 employees, Mr. Johnson said. It has assets per employee of $8.78 million; its peers' average is $3.78 million. Its branches look more like loan production offices, and they are staffed by a few relationship managers who make routine calls to their customers (the bank also has courier services).
Though he could not say whether American's loan-to-deposit ratio would ever substantially increase, Mr. Johnson said its earnings could keep rising even if that ratio remained the same - as long as the assets-to-employee ratio stayed relatively low.
Despite going up against regionals and the bigger banks, American should continue to grow, Mr. Carpenter says, because the middle market is the fastest-growing market in the Los Angeles area.
Mr. Johnson said he expects American's assets to double within five years and reach $2 billion within 10. He said it will probably be mostly organic growth but that the board may consider buying other banks.
"The only problem," he said, "is that it's hard to find acquisition candidates that serve the same type of customers we do, but we're still looking."
