One day Scott Carpenter was a the top executive in charge of middle- market lending at Security Pacific National Bank, where he courted the Fortune 500. The next, he was chairman of a bank whose $29 million in equity capital was half his old loan limit, and whose typical customer had $5 million in annual sales.

And Mr. Carpenter made the change voluntarily.

"We came here to build an institution that could compete with the big banks," said Mr. Carpenter, chairman and CEO of $280 million-asset California United Bank, based in Encino, Calif. "We've tackled that with a great deal of enthusiasm."

Indeed, the story at Cal United is more than a successful turnaround. It is the tale of how a small company is building a franchise by targeting profitable niches and by reengineering a costly small-loan underwriting process.

Working with former BankAmerica Corp. executive David Rainer, who is president and chief operating officer at Cal United, he has focused on small to midsize companies in Los Angeles.

Though they have other targets, they have made a specialty of lending to immigrant-owned manufacturers - a niche where margins are good, because few banks are courting the small companies.

"That business has been theirs to have," said Campbell Chaney, banking analyst at Rodman & Renshaw. "As competition gets really tight for loans of all kinds, those kinds of niches can be difficult to find and to keep."

Though the bank's return on average assets is a distinctly average 1%, the strategy has planted the seeds of future profits. At the end of the third quarter, the company reported $160 million in total loans, up just over $30 million from a year earlier.

Mr. Carpenter says being small is one reason for the success. He estimates that Cal United, with three regional offices and one loan production office, gets two-thirds of its new business by taking it away from big banks like the one he used to work at.

The focus: customers with $5 million to $30 million in sales and credit needs of $1 million to $3 million.

But there are other niches. The bank is also drawing customers through an international trade services group formed to handle letters of credit, foreign exchange, and foreign collections for customers involved in foreign trade. And the Westwood office has a specialty in working with the entertainment industry.

"The real enjoyment we derive in this business is in the relationships we develop with our customers," said Mr. Rainer. "You are more likely to develop a relationship with a smaller company than with a more sophisticated middle-market company that is focused on rates."

But when he came to Cal United in July 1992, the emphasis was less on strategy and more on survival. The bank, with assets of $500 million, was overloaded with real estate-linked loans, and some investors considered its management arrogant.

Regulators, too, were unenthusiastic about the way the company was being run. Both the Comptroller of the Currency and the Federal Reserve Bank of San Francisco has formal agreements with management.

The bank was freed of these agreements barely a year later - an incredibly short period by most standards - after Mr. Carpenter took control. "They proved this was a bank worth saving," said Mr. Chaney.

The first order of business was to shrink the balance sheet by nearly half and to cleanse the books of sticky real estate loans.

In 1992, problem assets totaled $27 million. By Sept. 30, that had been trimmed to $113,000. The bottom line improved from a loss of $8.2 million two years ago what is expected to tally up as a $2.4 million profit for 1994.

How quickly profits grow will depend on the ability of Cal United to leverage its balance sheet through acquisitions (see sidebar) and loan growth. With its troubles behind it, the former big bankers as pushing to expand its lending and fee income.

Trying to jump-start its lending in 1993, Cal United put together a list of its top 250 prospects. The sources: a list of would-be small and middle- market customers developed from telemarketing efforts; input from on-the- street bankers; and the long memories of veteran bankers.

Then, everyone from Mr. Carpenter on down hit the pavement to talk with prospects. More than a year later, this approach has not changed.

"The sales culture here is intense," said John Callos, a senior vice president and head of Cal United's 18-month-old SBA department.

The bank's executives are regularly pushing their staff for growth. Seasonal and theme-based sales contests promote specific goals.

For example, at the beginning of football season the bank put the names of its officers and their sales targets on Nerf footballs. The targets were set at realistic levels, though, to avoid scaring the bankers. Last year the company raised its new loan commitment by $20 million; for this year, the SBA department alone is aiming for $20 million in new business.

Following a trend among banks of all sizes, Cal United wants to make it easier to generate new business, by centralizing some credit analysis functions. Mr. Callos hopes that looking at the bank as if it were a production facility will make approvals flow better, faster, and at lower cost.

The process could also help eliminate such bottlenecks as having to go back to ask the borrower for additional documentation.

"The challenge for me and the rest of the bank is getting enough production at the top of the funnel to meet that goal," Mr. Callos said.

For the SBA department, that production will be different than for most lenders. "While many banks and active lenders have chased the real estate side of the SBA business, we have tried to complement our commercial loan business," said Mr. Rainer.

In some cases the bank will look for the SBA to secure a term loan for a portion of the customer's inventory. At the same time, the bank will layer in an unguaranteed term loan that can reach $1.5 million.

The potential payoff of Cal United's strategy may be best exemplified by the expansion of the company's net interest margin. The company has benefited from rising interest rates as its variable-rate loans adjust faster than the cost of cheaper demand deposit accounts from small business clients.

At a time when most banks are seeing the margin contract and profits wither, Mr. Carpenter's bank had reached an incredible 6.33% by the end of the third quarter. That is up from a healthy 4.94% the same time a year before.

Outsiders say that even as the cost of funds rises, the margin probably won't fall below 6%.

"They're just in hog heaven," said Mr. Chaney.

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