FCB, National Mercantile latest in merger flurry.

In banking at least, it seems that size does matter.

So went the thinking behind the just agreed-upon merger of Camarillo-based FCB Bancorp and National Mercantile Bancorp in Century City, a move that mirrors a burst of merger activity among banks across the country.

The merger, a stock transaction expected to close in the fourth quarter of the year, will create an entity with assets of nearly $1 billion, enabling the new bank to double its lending limit while saving something in the neighborhood of 7 percent to 12 percent in operating costs.

"This will create a larger platform to realize benefits from a larger organization," C.G. Kum, president and CEO of FCB, who will also assume the top job at the merged bank, told a group of investment bankers recently.

Following the merger, FCB and National Mercantile will create a new bank called First California Financial Group.

"I particularly like the words financial group because I believe over the next five or ten years, banks will have to add more than just banking services," Scott Montgomery, CEO and president of National Mercantile, said in a conference call.

The bank will be headquartered in Camarillo with Kum as president and CEO. Montgomery, who will be 65 in March, will retire once the transition is complete.

The new board will be comprised of five directors from each of the banks.

In a conference call to analysts Montgomery and Kum said that the merger will provide the bank with resources that neither company enjoyed independently.

As a matter of course National Mercantile Bank was selling off loans it would have preferred to keep on its books because of the bank's legal lending limits. And as sales at some of its clients grew and they sought larger and larger credit lines, it was likely that they too would have to be turned away.

Kum said that, although FCB has grown to just under $500 million in assets from $100 million when he arrived six years ago, lending limits, based upon a bank's net worth, limited its lending abilities as well.

The new bank will rank 12th in Los Angeles County, up from the 17th and 18th spots that the two organizations occupied prior to the merger.

With the merger, the new bank's lending limit will increase to the $15 million to $18 million range.

The move by FCB and National Mercantile is part of a larger trend in the banking industry, which has seen mergers and acquisitions jump by more than 14 percent annually since 2003 when there were 276 such transactions across the country, according to data from American Bankers Association.

"In the first quarter of this year, there've been 85 bank mergers," said Keith Leggett, senior economist at Washington, D.C.-based ABA. "I think fight now it seems the pace is on track for 2004 and 2005 levels (with 322 and 315 mergers respectively). That reflects several factors."

Leggett noted that as the stock market has improved so too have the prices banks can command. Many too are flush with excess capital after several years when lending slowed in 2003 and 2004. At the same time, banks are facing far more regulatory burdens, and smaller institutions have been hard-pressed to handle the expense of compliance.

The National Mercantile/FCB merger grew out of somewhat different needs. National Mercantile had been looking for a merger partner for several years, in part to assist with succession planning.

But officials at both banks also recognized that, with more mass, they could afford resources that neither could accommodate independently.

"National Mercantile and FCB were not able to afford certain capabilities we will now be able to afford--a marketing officer and a full-fledged compliance staff," Kum told the analysts. "One of our objectives is not to lose talented bankers."

Besides their combined size, the bankers expect to benefit from the fact that the two banks have operated in somewhat different sectors and in distinct geographies with little overlap.

First California operates eight branches in Thousand Oaks, Simi Valley, Westlake Village, Anaheim Hills, Irvine, Oxnard in addition to Camarillo.

The bank's commercial mortgage group is based in Sherman Oaks.

National Mercantile, which also owns South Bay Bank, has one branch in Encino. Torrance-based South Bay has an El Segundo branch and a regional loan production office in Costa Mesa.

"There literally is no branch overlap here," said Montgomery.

For the most part, though, the bank officials said that the anticipated cost savings will come from combining the operations of both banks, particularly legal, data processing, compliance and audit and some staff overlap.

"One area that comes to mind is my associate Scott will be retiring," Kum joked with the analysts.

About 25 percent of National Mercantile's lending business comes from entertainment lending.

"If it's not the most profitable division, it's the second most profitable," Montgomery said.

And First California has a small-business lending program while National Mercantile does not.

"It is our intent to grow the division due in part to higher legal lending capability that the company will have," said Kum of the National Mercantile entertainment lending division. "There will be opportunities to buy back participations or to be involved in transactions that are much larger."

Nestle Changing Diet

The media had some fun characterizing Nestle as playing both sides of the fence when it announced plans to acquire Jenny Craig.

But somewhat lost in the joke was the increasingly acquisitive bent of the Swiss chocolate maker with U.S. headquarters in Glendale.

The acquisition of Jenny Craig Inc., a weight loss products and services provider for about $600 million, is just one of a number of acquisitions Nestle has made in recent years.

The company acquired Power Bar in 2000 and Hot Pockets in 2002 and, this year, it bought an Australian maker of nutritional cereals and snacks.

The company's expansion and diversification likely will not stop there.

When the U.S. company hosted a meeting of venture capitalists, Maverick Angels, several months ago in Glendale, officials told the group that the company was embarking on an internal effort to develop new products in a more entrepreneurial environment and partner with other entrepreneurial companies.

Called an "innovation development system," Nestle is sponsoring retreats that allow some of its employees to work free of the requirements of sales reports and phone calls in order to brainstorm ideas and develop new products.

At the same time, the company said, it plans to approach M&A somewhat differently, partnering with nascent companies and assisting them in reaching the kind of critical mass that would make them attractive to the M&A market.

BY SHELLY GARCIA

Senior Reporter