L.A.'s No. 2 bank grows as affiliates prepare to merge.

A little-known Oak Park, Ill. bank holding company is about to merge its two Los Angeles subsidiaries, California National Bank and Fidelity Federal Bank, and bolster what's quietly emerged as L.A.'s second-largest financial institution, with $5.7 billion in assets across 57 branches.

The merger, which takes effect Oct. 28, will extend the bank's network from Ventura to Orange County and from Pacific Palisades to the eastern end of the San Gabriel Valley.

California National vaulted to the top tier of L.A. banks last year when its holding company, FBOP Corp., acquired PBOC Holdings Inc., parent of Peoples Bank of California. The deal, which gave California National $3.5 billion in assets, made it the second largest L.A.-based bank, behind $11 billion-in-assets City National Corp., based in Beverly Hills.

Just two years ago, California National was the 15th largest bank based in Los Angeles, one of a handful of community banks with assets just under $1 billion.

The bank resulting from the merger, which has not been announced, will be known as California National. "It's remarkable, because it's been done fairly quietly," said Jim Hill, a managing director specializing in banks at investment bank Friedman, Billings, Ramsey & Co.

"We've elected to refrain (from marketing) until we could have a flawless back office and a service culture that sets us apart from our competitors," said Greg Mitchell, president and chief executive of both California National and Fidelity Federal banks. In October, the bank said, all that will be left to do is combine the balance sheets and introduce a new logo.

California National has not trumpeted its expansion, although that will change next month, when it announces a marketing campaign.

"We'll effectively hit a switch," Mitchell said.

Heading West

Privately held FBOP, with $10.5 billion in assets and controlled by Illinois investor Michael Kelly, owns banks in the Chicago area, Texas and is in the process of buying a bank in Arizona.

The press-shy Kelly, who did not return calls seeking comment, started EBOP in 1981 with the purchase of then-troubled First Bank of Oak Park. A one-time executive at Norwest Corp., since merged into Wells Fargo, Kelly has garnered a reputation for buying troubled banks on the cheap and then turning them around.

His expansion into California began with the July 1996 purchase of Torrance Bank, a single branch operation with $115 million in assets, for 64 percent of its book value.

Later that year, FBOP bought Topa Savings and Topa Thrift from billionaire L.A. investor John Anderson, adding about $400 million in commercial real estate loans and assets to its portfolio.

In January 1998 the collection of assets were merged together and renamed California National Bank.

FBOP's biggest splash came when it agreed to buy Los Angeles-based PBOC Holdings Inc., the holding company behind People's Bank of California, in April 2001. The deal, for $193 million in cash, more than doubled California National's size.

"Once we completed People's, planning (to build the California National brand) kicked into high gear," said Mitchell, who had been an investment banker and a regulator for the Office of Thrift Supervision before taking the top job at California National about a year ago.

Just months after the People's deal closed, FBOP announced it would buy Bank Plus Corp. for $147 million in cash, just under two times book value, adding another $2 billion in assets. It was by far EBOP's most expensive acquisition to date.

The ailing Bank Plus had lost $118 million between 1998 and 2000. Over the like period the bank trimmed its asset base to $2.2 billion from $3.7 billion as it fought to clean up its portfolio. In June 2000, federal regulators ordered the bank to strengthen its underwriting standards.

Since the acquisition, all but: one member of Bank Plus' senior management has been replaced, but some problems have lingered.

EBOP agreed in July to a $1.6 million settlement with the Justice Department, which alleged that First Fidelity discriminated against Hispanics in its lending practices. The suit arose from an examination by the Office of Thrift Supervision in May 1999, when the discriminatory practices were identified.

"Without admitting wrongdoing we elected to reach an amicable settlement with the Justice Department' Mitchell said. "Despite the sins of the parent, the subsidiary and the people are extraordinary."

Besides California National Bank, FBOP bought San Diego National Bank, which has $1.5 billion in assets, for $27 million. Mitchell said FBOP has no plants to merge San Diego National with California National. "We're two distinct organizations growing in unique markets," he said.

Local approach

Maintaining the branding of its portfolio of community banking assets is a standard strategy for FBOP. The company owns four separate banking organizations in the greater Chicago area and two in Texas.

"They've shown the discipline not to put their name on everything they buy," said Robert Schack, chairman of American Business Bank in Los Angeles. "Too often acquiring banks make the mistake of trying to change everything right after a purchase. There are reasons why people stay with their banks."

Bob Heskett, president of FBOP, said, "We run community banks and they will remain that way. That's our style, that's our goal."

In recent months, FBOP has also made limited moves into underserved communities.

In March, FBOP's agreement to purchase Family Savings Bank stalled when community leaders, including Rep. Maxine Waters, D-Calif., charged that new ownership would ignore the South Central L.A. institution's black customer base.

Family Savings, which has $196 million in assets, backed out of the deal and was ultimately sold to Boston Bank of Commerce, which is black-owned, for a reported $12 million.

In July, FBOP agreed to buy a Maywood office from Operation Hope Inc., a non-profit credit counseling company based in Los Angeles, in hopes of setting up a branch there.

Mitchell said selling California National to a mega-bank, which in recent history have paid top dollar to get into the Los Angeles market, is "not an option."

"If you're a privately held company you can take a long term view," he said.

As for continued growth, Hill, of Friedman Billings, said barring a spectacular deal, he thinks the bank will lay off the acquisitions for a while. "My guess is they will focus on increasing profitability and expand discreetly," he said. "They have a critical mass now."