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Tuesday, May 21, 2024

Deal With Key Shareholder Likely To Ease CEO Search

It appears that Banc of California can strike proxy-battle skills from its list of job requirements when searching for a new chief executive.

The Irvine-based bank is likely more attractive to a top-tier candidate after its deal last week with Legion Partners Asset Management LLC, according to Ted White, co-founder of the Beverly Hills-based investment firm.

“Their ability to attract top candidates is getting better,” said White, whose firm owns 6.6% of the bank’s shares and had raised the prospect of a proxy fight before it forced some changes that have been well received by the market.

“The story is very positive here, and there is one of increasing momentum,” White said.

Bank Chairman Robert D. Sznewajs said he didn’t believe a proxy battle would have discouraged top-tier CEOs because they are professionals who are paid to run companies. He also said that he had anticipated resolving the dispute with Legion Partners before the annual meeting.

A deal struck last week to expand Banc of California’s board to nine members from its current seven—representatives of Legion Partners are expected to seek the new seats—settled the matter in any case.

The bank’s next big challenge is to find an executive to follow up on criticisms held over from former Chief Executive Steven Sugarman’s tenure. Among them: a federal probe over the bank’s handling of allegations of dubious personal links; relatively high compensation rates for top executives and board members; and a share price that lagged peers by a considerable margin in the months before Sugarman’s departure.

The new chief executive also will work for a largely independent board of directors that has already made several strategic moves since Sugarman resigned.

What type of chief executive does Wall Street want for Banc of California, the largest OC-based bank by assets, with more than $11 billion.

“The ideal candidate should have a well-established background in commercial and community banking,” said Jacquelynne Chimera Bohlen, an analyst who follows the bank for KBW Research.

The bank began its search on Jan. 23, the day Sugarman resigned as it revealed the Securities and Exchange Commission is probing how it handled allegations by an anonymous blogger about improper connections to an organized crime member. An investigation commissioned by the board refuted those claims in February. Shares soared 23% that day, the biggest single run-up in an overall rise of about 41% since Sugarman quit.

“The central issue was this is an incredibly valuable franchise, and it was trading at a significant discount,” said White, whose firm had the backing of one of the world’s largest mutual funds, the California State Teachers Retirement System. “There was a general view that this thing had grown very fast and had generally poor governance. The market viewed the strategy as a bit aggressive, and there were a lot of things out of the norm.”

The bank’s search for a new chief executive might take longer than the typical six months because of the upheaval on the board of directors, according to Charles Skorina, a San Francisco executive recruiter for investment firms who has worked in the banking industry.

The decision to add two board seats came about a month after the board appointed two new directors, Richard Lashley and W. Kirk Wycoff—both of whom represent large shareholders in the bank—to fill seats vacated by Sugarman and Chad Brownstein, the former vice chair who oversaw compensation.

Chairman Sznewajs declined to give a timetable or say how many candidates have applied for the chief executive post. He said the board is actively looking and is “very comfortable” with the candidates thus far.

The ideal candidate will strengthen the bank’s four pillars: reasonable and disciplined growth, strong asset quality, a focus on its 10 current businesses, and strong corporate governance, Sznewajs said.

“We’re looking for someone to embrace those pillars of our strategy. We’re clearly looking for somebody who understands our position in the market.”

The board has already taken several steps since Sugarman left, such as separating the roles of chairman and chief executive. It announced the sale of its home mortgage unit this month, a move that jettisons a relatively volatile line of business along with the servicing of an estimated $3.8 billion in unpaid balances of conventional agency mortgages and about half of Banc of California’s workforce of nearly 2,000.

Acting Chief Executive Hugh Boyle said the bank will concentrate on commercial lending that will boost its net interest margin, a key metric followed in the banking industry.

“The NIM should increase as we move forward in the next quarters,” Boyle said. “You can assume it will look similar to other banks with a similar size in assets.”

Boyle declined to say if he is running for the chief executive post, although he did say the board’s search includes candidates inside the bank.

Critics’ List

Banc of California shares rose 17% during Sugarman’s nearly five-year tenure, compared to an 87% rise of the benchmark KBW Nasdaq Regional Banking Index.

Investors questioned Sugarman’s deals that benefitted relatives or friends, and his compensation.

The Institutional Shareholder Services said Sugarman’s 2015 compensation of $2.6 million was about twice the peer median of similarly situated companies.

The board members themselves received pay almost three times the average of their peers, said ISS, which gave the bank’s compensation practices the lowest possible mark.

The board appeared to take a light hand to governance when Sugarman was chairman—he was the only director to attend last year’s annual meeting.

The new chief executive will probably get a seat on the board, said analyst Bohlen, who said a 10-member board isn’t too large for a bank of its size. A date hasn’t been set for the new seats to be filled or for the bank to hold its annual meeting.

White said the bank has a lot of potential.

“It will look more like a bank and less like a hedge fund,” he said. “California is a great economy, and the bank is a reasonable competitor in this space. The world is their oyster.”

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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