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Wednesday, May 25, 2022

Investors Banc on Change

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What if the largest bank in Orange County held its annual shareholders meeting and none of its directors came?

Not likely this year for Banc of California, which is scheduled to hold this year’s gathering sometime this spring.

Whether or not storm clouds gather in the form of a proxy fight as winter yields to spring remains in question for the Irvine-based bank, which leads all locally based institutions in terms of assets, with about $10 billion.

One thing is certain for this year’s meeting: Steve Sugarman won’t be among the directors in attendance.

Sugarman resigned his posts as chairman and chief executive and gave up his board seat in January amid controversy. He was the lone director to make last May’s annual confab at the Pacific Club, according to Richard Lashley, a co-founder of PL Partners, one of the bank’s largest shareholders, with a 6.9% stake.

Lashley said last year’s meeting did not include a formal presentation or the chance for shareholders to ask questions.

“In my 35 years of professional experience, I cannot recall an annual meeting where all or the vast majority of the directors did not attend,” Lashley wrote Sugarman after that meeting.

Sugarman’s resignation isn’t the only recent and dramatic change at Banc of California in the past month.

Chad Brownstein, the vice chair who also oversaw compensation, resigned from the board post this month.

The Securities and Exchange Commission continues an investigation into how the bank handled allegations last October of inappropriate contacts with organized crime. An outside legal firm cleared Banc of California of the allegations, but it now faces at least 10 lawsuits challenging how it handled the matter.

Lashley replaced Sugarman on the seven-member board. Brownstein’s seat went to W. Kirk Wycoff, founder and managing partner of Patriot Financial Partners, a Philadelphia-based firm that owned 7.1% of the bank’s shares, according to its 2016 proxy.

Neither Lashley nor Wycoff returned calls seeking comment.

Interim Chief Executive Hugh Boyle, meanwhile, isn’t on the board. The bank is still searching to fill that executive position, as well as the chief financial officer’s position. James McKinney resigned as CFO last September after less than a year, leaving for Kemper Corp., an insurance firm based in his hometown of Chicago.

A third activist fund, Legion Partners Asset Management LLC, wants two of the three board seats that are up for grabs at the upcoming annual meeting and is threatening a proxy fight. Legion Partners is allied with the California State Teachers Retirement System, one of the world’s largest pension funds, with $198.8 billion in assets under management.

Ted White, Legion’s managing director, was the director of corporate governance at the California Public Employees’ Retirement System, where he was responsible for proxy voting.

White told the Business Journal he couldn’t comment on Banc of California.

This year’s board election will cover three seats, all with incumbents expected to seek new terms.

One of the seats is held by Chairman Robert D. Sznewajs, who stepped into the job after Sugarman’s departure.

Eric L. Holoman—the operating partner of Magic Johnson Enterprises and a former two-time president of the Los Angeles City Employees Retirement System—has another.

A third seat is filled by Halle Benett, managing director at Melody Capital Partners. Benett initially intended to step down from the board when his term ended, but decided to seek re-election after Sugarman departed.

Each of the board members was compensated at between $224,558 and $327,082 in 2015, according to the 2016 proxy. The average outside director’s compensation was 2.9 times the median of company peers, the Institutional Shareholder Services reported last year.

Will they attend this year’s meeting?

“A contingent of the board members will be attending the annual meeting this year, although I cannot guarantee that everyone will be there,” bank spokesperson Joe Hixson said.

Banc of California directors and executives declined to speak about the potential proxy fight. The bank sent a statement to the Business Journal saying it has taken many steps in the past month to improve corporate governance and is conducting a national search for a CEO.

Sugarman, who was 38 when he became chief executive of First PacTrust Bancorp, merged it with the Private Bank of California, and changed the combined entity’s name to Banc of California. Then came a growth streak that more than quadrupled Banc of California’s assets to $11 billion through a series of acquisitions and organic growth.

Wall Street was only mildly impressed—shares lagged the benchmark KBW Nasdaq Regional Banking Index for most of Sugarman’s tenure, then beat the benchmark for about a year before sinking precipitously amid the recent controversies.

“The strategy and story told to investors wasn’t compelling,” said Gary Tenner, an analyst at D.A. Davidson who rates the shares a buy with a $22 target price.

Banc of California almost broke even—it posted an $84,000 loss in 2013—before starting a steady rise in profits, with net income of $32 million in 2014, $60.1 million in 2015 and $115.4 million last year.

Investors on Wall Street nevertheless frowned on the bank’s capital management as it became known as a “serial issuer” of stock and debt that didn’t compare favorably with peers, Tenner said. Banc of California reported 49.9 million common shares as of Dec. 31, almost five times the 11.7 million shares at the end of 2012, when Sugarman took over.

Lashley last May criticized the company’s stock incentive plan, saying it included up to 20% of the outstanding shares.

“It is unfair to burden current and future shareholders with the dilution from this plan,” Lashley wrote.

Corporate governance at the bank also created consternation among some investors.

The bank rated the lowest possible score of 10 on governance risk, according to a report by ISS.

Among the reasons for concern, according to Tenner, were deals the bank made that involved relatives and acquaintances of Sugarman.

“Those types of cronyism was one of the things that investors didn’t like over time,” Tenner said.

Banc of California is spending $100 million to obtain the naming rights for a soccer stadium in downtown Los Angeles that will cost $350 million. The naming rights were one of the richest prices ever in Major League Soccer, Bloomberg reported in September. Sugarman’s brother, Jason Sugarman, is a minority investor in the team, the Los Angeles Football Club. And Jason Sugarman’s father-in-law, Peter Guber, the famous Hollywood mogul, is executive chairman of the club.

“That transaction raises serious questions about governance and wasting corporate assets,” Lashley wrote in a September letter. “That transaction is also apparently rife with potential and actual conflicts of interest.”

The latest tumult started in October when an anonymous blogger on Seeking Alpha accused the company of inappropriate connections with a convicted felon, Jason Galanis, who is reported to have ties to organized crime. The blog post was followed by the bank’s announcement that its board of directors had initiated an independent inquiry into the allegations.

The bank retracted the press release three months later, pointing out that the investigation was conducted on an internal basis by management, and wasn’t independent.

Sugarman resigned at the same time the correction was made public, and the bank announced the SEC was investigating.

The bank two weeks later announced what it characterized as a genuinely independent investigation by Boston-based law firm WilmerHale that exonerated the company of accusations of improper relations with Galanis.

Shares soared 23% that day, the biggest single-day gain in a run-up of 31% since the day Sugarman left.

The board has since approved a new policy that tightens the controls on outside business activities of officers and employees of the company and requires directors to refrain from engaging in outside business activities that create an actual or apparent conflict of interest.

“Clearly, the bank and the board have made effort to improve their corporate governance, which has been a bone of contention,” Tenner said.

Banc of California is on its way to a new headquarters at 3 MacArthur Place in Santa Ana, a property it bought last year for $76.4 million .

How many new board members will be overseeing the place remains to be seen.

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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