Banc of California was at a high point last summer.
The Irvine lender’s assets had topped $10 billion, a milestone for a bank that had assets of less than $1 billion just five years earlier. Impressed investors sent its notoriously cheap stock to a post-recession high.
And in August, its ambitious chairman and chief executive, Steven Sugarman, announced a deal aimed at making the little-known bank a household name: It would pay $100 million to put its name on a Major League Soccer stadium being built near USC.
In the months since that deal was announced, though, the bank has been rocked by questions about insider deals, weak corporate oversight and connections to a convicted fraudster. Sugarman resigned in January and Chad Brownstein, the bank’s influential vice chairman, followed suit last month.
Now, though the bank is continuing with the stadium deal, it is cutting back on other ad and sponsorship campaigns, selling off a major business unit and laying off workers in what amounts to a dramatic strategic shift.
“Before, it was grow, grow, grow, grow,” said Tim Coffey, an analyst with Atlanta brokerage and investment bank FIG Partners. “Now, they’re shifting focus from growth to profitability.”
The biggest element of that shift is the bank’s recently announced sale of its home mortgage division to Texas firm Caliber Home Loans, which will trim dozens of offices from the bank’s footprint and hundreds of workers from its payroll.
The sale of Banc Home Loans, set to close this month, is just the latest divestiture for the bank, which in October sold an equipment-financing division to Koreatown lender Hanmi Bank.
Banc of California also plans to lay off 139 workers at its corporate offices in Irvine and Santa Ana this summer and try to rein in expenses as it seeks to become a more stable and profitable institution — one that probably will grow more slowly and might even shrink.
Hugh Boyle, the bank’s interim chief executive, said that by selling off the two divisions, which both made loans in other states, the bank will be able to concentrate on its core business: lending to businesses in California.
Boyle and the bank’s board believe that focus, along with a simpler business model and lower costs, will result in more interest from investors. Despite its rapid growth and solid earnings, Banc of California has lagged behind other publicly traded banks in terms of its market value, even when the stock hit its high last summer.
“While we grew assertively, our stock price valuation didn't reflect that growth, which told us the market didn't value that growth the way we felt it should,” Boyle said. “What we're saying today … is that we're no longer growing for growth's sake.”
Boyle said the bank had been working on divesting the mortgage business since well before Sugarman resigned. Still, Coffey said the sale and the bank’s new grow-slow approach make sense given the recent board shake-up.
“You've gone from a company run by a lot of people without much banking experience to a board where a lot of people have been in the industry for a lot of years,” the analyst said.
Robert Sznewajs, who took over as chairman when Sugarman resigned, has spent 40 years working for national and regional banks.
The bank has also added two new members to its board: Richard Lashley, a former bank advisor for accounting firm KPMG, and Kirk Wycoff, who ran community banks in the Philadelphia area. Lashley and Wycoff are both longtime shareholders in Banc of California through their investment firms.
The bank’s strategic shift, particularly the sale of the mortgage business, falls in line with some of the suggestions made by Lashley and other investors.
Under Sugarman, the bank had a testy relationship with Lashley’s firm, but has lately sought to make peace with investors. Along with putting Lashley and Wycoff on its board and making changes to its corporate governance policies, the company this week announced that it had reached an agreement with activist investment firm Legion Partners.
The L.A. firm, backed by the massive California State Teachers’ Retirement System, had nominated two candidates for the bank’s board last month. As part of a deal announced Monday, the bank agreed that it would add two board seats — making nine seats in all — and would consider Legion’s nominees for the new positions. In turn, Legion, which owns 6.6% of Banc of California’s stock, will vote in favor of the board’s nominees.
“We’ve covered a lot of ground in the last 90 days,” said Brad Vizi, a managing director at Legion. “The CEO is gone, we’ll have a new one coming in soon, we’ve turned over half the board and we’ve gotten out of the mortgage business.”
Boyle said the bank has no immediate plans to sell off any other divisions and that the focus for the rest of this year “is really executing on the businesses we have” and continuing to trim expenses.
In an investor presentation last week, executives said they will cut back on some of the bank’s sponsorship deals, in part to offset the $100 million the bank will pay over the next 15 years for naming rights at Banc of California Stadium, which starting next year will be home to new MLS franchise Los Angeles Football Club.
In the presentation, the bank said it would cut about $2.4 million a year on other sponsorships. The bank has deals with USC and San Diego State athletics programs, as well as with the Los Angeles Rams Foundation, though Boyle would not say which deals might be downsized or scrapped.
The bank will also have to continue building up the volume of business loans on its books. Today, an outsized portion of the bank’s assets are tied up in various securities rather than loans the bank originated.
Just as crucially, the bank will have to continue to grow its customer base and persuade business owners to open accounts and entrust the bank with their deposits. Today, nearly a quarter of the bank’s deposits are so-called brokered deposits, usually certificates of deposit from customers who may never even have stepped into a branch — “deposits from people they don’t know,” as Coffey put it.
But as the bank looks to attract more deposits from local customers, Timur Braziler, an analyst with Wells Fargo Securities, said the same issues that led to the bank’s board and management shake-up could be an impediment.
That includes questions about deals that benefited members of Sugarman’s family, including his brother Jason, who was part owner of a company acquired by the bank in 2013 and remains a part owner of the Los Angeles Football Club. The bank also is the subject of an investigation by the Securities and Exchange Commission.
In October, an anonymous short-seller alleged on a financial blog that the bank was secretly controlled by Jason Galanis, a Beverly Hills financier who last summer pleaded guilty to securities fraud. An outside law firm hired by the bank to investigate found no evidence that Galanis controlled the bank or of any wrongdoing, but the bank reported in January that it is being investigated by the SEC over false statements made in its initial response to the short-seller’s claim.
“You pick up the paper and, more recently, the news about the bank has all been negative,” Braziler said. “How is the customer base seeing this?”
Boyle, though, said problems with the bank’s reputation haven’t cost it any important customers.
“We’ve been very successful in retaining our customers throughout this crisis,” he said. “Over the last three to five months, we’ve kept all of our strong customer relationships.”
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