Proxy Fight Looming as Crown Bancorp Is Divided by Factions

Already overloaded with a year full of controversies that followed four years of stellar growth, Crown Bancorp may be bracing for its biggest imbroglio yet: a proxy fight for control of the holding company and its largest subsidiary, the Bank of Coronado.

The corporate storm clouds for such a battle are gathering over the shores of Coronado.

For example, the day after the abrupt--and some say forced--resignation last week of Crown President James G. Klingensmith, former Chairman Richard Maitland and some Mexican business associates withdrew more than $1 million in trust funds from the bank. The withdrawal made good Maitland’s threat to pull some of his funds if the board did not remove Chairman Dustin Rose.

The board, in a special meeting last Tuesday night, instead called for Klingensmith’s resignation.

The stage is set, according to several sources, for Maitland to call for a special shareholders meeting. At the least, Crown directors could be forced to the bargaining table with Maitland if they want to avoid such a meeting.

In any event, the composition of the Crown board and the direction and philosophy of the company could soon change.

One reason for that viewpoint--shared by sources inside and outside of Crown--is the breakdown of stock ownership.

Maitland, who resigned as Crown chairman a year ago, owns nearly 4.5% of Crown’s stock. But, because of his ties with several Mexican business executives, he could control as much as 26% of Crown’s common shares.

A 39% Share

Klingensmith controls directly and indirectly about 3.4% of Crown stock, and Frederick M. Swenson, a Crown director and a sales representative at the Coronado Shores Co., which is owned by Maitland, controls more than 9%, according to Crown sources. In total, the Maitland-Klingensmith-Swenson group could muster nearly 39% of Crown’s shares in a proxy fight.

Corporate regulations allow any shareholder who owns more than 10% of a company’s stock to call a special shareholders meeting, a move that Crown officials now anticipate.

Maitland last week refused to comment about that possibility or discuss anything having to do with Crown.

By contrast, Rose and the Crown board control about 23% of company stock. Directors of Capital Bank of Carlsbad, a subsidiary of Crown, would probably support the Crown board in a proxy fight. They control more than 6% of Crown shares. That would give the current board voting control of about 29% of the stock.

The issues in the potential battle are varied, but they involve the question of how local a local bank should be.

For example, Crown, with $79.1 million in assets as of March 31, has received several proposals from would-be buyers. The bids “have been unrealistic, given the assets, resources and position of the holding company,” according to one Crown source.

Philosophical Difference

Maitland, several sources maintain, has pushed for a sale of Crown and that was one of the “philosophical differences” that led to his resignation last year.

Ten days ago, a broker representing potential buyers met with Klingensmith to discuss purchasing Capital Bank.

When the issue of selling the bank was presented to the board last week only Klingensmith and director Frederick M. Swenson voted to sell. The other directors are inclined to merge Capital into the Bank of Coronado.

The potential battle is part of the company’s “growing pain” process, according to one Crown official.

“We’ve grown quickly, and now we have to step back and look at where we’re going,” offered one Crown director.

The board will “take a look at everything,” the director said. “We won’t close any branches, but branch banking with separate entities isn’t a good idea.”

That’s more the philosophy of a community-based bank than of an expansionist-minded corporation.

Klingensmith, according to sources, was of the latter philosophy, a minority view on the board.

That difference alone may not have led to his resignation. But the added pressures of Crown’s first-ever quarterly loss of $261,000 in the first quarter, large increases in loan loss reserves to $714,000 as of March 31, and the recent arrest and indictment of the bank’s San Ysidro branch manager on charges that she participated in a money laundering operation have heightened an already tense relationship between management and some board members.

Disclosures Questioned

The last straw, said Crown sources, was when Klingensmith disclosed the company’s second-quarter earnings before the board’s audit committee had reviewed them. Typically, the committee determines how much should be written down for possible loan losses.

“He kept releasing figures before any writedowns,” one Crown source said last week.

The audit committee met Monday to discuss the loan-loss reserves and will make a recommendation. Sources at Crown say that some additional writedowns for the second quarter are likely.

In addition, Crown’s board could soon name an interim president--perhaps as early as today--to replace Klingensmith. A search for a permanent replacement likely would be stalled pending the resolution of a proxy fight, sources said.

Sources also insist that there was no personality clash between Klingensmith and Chairman Dustin Rose, despite several controversies involving Rose, including his $35,000 settlement with the bank over a $555,000 loan he had guaranteed for a business associate.

Meanwhile, board members are taking the possibility of a proxy battle in stride, believing both that the company is in strong financial shape and that shareholders would only approve an attractive and profitable tender offer.

“If an opportunity came to sell the institution, to provide all shareholders with equitable return, then the shareholders would make the decision,” said one official. “That’s what democracy is all about.”

That would indeed be the case, in terms of numbers of shareholders: 75% of Crown’s approximately 300 stockholders own less than 25% of the outstanding shares.