Banc of California Chief on Handling Fast Growth, CRA Protests

After a busy and sometimes bruising year, Steven Sugarman thinks it's time for Banc of California to show its earnings power.

Sugarman, the Irvine, Calif., company's chief executive, has spent the past year managing rapid growth while, at times, putting out fires. The company's growth has been significant, but its earnings have been somewhat uneven, as acquisition costs and other occasional hiccups created ups and downs.

The good news is that Banc of California has passed its growth target of $5 billion in assets, a goal set by Sugarman's investor group in 2010 when it took over what was then First PacTrust Bancorp. Now, after seven acquisitions in the last two years, Sugarman thinks the company has the pieces in place to take advantage of an absence of regional players in California and earn strong, consistent profits.

Banc of California overcame its latest hurdle earlier this month when it closed its purchase of 20 Banco Popular branches, which added about $1.1 billion each in loans and deposits. The sale closed only after the Sugarman's team reached a détente with the California Reinvestment Coalition, an activist group that had initially opposed the deal and had insisted that the company make public its Community Reinvestment Act plan.

Banc of California also closed a $52 million capital raise earlier this month from Oaktree Capital Management and Patriot Financial Partners.

In a wide-ranging interview, Sugarman discussed how he came to terms with a the community group, why organic deposit growth has become the smartest play in banking, and how he plans to take advantage of the expansion opportunities available for a regional bank in southern California. Here is an edited excerpt.

After initially opposing the Banco Popular deal, the California Reinvestment Coalition changed course, calling your CRA plan a model for other banks. What were the initial disagreements and how did you overcome them?

STEVEN SUGARMAN: Generally, there has been a breakdown of trust between the banking industry and community-based organizations like the CRC. So they really want to understand what your plans are and what benefits communities will get. Once we finally got everybody into the room — them, their members, us, Mayor Villaraigosa — and talked through our community-development plans, things resolved themselves very quickly.

There's always a tension between getting over that hurdle of mistrust and, as a public company, making sure you protect nonpublic information. I think there was a little trepidation on their part over why there was some information we just couldn't give. There were several things in our internal plan that were nonpublic. For instance, the financial literacy day we had with President Clinton was something we told [the CRC] about when it became public. We partnered with USC athletics, and until we had actually signed the deal we couldn't disclose it publicly.

Sitting down and talking with them about the benefits of all the things we're doing — our lending programs, our activities in underrepresented communities — that's where we had the breakthrough.

Do community groups like the CRC have too much influence over whether deals get approved?

With each transaction there's a unique balance. I think the regulators do a nice job of enforcing that balance, because you want to receive input from all the community groups and make sure the banks have prudent plans. What's good about the process is that it's not predetermined what [the community groups'] influence will be, and you have a thoughtful regulatory body deciding that. If somebody challenges your plan, the regulators get to see everything and evaluate it.

The process works best when all the parties involved are acting with the best interests of the communities involved. As long as the community groups and the banks are acting in good faith, you get to the right resolution. The risks come out when there's more of a publicity or rhetorical aspect to it, which can be counterproductive.

You've acquired a range of businesses. Where are the best deals today?

I think most compelling today is the opportunity to attract deposits organically. There is an excess of deposits out there; liquidity is robust. The cost of acquiring high-quality deposits is lower than it has been historically.

Attracting those deposits organically is going to prove to be much better, financially, than acquiring them at some of the market prices we've been seeing. You can spend a comparably trivial amount of money compared to buying them from a third party. So over the next few quarters, I think that's where the most significant opportunity is.

How do you attract those deposits?

You need certain products and services, which I believe Banc of California now has. We have about 40 branches, which gives us the ability to serve the needs of Southern California. Some of our transactions have put us in a position where we can benefit from the excess liquidity in the market and the dislocations caused by changes in the banking industry, such as other people's M&A.

We're now one of the largest banks under $15 billion in Southern California, and that enables us to serve customers that are looking for a regional banking player able to meet their real banking needs and provide personalized customer service.

There's a void that developed in California in this last crisis. There used to be more regional banks between $5 billion and $15 billion, but they all had issues in the recession. In Southern California alone there is about $33 billion in business lending from banks that either failed or were subsumed by others and disappeared. We're now the biggest bank pursuing that business, and what's really remarkable is there are no incumbents to displace. It's just a void in the market.

The smaller banks have a hard time meeting the needs of Southern California's entrepreneurs and small business owners. They can be a bank for the client, but not the bank for a client. We're really well situated to be the bank for our client, but still small enough that if a client has a special need, he can pick up the phone and get senior-level attention to make sure that he's not a number and that we support him.

You've grown from less than $1.5 billion two years ago to nearly $6 billion today. What size are you shooting for?

From a size perspective, we've achieved what's needed. As a bank, we're now grown up, and the rest is what's elective, what creates value. We have the products and the services we need and it's in our hands to maximize shareholder value. We've been in the process of taking down the hurdles that could constrain our decisions about what's best for the business and shareholders. That's why getting the extra capital was important. And with the marginal economics of growth right now, it's pretty exciting to be able to just focus on profitability.

We're going to fund about $5B in loans this year, so loan growth isn't a challenge in the near term. Getting the right types of deposits and improving the relationships and the cross-sales is really the key for us.

In August, you disclosed a weakness in your internal controls. How do you balance growth with investing in operations and infrastructure?

One of the things we're most proud of is our standing with the regulators. As you might imagine, having just received approval to acquire these branches, we're in good standing. To have seen the growth we've had over the past several years — we have approached a 70% annual asset-growth rate — the regulators have to have confidence, like the board has to have confidence, that you're investing in your systems and platform and not growing too quickly.

That said, [the disclosure] is frustrating, but it is also empowers us to get it all right. It's always hard to make the decision to invest in new technology, new platforms, new people, and sacrifice some near-term earnings for long-term success. But when you see that it was really needed, that supports some of the actions we've been taking.