Editor’s note: On September 4, 2014, Banc of California announced a new, public Community Benefit Plan. Read more details about the plan here: CRC Announces Support for Community Benefit Plan by Banc of California as Part of Banco Popular Branch Acquisition
The California Reinvestment Coalition, a nonprofit coalition of over 300 membership organizations located throughout California, is urging the Office of the Comptroller of the Currency to not approve Banc of California’s acquisition of 20 Banco Popular branches located in Los Angeles and Orange County. The full text of CRC’s letter to the OCC is included below. If you would like to view Appendix A (a chart of related transactions) or B (a letter from Richard L. Lashley to Banc of California CEO Steve Sugarman), you can view them in the PDF of the complete letter here.
July 11, 2014
Office of the Comptroller of the Currency
Attn: Louis Gittleman
1225 17th St. Suite 300
Denver, Colorado 80202
Re: Opposition to Banc of California’s proposed acquisition of Banco Popular branches, request for extension of the comment period, request for public hearings
Dear Mr. Gittleman:
The California Reinvestment Coalition (CRC) is a membership organization whose mission is to advocate for fair and equal access to banking and financial services for California’s low-income communities and communities of color. CRC’s members consist of over 300 organizational members working in these communities across the state of California. CRC files these comments in opposition to the proposed acquisition of 20 Banco Popular Branches by Banc of California (Banc). We believe there are significant concerns and unanswered questions with this proposed acquisition, and these questions raise doubts that this merger will create a sufficient and clear public benefit. We call for the OCC to extend the comment period, hold hearings on Banc’s application, and deny its application until a strong CRA plan, which has been subject to meaningful public review, is in place and financial and managerial concerns are addressed.
Banc of California Refuses to Provide Community Members with a CRA Plan: Low Income Communities and Immigrant Communities Worry About Loss of Services
Banc of California’s proposed acquisition is of particular concern to CRC and its members because Banc of California fails to provide details related to CRA qualifying activity in its application to acquire Banco Popular branches. The bank’s application does not include plans for future CRA qualifying activity, and except for one recent investment, does not provide a history of the bank’s record of CRA qualifying activity.
Banco Popular’s business model has focused on meeting the banking needs of a largely Latino, Asian, and immigrant customer base. Preserving this business model is especially important given that it serves communities that have been historically underserved by financial institutions. Latinos represent 37% of Banco Popular’s deposits in the 20 branches Banc seeks to acquire, and HMDA data for Banco Popular shows that 42% of its mortgage home loans were to Latino borrowers and 68% of these loans were made in neighborhoods of color. While 7% of Banco Popular deposits come from branches located in low income census tracts, 0% of Banc’s deposits come from branches in low income census tracts. Even more strikingly, only 25% of Banc of California’s branches are located in majority minority zip codes, while 85% of Banco Popular branches are located in majority minority zip codes. Given that Banc of California’s business model has NOT historically focused on a minority or low income customer base, more specifics related to historical and planned CRA activity by Banc are especially important.
Banc of California
Percent of branches located in majority minority zip codes
Percent of deposits from branches located in low income census tracts
Note: Latinos represent 37% of Banco Popular’s deposits in the 20 branches that Banc of CA seeks to acquire
For Banc of California to take over Banco Popular’s presence in these communities, it must be prepared to provide needed services in a fair and CRA-compliant manner. In historically underserved communities, where trust of financial institutions is already low, a public CRA plan can provide the foundation for the building of trust, partnerships, and ultimately a successful business model.
Given the lack of information related to CRA activity provided in Banc’s application and given its ongoing refusal to provide the public with a plan for its CRA activity, we are concerned that the bank does not have a strong CRA program in place and that it will fail to meet the credit and CRA needs of these communities. Although we applaud Banc of California’s recent investments in Clearinghouse CDFI and its financial literacy and marketing partnership with the University of Southern California, a strong and full CRA Plan with clear benchmarks is still warranted. CRA plans provide a level of transparency to communities on a bank’s planned CRA activities and inform affected communities and regulators about how the Bank intends to meet community need in the future, and not just before a merger application.
CRC hopes to help Banc succeed at serving community needs. If Banc of California has a strong plan to serve the community, it should be proud to share it. We urge the OCC to hold public hearings to solicit input from underserved community members and to ensure that this input informs a meaningful CRA plan that identifies and addresses local community needs. Currently the bank’s record is not sufficient for the OCC or the public to determine whether or not the bank will meet the community’s credit needs.
There is precedent for this type of regulator action, in recent mergers by Pac West Bank and Umpqua Bank, both the FDIC and the Federal Reserve urged CRA Plan transparency. The FDIC facilitated a meeting between the applicant and community groups which resulted in the discussion and development by PacWest of a CRA Plan, with input from community groups. The Federal Reserve made the development of a CRA Plan a condition of merger approval for Umpqua, which did reach out to stakeholders for input in the development of, and comments on drafts of, its plan. We expect that the OCC will do no less than the FDIC and the Federal Reserve to ensure that banks applying for approval of mergers have public CRA plans in place to ensure that community credit needs will be addressed prior to any consideration of an acquisition or merger. All banks have a responsibility to serve their communities and need to be held accountable through clear CRA benchmarks and timetables.
Latino and Immigrant Communities Did Not Receive Meaningful Notice of Proposed Acquisition
Publishing a notice of the proposed acquisition in the OC Register and New York Times, as Banc did, does not provide meaningful notice to the communities served by Banco Popular. Both Los Angeles and Orange County, where many of Banco Popular Branches are located, have a rich diversity of ethnic press that serve the area. The largest Spanish language newspaper in the nation, La Opinion, is distributed in all six southern California counties. The Chinese Daily News, The Korea Times, and other Asian newspapers also have wide circulation in the communities served by Banco Popular. In order to provide meaningful opportunity for input by the historically underserved population served by Banco Popular, we are requesting a 30 day extension to the comment period, and more targeted outreach by Banc.
Lack of transparency around Banc’s mortgage lending and CRA activities
As indicated, the application has little information about Banc’s CRA activities. In the past, CRC has raised questions about the Banc’s mortgage lending, with its use of nontraditional mortgage products, as well as the practices of Banc’s wholly owned subsidiary, the Palisades Group, which purchases distressed loans and is in a position to work with homeowners facing foreclosure. We believe the public should have the opportunity to review and comment on Banc’s mortgage lending performance, especially as no such information was provided to the OCC as part of the public portions of the application. To this end, pursuant to 12 C.F.R. Part 203, Appendix A, CRC formally requests copies of 2013 Home Mortgage Disclosure Act (HMDA) data for Banc of California, and all of its lending subsidiaries and affiliates. We are specifically asking for the LARs in California, to be given in data format, or other format that can easily be imported into the CRA Wiz program. We are requesting that Banc provide this data without charge, and within 30 days mandated by the above-cited regulation. We also request, and urge the OCC to review, loan modification, re-default and foreclosure data for Banc of California and affiliates, including the Palisades Group.
Similarly, on April 19, 2014, CRC submitted to Banc a list of fourteen CRA-related questions, a list that we have posed to several banks in the past without controversy. We asked the Banc to respond by late May. The Bank has yet to respond and has given no indication that it will respond to these basic questions about its CRA performance that other institutions had no problem disclosing. If the bank is serious about its plans to grow in California, then we believe it should take its community reinvestment plans seriously, as other large and small banks have done in California.
In contrast to the sparse public record of Banc’s CRA activities, Banco Popular’s most recent Performance Evaluation demonstrates a commitment to its communities. Specifically, BPNA received “High Satisfactory” for its lending; “High Satisfactory” for its investments, and “Outstanding” for its service activities in California. The evaluation notes a “relatively high level” of community development lending, including “excellent” multifamily lending in LMI tracts in its Los Angeles-Long Beach-Santa Ana MSA assessment area, and nearly 200 community development loans to support the development of over 1,000 units of housing affordable to LMI tenants and for other community purposes during the exam period. Small business lending in LMI tracts in BPNA’s Los Angeles-Long Beach-Santa Ana assessment area was likewise deemed “excellent.” BPNA received a “High Satisfactory” under the investment test, with 78 qualified investments and $444,000 in charitable contributions made in its Los Angeles-Long Beach-Santa Ana assessment area during the exam period. Finally, BPNA’s regulator found that the Bank was “a leader” in providing community development services in its Los Angeles-Long Beach-Santa Ana MSA, earning the Bank an “Outstanding” rating under the service test.
The lack of transparency in this application, the emergence of Banc as a Large Bank for CRA purposes with enhanced expectations, and BPNA’s record of CRA activity serving its communities, all support the call for Banc to disclose a CRA Plan for how it will serve BPNA’s clients and constituents, as well as the call for an extension of the comment period so that the record can be augmented and so that the OCC has enough information upon which to base its decision.
Financial and Managerial Resource Concerns
Several areas related to Banc of California financial and managerial operations require further investigation by the OCC. Key findings by the California Reinvestment Coalition, using the CAMELS rating system include:
- Banc exceeds the regulatory requirements on capitalization and has demonstrated a current ability to access capital markets.
- Banc’s asset quality as measured by reserves for loans is significantly different than that of Banco Popular’s U.S. Mainland operations.
- Certain key ratios measuring management performance show underperformance compared to Banc’s peers.
- Earnings have been volatile in the past five years.
As of March 31, 2014, both Banc of California, Inc. and Banc of California, NA exceeded the regulatory requirements to be considered “well-capitalized.” In addition, Banc has demonstrated that it is capable of accessing capital markets. However, earning fluctuations discussed later in this letter, if continued in future periods, could eventually erode capital.
Asset Quality: Loan Portfolio Performance
Banc of California’s reserves for loans as of the first quarter of 2014 was .59%, far below that of its peers. Banc’s own stated peer group median had a reserve for loans of .89%. This may indicate that Banc considers its portfolio to be better performing and/or less risky than the portfolio of its peers. This is especially interesting given the rapid growth rate of Banc’s loan portfolio (96.7% grown from 2012-2013; 59.1% from 2011-2012), much of it fueled by acquisitions. In the absence of tightened credit policies or the routine carving out of Non-Performing Loans (NPL), Other Real Estate Owned (OREO), etc. a rapidly growing loan portfolio would be expected to involve a proportional growth in loss reserves. We urge the OCC to investigate whether Banc of California is holding adequate reserves to cover its current loan risk.
Possible Disparities between Banc of California and Banco Popular’s Credit Products and Account Services
Although the proposed Banco Popular acquisition carves out NPL, examining Banco Popular loan portfolio performance can provide some insights into possible trends in the markets and customer base which Banc is seeking to enter. As of the first quarter of 2014, Banco Popular’s U.S. Mainland operations showed total reserves for loans of 1.91%. This is more than triple that of Banc’s first quarter reserves for loans of .59% and higher than Banc’s peer group median of .89%. The differences in reserves held by these two institutions indicate that the two banks have very different business models given their customer base. Disparities between existing underwriting, credit administration, and/or risk identification practices between Banco Popular and Banc of California could signal a significant challenge to implementing a successful acquisition. In addition to the challenges this can pose to the acquisition, Banc needs to have a strong strategy in place to ensure that it will continue to meet the credit needs of the communities served by Banco Popular. This has not been demonstrated to date.
In its application, Banc of California reports that it will discontinue the following services currently offered by Banco Popular:
- New account cash incentives
- Interest rate bonuses on savings when checking account is maintained
- Debit card reward program
These services are important for low-income community members because they encourage saving and the opening and maintenance of bank accounts for a population that has been historically unbanked.
In its application, Banc notes that it will review other services provided by Banco Popular to evaluate whether to continue offering them. Regulators should ensure that the discontinuation of services will not negatively impact the population served by Banco Popular.
Disparities in services and products offered to customers indicate different business models and corporate culture between these two banks exist. Studies have shown that managing differences in corporate culture is important to successful mergers and acquisitions, and that the lack of synergy between two entities can be central to their failure.
Following comprehensive research performed in recent years and the accumulated experience in many mergers, it is known that, in essence, the main factor that influences
the managers and the workers, primarily in the acquired company, is the degree of the management/organizational culture differences between the two merging organizations.
When the difference of the management culture is considerable, the merger is fated for failure.
Significant differences in corporate culture appear to exist here. For example, as pointed out above, there is a large disparity in loan reserves between Banco Popular and Banc. This raises the question of if and how Banc of California is planning on serving Banco Popular’s low income, Latino, Asian, and immigrant customer base that may not have the assets or creditworthiness to secure more traditional and less risky home loans. The OCC should confirm that Banc of California has an array of mortgage products that are accessible to Banco Popular’s traditional customer base, and that these Banc mortgage products are affordable, safe, and sustainable for these same customers. In order to serve the banking needs of the communities which it is proposing to enter, Banc will likely have to assess its current procedures, practices, and product offerings for possible changes that balance community needs with risk tolerance. A public CRA plan provided by the bank, as well as adequate reserves to account for the needs of the market it seeks to enter could help assure the community that Banc has a viable plan to do so.
Management actions can and do affect the overall safety and soundness of a bank. Assessing its capability and performance involves considering items such as: The willingness to serve the community’s banking needs; the avoidance of self-dealing; and the effectiveness and appropriateness of management information and risk monitoring systems, in consideration of the institution’s size and complexity. Understanding these factors will allow the analyst to understand whether management demonstrates the ability to identify, measure, monitor, and control significant risks. As stated earlier in this letter, the bank’s repeated refusal to provide the community with a CRA plan raises concerns about Banc’s willingness to serve community banking needs. In addition to requiring a strong CRA plan from Banc, we urge regulators to examine issues signaling underperformance and earning volatility, we also urge a thorough investigation of the Banc’s potential for self-dealing (discussed in more detail later in this letter).
Efficiency Ratios Underperforming Peers
The proposed Banco Popular branch acquisition will more than double Banc’s current network of 18 branches. Although Banc’s current management team has overseen six acquisitions in three years, in some ways the benefits of these acquisitions have yet to be realized. Banc’s efficiency ratio is significantly higher than its peers (a lower efficiency ratio is generally considered better, for comparable institutions): 92.14% versus a peer group median of 67.75%. Banc’s efficiency ratio has been above 85% since 2011. The efficiency ratio is a measure of what a bank must spend in order to make one dollar. So Banc’s peers by comparison, only have to spend 68 cents for every dollar in revenue, whereas Banc must spend 92 cents for every dollar it makes. This high efficiency ratio may be explained in part by the significant “non-recurring” charges incurred by each acquisition. However, Banc has indicated in press releases that it continues to explore more opportunities, for example in the San Fernando and San Gabriel Valleys, and Northern California (OC Register, 4/23/14). Therefore, additional non-recurring charges, and the negative effects on the efficiency ratio, should be anticipated.
Other performance ratios also show underperformance when compared to Banc’s peers. Return on Average Assets (ROAA) provides insight on how effectively management can generate income from the bank’s available assets. Banc’s 0% ROAA compares to a peer median of 1.08%. Since banks tend to be highly leveraged, 1% is considered a benchmark for the banking industry.
Return on Average Equity (ROAE) is another way to assess profitability. It is especially useful during periods where shareholder equity undergoes significant changes in value, as happened for Banc between 2012 and 2013. An acceptable ROAE allows banks to attract capital from private investors. Banc’s ROAE was slightly negative at -.3%, compared to a peer median of 9.17%.
Related Party Transactions
A diagram detailing the related party transactions by Banc of California has been included as Appendix A to this comment letter.
A letter by Banc of California’s largest shareholder, Richard J. Lashley, a principal at PL Capital LLC, to Banc CEO Steven Sugarman, filed as part of a June 9, 2014 SC 13D SEC filing, raised concerns about related party transactions stating:
I am also concerned about the significant amount of related party transactions engaged in by you, your family and other related parties (e.g. as outlined in the most recent 10-K and proxy including the purchase of CS Financial which was an entity controlled by Mr. Seabold and individuals related to you; the unusual transactions various Sugarman related parties relating to allocation of the CS Financial purchase consideration; the consulting payments to Jason Sugarman; Mr. Seabold’s previous management agreement while he was on the board; etc.). (sic) 
In the same letter, Mr. Lashley goes on to say that Institutional Shareholder Services ranks Banc in the lowest decile for corporate governance and that ISS’s most recent analysis for the 2014 Annual Meeting cited concerns over the size of the 2013 Stock Option Plan. CRC believes that this warrants further investigation by regulators.
We are also concerned about a host of other issues raised in the letter by Mr. Lashley, a copy of which is attached for your review as Appendix B.
History of Volatile Earnings
Several of the performance ratios analyzed in the management section also apply here. In addition to those ratios, Net Interest Margin (NIM) is the spread between interest income from loans and investments, versus the interest paid on deposits or borrowed funds. NIM is used to understand the result of the institution’s implementation of its lending, investing, and liquidity strategies. Banc’s NIM as of the first quarter 2014 is in line with or slightly better than that of its average peer. However, when taken as a whole with other performance ratios, there is still cause for concern as to whether future earnings can support operations, capital, and liquidity.
Non-Interest Income Grows Exponentially
In what indicates a significant change in Banc’s business model, Banc’s non-interest income has grown steadily, both as a percentage of income and in absolute numbers. In 2009, Banc had $1,813,000 in non-interest income or 4% of its revenue; by 2013, non-interest income had grown to $96,743,000 or 45% of its revenue.  Although non-interest income helps insulate banks from interest rate fluctuations (Banc’s greatest source of market risk), there is also research that shows that non-interest income has a larger effect on individual bank risk, and that fee-based activities are associated with earnings variability.
We urge further investigation into the rapid growth of non-interest income and potential impact on bank risk, as well as analysis of this growth in relation to its potential impact on customers, especially low income customers currently served by Banco Popular. Bank fees have historically impacted low income customers the most.
Banc’s History of Volatile Earnings
Net income has been volatile since 2009, fluctuating between profits and losses. Between 2012 and 2013, profit declined by 98.77%. Although Banc currently exceeds regulatory minimums for capital adequacy, these earning fluctuations shown in the chart below, if continued in future periods, could eventually erode capital. 
Banc’s loan to deposit ratio (LTD) has been declining for several years. As of Q1 2014, Banc had an LTD ratio of 77.09%, compared to peer group median of 92.84%. This might signal excess unused liquidity. In other words, Banc may not be effectively using its assets to generate income.
Because liquidity is critical to the ongoing vitality of any bank, liquidity, management is among the most important activities that a bank conducts.
This could negatively impact liquidity and capital in future years, as strong earnings contribute to capital maintenance and support operational strength. Macroeconomic trends also affect the LTD ratio, e.g. demand for credit, prevailing interest rates, and regional variations.
As previously mentioned, CRC wants Banc of California to succeed. However, our definition of success includes a robust ability to meet the needs of the underserved communities that is CRC’s mission to advocate for. This letter is aimed at helping to ensure this critical outcome, no more and no less.
Given the concerns raised in this letter related to the financial and managerial resources of Banc of California and the bank’s continued refusal to provide a CRA Plan, we urge the OCC to conduct hearings, extend the comment period, engage in an in depth investigation of Banc’s safety and soundness, and finally that it require a strong CRA plan which has been subject to meaningful public review and a strategy for serving Banco Popular’s customer base.
If you have any questions about this letter, or wish to talk further, please feel free to contact me at 415-864-3980.
Cc: Comptroller Thomas Curry
 CRA Wiz
 Banc of California’s OCC application to purchase Banco Popular branches
 Banc of California SEC Filing 10Q for first quarter 2014
 Banc of California SEC filing 10Q for first quarter 2014
 Banc of California SEC filing 10K 2013
 Banco Popular U.S. Mainland Operations SEC filing 10Q for first quarter 2014
 The Financial Times. The M&A Paradox: Factors of Success and Failure in Mergers and Acquisitions. January 16, 2014.
 Banc of California SEC filing 10Q first quarter 2014
 Banc of California SEC filing 10K 2013
 Banc of California SEC filing 10Q 1st quarter 2014
 Banc of California Form SC 13D Filed 6.09.14 pg 10 exhibit 2
 Banc of California SEC filing 10k 2013
 The dark side of diversification: The case of US financial holding companies. Kevin J. Stiroh , Adrienne Rumble.
Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA Received 11 February 2004; accepted 15 April 2005
 Banc of California SEC filing 10k 2013
 Banc of California SEC filing 10k 2013
 Banc of California SEC filing 10Q first quarter 2014
 DSC Risk Management Manual of Examination Policies 6.1-17 Liquidity and Funds Management (12-04) Federal Deposit Insurance Corporation