First PacTrust Pays Director Hefty Fee to Build Mortgage Business

Pacific Trust Bank in Irvine, Calif., is paying a mortgage firm owned by one of its directors a $100,000-a-month consulting fee to help the bank expand its home lending business.

The arrangement, disclosed in a recent regulatory filing, is designed to give the bank, a unit of First PacTrust Bancorp (BANC), some high-level mortgage expertise following its August acquisition of a community bank that had a large mortgage lending unit. But some industry observers have raised questions about the size of the up-front fee, which appears outsized in an industry where compensation is typically based on productivity and profitability.

The partnership with director Jeffrey Seabold and his firm, Beverly Hills-based CS Financial, has also raised eyebrows because it stands to directly benefit family members of the chief executive of the bank's holding company, Steven Sugarman. Relatives of Sugarman own a minority stake in CS Financial, according to Securities and Exchange Commission filings.

Bank officials say there is nothing suspect about the agreement, which they note was explained in great detail in SEC filings.

John Grosvenor, the bank's general counsel, said the bank and the $1.6 billion-asset holding company took steps to ensure the deal was an arm's-length one, including setting up a special committee of the board, who approved the $100,000-a-month consulting deal.

"It was vetted, negotiated and approved by a committee of independent, disinterested directors," he said in an emailed statement. "The arrangement was thereafter properly disclosed to the public; and it was determined that the arrangement provides significant benefits and competitive advantages to the bank on fair terms."

To be sure, it is not unheard of for a company to hire directors or firms they own to perform specific functions, such as legal, marketing or accounting services.

Still, some corporate governance experts said this particular deal could raise flags with regulators because of the size of the consulting contract.

William Black, a professor at University of Missouri-Kansas City's law school, said the consulting agreement runs counter to the legal doctrine known as "usurpation of corporate opportunities," which as the name implies, involves directors taking advantage of inside knowledge to somehow enrich themselves.

"Regulators are supposed to care a great deal about these things," Black says. "This is a mind-set that says the corporation is our piggybank and the attitude is that this is a great opportunity for us, not for shareholders but for the executives that control the company."

David Larcker, a senior faculty member at Stanford University's Rock Center for Corporate Governance, says the company went to great lengths to mitigate any concerns about self-dealing. "They did a nice job with the disclosure process, which seems sensible to me," he says.

Larcker is more troubled by the close ties between the owners of the companies.

Sugarman, a Southern California financier, recapitalized First PacTrust in 2010 and became its CEO late last year following a management shake-up that led to abrupt resignation of its prior CEO, Gregory Mitchell.

The SEC filings did not disclose how large a stake his family members own in Seabold's mortgage company, but Larcker says those ties could invite more scrutiny from regulators and investors.

"The one part of this that seems unusual is the family relationship — the optics don't appear great on that," he says. "From a board member standpoint you want to feel like there's nothing that will come back to haunt you."

When it disclosed the consulting deal in December, the bank said the impetus for it was rather simple. First PacTrust had purchased Gateway Business Bank in August and that purchase included a large mortgage division, Mission Hills Mortgage. The bank planned to build a residential lending platform and needed someone with expertise to provide mortgage compliance, training and management consulting.

Seabold was a branch manager for eight years at Countrywide Home Loans before he founded CS Financial in 1999. He joined First PacTrust's board in 2011.

Under his consulting deal with the bank, Seabold was named managing director of the bank's mortgage division, but he did not give up his board seat and does not receive a salary.

As part of its efforts to expand its mortgage lending, the company on Friday announced that it plans to open six loan production offices in California and that it has hired a slew of mortgage lenders to run them. Many of the new hires came from Pacific Mercantile Bancorp (PMBC) in Costa Mesa, Calif., which announced in August that it was leaving the wholesale mortgage business.

The hires include Ted Ray, a former executive vice president at Pacific Mercantile Bank, who was named president of the bank's residential lending unit. He will be joined by five other top executives and five separate teams that will staff the individual offices.

In the news release, the company credited Seabold and CS Financial with helping to chart the banks' mortgage lending expansion.

"This process has included the use of experienced consultants and outside advisors, the addition of several exceptional senior executives to our team, a thorough review of each of our policies and procedures including compliance, risk, compensation and operations, and the implementation of a new, enhanced technology platform, all of which enable us to attract and retain the highest caliber production teams on the West Coast," Robert Franko, Pacific Trust Bank's chief executive, said in the release. "Our quick success identifying and strategically hiring top performing groups in the region validates the strength of our team, our platform and our plan."

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