San Luis Trust Bank facing threat of seizure

February 14, 2011

By LISA RIZZO and KAREN VELIE

San Luis Trust Bank (SLTB) may soon be added to the FDIC’s list of failed banks unless it pulls itself out of a “critically undercapitalized” state, according to federal regulators.

The bank’s regulator, the Federal Office of Thrift Supervision (OTS), says SLTB, which has only one branch, located at 1001 Marsh St., has until tomorrow, Feb. 15, to be recapitalized, according to a “prompt corrective action directive.”

In November, the OTS ordered the bank to submit a restoration plan detailing how it would become at least “adequately capitalized.”

On Wednesday, the OTS issued the “prompt corrective action directive” and denied SLTB’s restoration plan which was submitted more than a month past the original deadline.

In the directive, the OTS warned the institution that it had until Friday, Feb. 11, to submit a plan to be recapitalized by Feb. 15 through a merger, an acquisition or an investor in order to prevent seizure.

It is unknown whether the bank will meet the deadline or whether the OTS will extend more time. The bank’s operators and chairmen of the board have not returned CalCoastNews calls for comment.

Federal Deposit Insurance Corp. (FDIC) spokesperson Greg Hernandez of Washington, D.C. says “the OTS guidelines are not necessarily hard and fast rules. Sometimes banks can get more time. It’s up to the regulator to decide.”

Generally, decisions and activity leading up to a merger, acquisition, major investment or federal seizure are kept confidential.

The FDIC says it could step in to broker a deal between the troubled bank and a separate institution to assume its assets at a discount. The FDIC may be appointed as the receiver and would insure checking accounts with less than $250,000 per depositor.

In the directive, the OTS ordered SLTB to fully cooperate with the FDIC and any efforts to “avoid a loss” which includes “permitting FDIC to provide otherwise confidential information to third parties to facilitate the liquidation or other resolution of the Institution in anticipation of the possible appointment of FDIC as conservator, receiver, or other legal custodian.”

SLTB stock had fallen from a 52-week high of 99 cents a share to Friday’s 14 cents a share. Five years ago the stock was trading at more than $15 a share.

Since SLTB’s inception in 1999, six formal enforcement actions have been filed against the bank. Based in Washington D.C., the OTS is a bureau of the U.S. Department of Treasury and is the primary regulator of federal saving institutions, including SLTB.

In 2001, following a lengthy examination, the OTS determined SLTB had engaged in unsafe and unsound acts and practices. The OTS and the bank signed a 15-page agreement in November, 2001, attempting to bring the struggling institution back into compliance.

A week after that action, the OTS fined Brad Lyon, the bank’s chief financial officer, $1,000 for submitting inaccurate financial information. Lyon has not returned CalCoastNew’s call for comment.

Then, in 2006, two bank employees received civil fines for their business practices and the OTS demanded the bank enter into another supervisory agreement.

The OTS fined former SLTB director Richard Wells $5,000 for failing to disclose his involvement in a property with a bank customer. Well’s father, SLTB Senior Vice President Eric Wells, was fined $20,000 for “breaching his duty of loyalty to the institution and advancing his own interest and the interest of others with whom he had an ongoing business relationship at the expense of SLTB” and for benefiting from a loan he made in violation of banking laws.

In November, 2009, regulators issued a cease-and-desist order for SLTB stating the bank had ‘engaged in unsafe and unsound banking practices which resulted in deteriorating asset quality, poor risk management practices, and inadequate oversight and supervision of the lending function at the bank.”

Regulators required the bank to strengthen its capital ratios, maintain adequate short-term and long-term liquidity, revise its policies for modifying loans and reduce its level of classified assets — typically loans for which payments are not being received on time.

Numerous loans made to San Luis Obispo County projects and developments may have compromised the bank’s fiscal integrity.

Among them, bank loans made to notorious North County developer Kelly Gearhart, which appeared inadequately secured, may have created significant problems for SLTB.

Gearhart’s 2009 federal bankruptcy debt filing include $1.7 million owed to SLTB. Bank officials allegedly allowed Gearhart to move money in and out of his 401K without the required penalties.

In 2009, a few days before Gearhart fled for Ohio, he asked his common-law stepmother Marion Warner to meet him at SLTB to sign papers regarding an investment she had made in one of his developments, Warner said.

Gearhart and Warner went into SLTB and while Warner thought she was signing documents protecting her investment, she, in fact, was assuming responsibility for several of Gearhart’s outstanding loans, totaling about $559,000.

Bank officials approved the loans even though the loan application claimed that Warner, unemployed for more than two years, was an employee of a defunct Gearhart development company.

“Kelly made fraudulent statements to SLTB,” Warner said. “I took $500,000 of Kelly’s debt.”

The bank foreclosed on Warner’s loans and home earlier this year with an order to vacate within a few months.

Warner said the eviction had been voided after one of her neighbor’s made a bid to purchase the property from the bank. The neighbor planned to allow Warner to stay on the property for a modest rent.

“Eric Wells (bank senior vice president) pulled down my driveway, and said that everything was signed and I could stay,” Warner said.

A month later, Warner found a five-day eviction notice taped on her gate. She had until Sunday to figure out what to do with her two horses, six dogs, numerous cats and a handful of chickens.

Adding to its troubles, SLTB has been defending itself in a lawsuit that alleges fraud and false promises, according to a tentative ruling issued by Judge Charles Crandall on Feb. 7.

At issue is a June 2010 foreclosure and a San Luis Obispo project. The plaintiffs, Foothill Real Estate Investments, LLC and Patrick Aurignac claim the bank induced them into developing a Foothill Blvd. property based on a promise that it would ultimately provide the construction loan to complete the project.

The complaint alleges the bank reneged on the deal that would clear the bank’s liens on the property and extend a construction loan in exchange for a $3 million deed of trust.