Banks on thin ice after risky loans to developer

May 17, 2008

By KAREN VELIE and DANIEL BLACKBURN

Bank loans which appear inadequately secured made to a well known North County developer — as well as an accompanying tangled web of loan transfers — may have created significant problems for some San Luis Obispo County banks.

Kelly Gearhart owns an 884-square-foot house on a small, oddly shaped Atascadero lot at 5120 Traffic Way. The property transferred several times between Gearhart family members before San Luis Trust Bank, in 2005 and 2006, lent Gearhart a total of $3,696,677 on the house. The property is worth approximately $250,000 in today’s market, according to real estate experts contacted by UncoveredSLO.com.

According to court records, the loans have not yet been repaid. Neither Gearhart nor bank officials returned calls and e-mails from reporters.

San Luis Trust Bank reported earnings of $1.03 million for the first quarter of 2008, down from $1.08 million for the same period in 2007. In a recent press release, bank officials boasted of their $3.4 million loss reserve fund.

However, due to a recent $1 million hit linked to the failure of Cameron Financial Group’s First Choice Mortgage, coupled with $3.7 million in what may be under-secured loans made to Gearhart, San Luis Trust Bank’s “cushion” is stretched thin during the current climate of economic uncertainty.

Federal authorities began keeping tabs on the fledgling bank not long after its inception in 1999.

Following a lengthy examination of San Luis Trust Bank, the U.S. Treasury’s Office of Thrift Supervision (OTS) determined the bank had engaged in unsafe and unsound acts and practices. The OTS and San Luis Trust Bank signed a 16-page agreement in May 2006, written to bring the struggling lender back into compliance.

Heritage Oaks Bank also has made arrangements with hard money lenders and their developers that appear to be overly-risky.

Heritage Oaks Bank loaned Gearhart $1 million on Jan. 16, 2008, on his 14-acre Vista Del Hombre project — located near the airport in Paso Robles — with a deed of trust to secure the indebtedness.

(Vista Del Hombre’s problems were detailed in an April 29 UncoveredSLO.com article.)

Gearhart has stopped interest payments to hundreds of private investors who put $27 million into the project through Hurst Financial in 2005 and 2007. Those investors, though, are positioned above Heritage Oaks Bank in case of a default.

Gearhart claims his Vista Del Hombre project is worth between $100 and $150 million. However, real estate experts contacted by UncoveredSLO.com estimate the property to have a value closer to $5 million.

That property now includes some infrastructure, a golf course, three temporary buildings, a group of Porta-potties, and a small trailer housing both a pro shop and a cafeteria.

A cursory search of Gearhart’s holdings could have alerted bank officials to his current financial standing. Of dozens of properties Gearhart owns throughout the county, many have intertwining title profile histories.

Between 1994 and 2003, a residence located at 6305 Alcantara Avenue in Atascadero was transferred nine times between different Gearhart family members. At various times, it was listed in his wife’s name, Tamara Gearhart. Then the property’s ownership transferred frequently, listed to either June or Raymond Knight, Gearhart’s relatives, according to a title report. Because of state regulations governing interfamily transfers, these exchanges cost Gearhart nothing.

On November 7, 2006, Gearhart deeded a residence on Encinal Avenue in Atascadero to his son, Jeremy Gearhart, at no cost. A month later, on December 8, 2006, Central Pacific Mortgage Company provided the junior Gearhart with a $250,000 loan on the property. Later that same day, the property was deeded back to Kelly Gearhart, according to the title profile history.

Anticipating a rash of bank closings nationally, the Federal Deposit Insurance Corp. recently announced plans to beef up staff by as much as 60 percent, according to the Wall Street Journal. The key concern is not residential lending, but commercial and construction loan concentrations at smaller, locally-owned banks.