Federal action against Heritage Oaks Bank

March 9, 2010

By KAREN VELIE

Federal regulators have banned the parent company of Paso Robles-based Heritage Oaks Bank from paying dividends or incurring debt as part of a written agreement the company and the Federal Reserve Bank of San Francisco signed on Monday.

As part of Monday’s action, federal regulators have ordered officials of Heritage Oaks Bancorp to come up with a plan within 60 days to maintain sufficient capital while taking into account allowances for problematic loans.

The bank, which operates 15 branches in San Luis Obispo and Santa Barbara counties, reported a loss of $1.6 million that it primarily attributed to $6.5 million in bad loans. In addition, the parent company reported it has in excess of $34 million in “non-performing” loans, referring to loans in which borrowers are behind on their payments.

For all of 2009, the parent company reported a net loss of $5.2 million.

“In response to these issues, management significantly enhanced the bank’s internal loan review and implemented an independent semi-annual loan review during 2009, which was recently completed in the third quarter,” said Lawrence P. Ward, the bank’s president and chief executive officer.

In the past, bank officials have battled to secure a handful of questionable loans they made to local hard money lenders and builders.

In 2008, former North County developer Kelly Gearhart secured a $1 million loan for his Paso Robles Vista del Hombre golf course and mixed 32-lot development project east of downtown Paso Robles even though the property, valued at around $5 million, was already saddled with $27 million in previous loans by Hurst Financial Inc.

The bank determined, two months after bank officials provided the funds to Gearhart, that the loan’s approval was based on “erroneous” and questionable claims, according to the bank’s appraisal of the property.

In June 2009, a group of investors filed a lawsuit against the parent company, alleging that the bank aided and abetted and/or conspired with Hurst in defrauding hundreds of seniors through illegal investment schemes.

The bank is also on the hook for an unsecured loan of more than $5 million it provided former Estate Financial President Karen Guth. After it became apparent Guth’s financial empire was crumbling, the bank allowed her to guarantee the loan with property that was not hers, according to court records.

Last year, bank attorney William Raver asked the court to allow the bank to foreclose on some of Guth’s personal assets.

However, San Luis Obispo Superior Court Judge Jac Crawford voiced his concerns over the validity of the bank’s request during a hearing last year.

“You loaned large sums of money when crimes were being committed,” Crawford said.

Investors in Guth’s Estate Financial have also accused the bank of allowing her to defraud investors by pumping up her company’s financial reputation.

“If Heritage Oaks hadn’t provided an unencumbered line of credit to Guth, many of the injured investors might not have been robbed of their retirements,” investor and real estate broker Jeri Kirkpatrick told CalCoastNews.