Headline: No Longer 'Commercial Grant' Bank

Publication: East Bay Business Times

Dateline: Week of May 5th, 2003

Brian Garrett, the new CEO of Oakland's Community Bank of the Bay, laughs when asked what changes at the bank an outsider might see.

"They can see," he says.

One of his improvements since joining the troubled bank was simple - lights.

When he took over last summer, the bank was in such a state that even the lights in its Broadway and 19th Street lobby were half off.

The lights, however, were the least of the worries. The bank's finances were in trouble and bad loans were burning a hole in its books. Collections were so poor that one newly hired executive referred to the previous commercial loan department as "the commercial grant department."

Things hit bottom early in 2002 when the Federal Deposit Insurance Corp. stepped in and mandated changes in the bank's lending and collections policies and in its management.

In the past eight months, the bank has been going through an aggressive turnaround - hiring a determined team of experienced executives, collecting hundreds of thousands of dollars in outstanding debts, crafting new strategies to attract deposits, revising lending practices and planning a new share offering to raise capital to put the bank on a solid footing for growth.

"The bank is poised and ready to grow," said Chief Financial Officer Gary Burns. "We just have to work ourselves out of some stuff the previous management left."

Burns and others in Garrett's team are rapidly working their way out of the hole the bank found itself in last year.

Through the end of March, Dean Abercrombie, chief credit officer, had collected $700,000 in loans that had been deemed unrecoverable. Abercrombie, who joined in December, expected to collect another $240,000 by early May.

How? Just knocking on people's doors and telling them it was time to pay, he says.

"If they (past management) had done it two years ago, they'd (have) gotten the same result. And we wouldn't be in here," said Burns, who started in January.

The previous management had a practice of rolling debt into a new loan when a borrower got in a bind, the new executives say. They have rewritten the lending procedure to avoid such pitfalls and increase consumer lending, said Abercrombie, who traced many of the bank's problems to what he called the previous management's "commercial grant department."

Those lending practices saddled the bank with $1.3 million bad commercial and industrial loans as of the end of 2002.

That's a big number for a bank with just one branch and assets of $44 million.

Collections are just one piece of the cleanup. The bank is boosting its reserves for troubled loans, and Garrett said the goal is to have reserves three times the average for banks its size.

Garrett and others said the two troubles that can sink many institutions - mushrooming bad debt and insufficient capital - won't topple Community Bank of the Bay.

"We can weather the storm. There is sufficient capital," Garrett said. "To the extent the loan portfolio was going to be a ticking time bomb, it wasn't."

He's more concerned about an interest-rate imbalance that holds the bank back from becoming profitable. The bank is paying sky-high interest on long-term CDs and collecting relatively low interest on its loan portfolio. All he can do is try to attract new deposits while counting the days to the maturity dates of those CDs, many of which were sold outside the East Bay to attract funds.

"We're beating the streets for new business," Garrett said. "We're going to focus on bringing in community deposits."

The bank is essentially returning to its roots as a community bank.

When opened in 1996, Community Bank of the Bay was the first California bank chartered under a federal program to promote banking in low- and moderate-income communities. As a community development bank, it is a for-profit venture that caters to businesses and consumers underserved by larger banks. Investors include the city of Oakland and Wells Fargo, which has invested $400,000.

Frank Tsai, board chairman and one of the organizers of the bank, said the bank lost sight that lending to underserved borrowers didn't mean lending only to high-risk customers. The bank should have been targeting not just risky borrowers but also creditworthy borrowers who were not served by large banks in the midst of the banking consolidation that has swept the market, he said.

"We have to serve our community, and that's anyone in the community," he said. "We don't want to turn our back on good borrowers."

And, Tsai said, the bank could have done a better job evaluating credit customers and a better job monitoring the ability to repay.

As is typical with loan portfolios, as the bank's portfolio aged, the level of troubled loans grew. With problem loans mounting, the bank was also hit by the economic slowdown. Early on, regulators advised the bank to keep an eye on certain issues.

"It wasn't anything that raised alarm bells," Tsai said. In the last couple years, however, bad loans and other weaknesses became more problematic. "Then their concerns were, we were not on top of the portfolio," he said. Early last year, the bank's primary regulator, the FDIC, issued a nine-page cease and desist order that, Tsai recalled, sent the message, "You guys can fix this. But you need to fix it."

The FDIC gave the bank's board a laundry list of fixes. The order cited alleged unsafe banking practices and violations of laws or banking regulations, including:

• Hazardous lending practices.
• Inadequate capital.
• Too many risky loans.
• Inadequate loan reserves.
• Inadequate liquidity provisions.
• Operating loss.
• "Operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits."
• "Operating with a board of directors which has failed to provide adequate supervision."

Five months after the order, CEO George McDaniel resigned.

Tsai said the board looked at who it needed to restore the bank's health in the wake of the FDIC order and felt a management change was needed. He said McDaniel's health problems ontributed to his departure.

"We needed someone really healthy to respond to that C 'n D," said Tsai.

McDaniel said in a voicemail message that he is "totally supportive of the bank, its new management and its current direction." He was not available for further comment.

Garrett, a veteran East Bay banker, was encouraged to step in to right the bank. He said it began with a call early last year from an executive search firm saying, "There's a bank that has to make a change."

Garrett was one of the founders in 1980 of Bank of Walnut Creek, where he worked as chief credit officer for 10 years before going to East County Bank in Antioch.

Last year, he spent about three months getting the lowdown on Community Bank of the Bay and negotiating with regulators and the bank's board. He said he made it clear that he wanted this to be a turnaround, not a shutdown, story.

Garrett said the bank has hit the targets the FDIC set for it, and Tsai said the board, regulators and the bank's employees feel confident about Garrett and his team.

"Things are going very well," said Tsai, who, in addition to chairing the bank's board, is the chief financial officer for Summerville Senior Living Inc. in San Ramon.

To help lure business customers, the bank cut a deal that allows commercial customers to make deposits to their accounts through Wells Fargo Bank's 6,700 ATMs. The arrangement led some inside the bank to say Community Bank of the Bay now has "one more branch than Wells Fargo."

Perhaps the biggest job facing the bank will be reconnecting with its target customer base of borrowers and potential account holders.

"We're not out of the woods, yet," Tsai said. Bank representatives need to get out and network to expand the customer base, he said.

"This bank sorely needs cheerleaders," Garrett said.

One way to get cheerleaders would be to raise capital through a broad-based share offering in the community. Garrett recalls that Bank of Walnut Creek attracted 700 initial investors at $2,000 each who became "cheerleaders" for the bank and kept the bank anchored to the community. That approach in Oakland would help tie the bank to the community, Garrett said. It would also require approval of regulators, who might have concerns about giving individual investors illiquid stock that is not easily sold.

Executives and the board are working out the recapitalization plan now. Garrett points out the bank will hold an annual shareholders meeting in June, at which point executives hope the troubles will be in the past and they will be talking about Community Bank of the Bay's bright future.