Headline: East Bay Bank Struggles To Clear Its Sullied Name

Publication: San Francisco Business Times

Dateline: June 30th, 2003

Community Bank of the Bay is trying to make a comeback, bringing in new management to clean up the loan portfolio and improve overall performance.

The troubled community bank, which has lost about $5 million in capital since its founding in 1996, is operating under a cease and desist order issued by the Federal Deposit Insurance Corp.

The bank, with $2.5 million in capital remaining, lost $111,000 in the first quarter as it pursued a turnaround.

Federal regulators are calling for an injection of an additional $4 million to $5 million through a secondary stock offering. The bank is gearing up for that offering, expected to occur early next year.

"We have a full year to get our house in order and gain the regulators' confidence," said Gary Burns, the bank's chief financial officer. "When a potential investor looks at us, we need to have a story to tell."

And it will be no small feat to give that story a happy ending.

The new management is moving quickly to improve performance to take advantage of investors' appetite for community bank stocks.

The Oakland bank is seeking special designation from the state of California that will give investors buying at least $50,000 worth of the bank's shares an immediate tax credit equaling 20 percent of their investment.

"I don't want to minimize the work ahead of us, but that's why I'm so optimistic that we'll be able to raise the money," said CEO Brian Garrett.

Community Bank of the Bay's sale of stock, if successful, will not only bring in capital but will also create a pool of vocal advocates for the bank, which was the first California bank chartered under a federal program to promote banking in low- and moderate-income communities.

Community Bank of the Bay and institutions like it are modeled after the very successful ShoreBank in Chicago, the nation's oldest community development bank, which demonstrated that pumping money into troubled communities through sound banking practices could pay big dividends for all involved.

Community Bank of the Bay is making progress in its turnaround since Garrett, a veteran East Bay banker, came on board as CEO last September.

"There were some problems in the past when the loan department confused loans with grants," Garrett said.

Chief Credit Officer Dean Abercrombie said he and his team have used old-fashioned shoe leather in calling on delinquent borrowers to pay back loans.

Since last fall, the bank has collected $700,000 in loans that had been considered bad debt.

But Garrett is the first to say the new management has its work cut out for it.

The FDIC's cease and desist order includes a litany of complaints on how the bank was run, including:

• Hazardous lending and lax collection practices.
  
• Operating with inadequate capital.
  
• Maintaining inadequate reserves for bad loans.
  
• Producing operating losses.
  
• Operating with a board of directors that failed to provide adequate supervision and oversight.
  
• Former CEO George McDaniel resigned five months after the FDIC's order was issued early last year.

McDaniel told the East Bay Business Times he is "totally supportive of the bank, its new management and its current direction."

He was unavailable for further comment.

Under Garrett, the bank is focusing on a basic tenet of banking: Lend to creditworthy customers and pull in more deposits from the neighborhoods it serves.

"A well-run community bank doesn't venture much more than 10 miles from its front door," Garrett said.

The FDIC criticized former management for making loans outside the bank's service area, including a $1 million unsecured loan in Danville that was not repaid.

To reduce its loan portfolio risk, the bank sold about $8 million worth of loans that were outside its service territory, which stretches from Hercules to San Leandro along the inner East Bay.

The bank reduced its problem loans and net charge-offs by $1.6 million to $3.8 million in the eight-month period that ended May 31. Total loans at the end of May were $25 million.

And Garrett says cleaning up the bank's loan portfolio is providing more capital to make more loans locally.

"We now have money to lend," Garrett said. "We may have to hang a sign outside announcing a loan sale."

Mark Calvey covers banking and finance for the San Francisco Business Times.

© 2003 American City Business Journals Inc.