Headline: Banking on Community: Community bank returns home to reverse its fortune

Publication: Oakland Tribune

Dateline: January 4th, 2004

This is a tale of two tiny banks, both based in Oakland.

One is trying to turn around after receiving a federal order to stop engaging in "unsafe and unsound banking practices."

The other has quickly risen to be No. 1 in making Small Business Administration loans to African-American companies in California and No. 5 nationally in SBA loans.

The first is Community Bank of the Bay. It was founded in 1996 as one of only six banks of its kind in the U.S. and the first in California to be designated a community development financial institution -- part of a federal program to promote banking in low- to moderate-income areas. The bank, which received, $1 million from the city, got in a hole by ignoring its local mission and making bad loans, but new management is working to dig it out.

The second is Innovative Bank. It was founded in 1982 as Bank of Oakland. New owners took it over in 2001, changed the name and turned the sleepy two-branch bank into a leading SBA lender by making loans as low as $5,000 to small businesses in low- and moderate-income areas.

Their stories reflect the ups and downs of running a small bank. It takes focus, experience and commitment. Still, success is far from guaranteed.

Some small banks become big, such as Oakland's Golden West Financial. The bank, run by Herbert and Marion Sandler for 40 years, focuses on adjustable-rate mortgages and controlling costs, and has become a profitable Fortune 500 firm with assets of $80 billion.

Fremont Bank was one of 50 banks to start in 1964. The others folded or merged, but Fremont Bank stayed independent and intact. The profitable bank -- which stays open on Saturday, offers no-closing-cost home loans and has branches in supermarkets -- has grown to assets of $1.8 billion.

And then there are Community Bank of the Bay and Innovative Bank (see related story).

A bank for the community

Community Bank of the Bay started with fanfare in 1996 in Oakland, attracting $1 million from the city.

The bank, which took four years to launch, was the first of its kind in California. Its mission was to serve the local community, making loans to low-income residents and businesses.

But it quickly got off track. It took deposits from all around the country, issuing CDs at above-market rates, which became a big problem as interest rates plunged. It made questionable out-of-area loans and went through a revolving door of loan officers. The bank tried to improve its portfolio by buying government-guaranteed loans, but purchased them at bad terms.

The bank's losses piled up. In seven years, it lost more than $5 million of its $7.65 million in equity capital.

"They ignored the mission of the bank," said Brian Garrett, hired as the bank's CEO a year ago to turn it around.

The Federal Deposit Insurance Corp. told the bank three years ago to correct things, but it didn't respond to a memorandum of understanding, Garrett said.

Then the FDIC issued the bank a cease-and-desist order in August 2002, citing it with:

Engaging in hazardous lending and lax collection practices.

Operating with inadequate capital.

Operating with a large volume of poor quality loans.

Operating with an inadequate loan valuation reserve.

Operating with inadequate provisions for liquidity.

Operating in such a manner as to produce operating losses.

Operating with management whose policies and practices are detrimental to the bank.

Operating with a board of directors that had failed to provide adequate supervision.

"They call it operating in an unsafe and unsound banking practice," said Gary Burns, the bank's new chief financial officer.

The cease-and-desist order caught the bank's attention.

"If you ignore it, you probably have six months and they'll force a sale ... (and) they'll assess civil penalties," Garrett said.

Garrett, a veteran banker, welcomed the challenge.

"Some people fix up real estate and make a profit. I fix up banks," he said. "I think the East Bay market -- Oakland, Berkeley, Emeryville, San Leandro -- is a strong market for small banks."

Garrett quickly cleaned Community Bank of the Bay's house, bringing in Burns and Chief Credit Officer Dean Abercrombie. Among top officials, only two board members and the chief compliance officer stayed. The 14-employee bank kept its staff and worked to fix its problems.

The bank lowered its CD rate and let existing accounts mature. At the start of 2003, two-thirds of its CDs were from out of the area. Now, it's one-third.

The bank sold 80 percent of its government-guaranteed loans, taking a $25,000 loss to eliminate a potential $800,000 hit to the balance sheet.

It formed lending policies, collected loans and built its loan loss reserve.

Also, the bank has worked to build its relationship with one of its biggest investors, the city of Oakland.

It was a struggle at first. When Garrett talked to former City Manager Robert Bobb last year to tell him the bank wouldn't fail, "he had no idea they had money invested in this bank," Garrett said. "It left me without words."

However, city-bank communications have improved lately. Roy Schweyer, Oakland's housing and community development manager, said he had a positive meeting in mid-November with bank officials.

"We made the investment to create a bank that would provide services to the city," Schweyer said. "We're planning to get back together and see how we can work with them."

Also, Garrett met with Councilmember Jane Brunner (North Oakland).

"We really want Community Bank of the Bay to be successful," Brunner said.

But she heard complaints from several local businesses that the bank had taken away their loans or changed the terms. She has asked city officials for an analysis of the bank and where it is making loans.

"The main issue is, for $1 million, you want to make sure it's making loans in the city," Brunner said.

Garrett said that since he has been on board, all but one of the bank's loans has been in the Oakland-Berkeley market.

"My goal is to make this bank profitable and stable and serve this Oakland community," Garrett said. "I don't want any business more than 10 miles from my front door."

But for customers who don't repay loans, "we'll be the meanest junkyard dog in town," Garrett said. "If I have to step on toes, so be it."

The bank's new reputation as tough on delinquents is a far cry from its old image as the place where "all of the crooks would bank," Abercrombie said.

The bank has collected most of a bad $1 million loan to a Danville company.

Another bad loan was to a San Leandro firm that went under a year ago. The bank charged off the loan and had a lien on the equipment. Abercrombie went to the office and found coffee in cups, piles of unopened mail and a new $80,000 Cisco router still in its box.

"We grabbed it all, moved it all out and sold it," Garrett said.

Also, the bank stopped renting two storage lockers in Dublin. One was filled with 2,200 pounds of Belgian chocolate -- inventory from a failed candy store. The bank sold most of the chocolate and kept some for employees to eat.

FDIC examiners visited the bank in February and August and liked what they saw, Burns said.

Burns believes the bank now complies with 17 of the 18 points in the cease-and-desist order. But the last one is big: The bank has to raise more capital.

The FDIC has ordered the bank to have capital equal 9 percent of its assets. The bank ended Sept. 30 with $2.13 million in capital, or about 6 percent of its $37.52 million in assets.

The bank is planning to issue a secondary stock offering. It still has to set terms but expects to raise at least $1 million.

The bank hopes to be profitable in 2004, but it's not out of the woods yet.

"The shareholders who bought it seven years ago probably aren't happy with their investment," Garrett said.

The bank's deposits are down to $35.1 million and loans to $20 million.

Garrett wants to rebuild the bank by making loans and taking deposits locally with residents and small businesses. It offers free checking, reimburses ATM fees and has an agreement to let customers make deposits at Wells Fargo ATMs. It's preparing a marketing campaign and plans to roll out Internet banking.

"We want a relationship, where they have checking, savings, a CD, student loan, you name it," Garrett said.

The bank has one branch at 1750 Broadway, with free parking next to the 19th Street BART station. The office was rundown, so management installed new lights, repainted the walls, cleaned the carpet and washed the windows. Garrett came on a Saturday to trim the bushes. His business card includes his direct line and cell phone number.

"If you have a question, you can reach me," Garrett said.

The model community development financial institution is Chicago's ShoreBank, which was founded in 1973 and now has assets of $1.4 billion, with record 2002 profit of $6.7 million. Community Bank of the Bay is one of less than 60 CDFIs in California. While CDFIs are certified by the U.S. Treasury Department, they also can obtain California Organized Investment Network certification, adding a tax-credit incentive for equity investors.

Community Bank of the Bay is trying to regain its state COIN certification, but it has run into a brick wall. An Insurance Department spokeswoman said COIN is working with the bank but hasn't received the proper information.

"That's crazy," Garrett said. "We did respond."

COIN certification would make the investment for new capital more attractive. "The bank desperately needs new capital," Garrett said.

Community Bank of the Bay officials say they deserve another chance.

"This is a mulligan," Burns said. "We're a do-over bank."

Alec Rosenberg can be reached at (510) 208-6445 or arosenberg@angnewspapers.com.