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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.