Starting a community bank is dicey at best, and the disasters at First National Bank of Marin, San Rafael, Calif., show just how perilous the enterprise can be.

First National Bank of Marin was started in a bedroom community of San Francisco by a group of local business people in 1984. Since then, it's had a series of stunning - for so small a bank - setbacks and has had only one profitable year.

In March, it staved off a federal takeover when its Tier 1 capital fell nearly to zero.

Tier 1 Capital on Track

But now, with a fresh recapitalization, its Tier 1 capital is up to around 7%. And First National chief executive David Shockney says some of the products that nearly felled this $37 million bank, were weird indeed.

Mr. Shockney, who was brought in to turn the bank four months ago, says that on top of the normal credit-related problems many new banks face, First National took on a heap of operational risk by going into lifetime reverse mortgages, auto insurance premium financing, credit-enhanced auto loans, and a national secured credit-card program.

Credit-Woe Exposure

"The credit problems were, manageable," Mr. Shockney said. "But the operational risks associated with something like auto insurance premium financing were way out of whack for a small bank like ours."

The lifetime reverse mortgages, in which an elderly person borrows on the equity in a long-owned home, a loan which is paid back when the individual dies and the home is sold, is a non-cash-flow product. The payoff can be 15 to 20 years down the road. Mr. Shockney said the bank bought heavily into this product, constricting its current income and leaving it exposed to other credit. problems.

The credit-enhanced auto loans and the secured credit card can only work with "a lot of bodies to service them" because the borrowers are frequently inexperienced borrowers. Mr. Shockney said. The secured credit-card program is still underway, he said, and profit", but required more staff to straighten out the inevitable customer problems that go along with it.

Auto Insurance Impact

But the biggest problem came with the auto insurance premium financing. In theory, if a borrower fails to pay back the loan used to finance his insurance premiums, all First National had to do was repossess the car. But through an oversight in the underwriting process, First National was also financing the application fee for the insurance, which wasn't secured by the car.

The result: First National lost $800,000 in $75 increments. All told, the insurance premium financing cost the bank $1.3 million.

"The last of that stuff should be off our books by the end of the year," Mr. Shockney said.

He said First National's problems can be chalked up this way: "This bank started with no capital so it had to keep costs down to the bone. But with these special lending products, you need a lot of bodies. For a $36 million bank to be spending a few hundred thousand dollars a month on overhead is incredible."

For the future, Mr. Shockney said First National Bank of Marin will concentrate on its 35,000-account secured credit-card program and "will be more aggressive as a community bank."

The bank made $90,000 in the second quarter.

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