PALO ALTO, Calif. -- Shareholders of University National Bank and Trust Co. are accustomed to lively annual reports from Carl J. Schmitt.

Over the years, the chairman has used the reports to discourse on everything from deposit growth to how many pounds of Walla Walla sweet onions the bank gave away.

This year, however, Mr. Schmitt outdid himself.

Breaking taboos, he devoted his shareholders message to skewering the regulatory system in general - and the Office of the Comptroller of the Currency in particular.

Among his observations:

* "The regulator is more concerned with putting locks on the barn door after the horse has escaped than in observing if the gate has been closed!"

* "What had been considered adequate with a simple check and balance system has evolved into a check, balance, recheck, and rebalance system!"

The tirade - the culmination of a long battle between Mr. Schmitt and the Comptroller's office - cemented Mr. Schmitt's reputation as one of the nation's most outspoken community bankers.

"When I see something that doesn't ring true, my feeling is that it has to be talked about," Mr. Schmitt said in a recent interview. "I know there are some people who don't like it, but it's how we do things here."

University's ways of doing things generally work quite well. The $406 million-asset bank, formed 14 years ago, has long been one of Northern California's best-performing community banks. University earned 1.12% on its assets in 1993, and that was one of its weaker showings. It has a primary-capital ratio of 9.7%.

The regulatory fight began last June, when the Comptroller's office gave the bank a "needs to improve" rating under the Community Reinvestment Act. Mr. Schmitt swiftly appealed - and eventually won an upgrade. He also laid plans to convert University from a national bank to a state bank, thereby avoiding any future clashes with the Comptroller's office.

Observers say the the episode was vintage Schmitt.

"Carl had the courage to say what's what," said University board member George G.C. Parker, who also is a Stanford University business professor. "Most hankers challenge the regulator from a position of weakness, usually trying to save their hide. Carl challenged them from a position of strength."

"I know he's viewed as someone with strong opinions," said former Palo Alto mayor Jean McCown, who worked and argued with Mr. Schmitt over zoning issues in the wealthy enclave south of San Francisco.

'Open to New Ideas'

"I didn't see eye to eye with him on a lot of things and I still don't," she added. "But I know from experience that he's open to new ideas. He might disagree, but he's always open-minded about those disagreements and truly wants to have an exchange of ideas."

Indeed, Mr. Schmitt's positions are anything but predictable. While the latest conflict pitted him against regulators, he was a regulator himself back in the 1970s - superintendent of banks for California.

Back then, he caused a stir by charging that the policies of the Conference of State Bank Supervisors were being formulated by bankers, not regulators. He resigned from the group.

While his positions are strong, his demeanor is remarkably calm. With his trademark bow tie and tweed jacket, he seems unthreateningly professorial, despite an imposing 6-foot-3 frame.

Dress him in overalls and he could easily pass for the friendly host of a gardening show on public television.

In the CRA dispute, he says, he had little choice but to approach the regulator head on.

In a letter to shareholders last year arguing for a "yes" vote on the charter switch, Mr. Schmitt wrote: "It is now apparent that our principal regulator, the OCC, is approaching bank regulation from a national perspective, trying to make all banks perform their services in a like manner, and imposing a standard of management bureaucracy that is counterproductive to providing the high level of service that our customers have become accustomed to."

The battle got under way when the agency's examiners arrived for the bank's first-ever CRA compliance review. Though the situation that ensued was freakish, at least part of it should sound familiar to most community bankers.

While Palo Alto itself is affluent, neighboring East Palo Alto is a poor, crime-ridden, predominantly minority community. And East Palo Alto is in University's "delineated" area for community reinvestment.

A lack of mortgage loans there - and the bank's advertising methods - was largely responsible for the "needs-to improve" rating.

University spent the six months after the exam jumping through regulatory hoops, trying to have its courier vans approved as deposit-taking branches, trying to buy and open a coveted branch location in nearby Los Altos, and, finally, getting its charter switched.

Armed with Statistics

It soon became evident that a successful charter switch depended on first getting an improved CRA rating. The Federal Reserve Board of Governors, which had to rule on the charter switch because Mr. Schmitt sits on the San Francisco Fed's board, decided to take the "needs to improve" evaluation into account under the "public need and convenience" concept.

University embarked on its appeal armed with statistics that, it argued, showed 32% of the bank's loan portfolio as CRA credits. But Robert Klinzing, the Comptroller's office western region chief, backed up his examiners and rejected the appeal.

Next, Mr. Schmitt turned to the agency's ombudsman, Samuel P. Golden. As he has with 70% of the eases that have come across his desk in Texas, Mr. Golden found in favor of the bank, and gave University a satisfactory rating.

"[Mr. Golden] is probably the best thing to happen to the OCC in a long time," Mr. Schmitt said. "He's bringing a discipline to the agency that is long overdue. Gene Ludwig will go down in history as the comptroller who created the ombudsman."

Mr. Schmitt says he isn't trying to rub anything in the agency's face. He doesn't dislike its examiners, he says, and points out that as California's top bank regulator he was an ardent and early supporter of the Community Reinvestment Act in 1977.

"I was truly talking to my shareholders," he said of the annual report. "I admit I wanted to get it off my chest, but in my mind it was a disclosure issue. I was sharing with them events that had an effect on the bank's performance."

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