Seven of them – including Community Business Bank – loaned more to their officers and directors than those banks received from TARP.

Only Valley Business Bank in Visalia received even an average rating from Bankrate.com. Nevada City-based Citizens Bank of Northern California – the lowest-rated after Community Business Bank – and Heritage Oaks Bank in Paso Robles scored below more than 80 percent of banks of their size.

Some economists say local commercial banks could become the next cautionary tale for a beleaguered industry. Business, construction and land-development loans – crucial to Community Business Bank and similar lenders – have become shaky. Foreclosures on such properties have spiked.

DiMichele acknowledged that many of his bank's construction loans are secured by land whose value has tumbled, but the bank does not generally record those lower values on its balance sheet, as permitted by new federal rules.

"Without knowing the true value of the bank's assets, its safety and security can be hard to assess," said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington, D.C., think tank. In the case of Community Business Bank, he said, "the downside is that the bank is playing with the taxpayers' money."

Humble beginnings

In 2004, DiMichele and his partners sold Woodland-based Yolo Community Bank and then raised $21.3 million from a public stock offering to start Community Business Bank.

It opened the following year in a strip mall on Jefferson Boulevard near the Interstate 80 business loop, nestled between a Little Caesars pizza parlor and a Chinese takeout restaurant. The bank later moved elsewhere in West Sacramento and opened a branch in Lodi.

As its name implies, Community Business Bank is focused on local enterprises.

"We're just a small bank," DiMichele said. "We try to do the best we possibly can with professionals and not-for-profits and small businesses." He mentioned loans to a Christian association and a center for hearing-impaired children as examples of civic-mindedness.

The bank's landlord was Mark Engstrom, a developer who owns more than 30 commercial properties in the region. Engstrom has worked with Woodland-based Nugget Markets and Food 4 Less, which have stores in some of his retail centers. He also serves on the board of the Woodland Healthcare Foundation, which supports a local health center.

In a storefront on the other side of the Chinese takeout restaurant, Engstrom operates a property-management firm with his brother James G. Engstrom – a founding director of Community Business Bank who today owns about 3 percent of its stock.

Mark Engstrom didn't need his brother to help him get a loan, he said, because he had been doing business with some of the bank's organizers for two decades. H. James Gray, Engstrom's business partner at real estate brokerage NAI BT Commercial in Sacramento, also is a Community Business Bank director, part-owner and borrower.

"A community bank can be a vital asset to the local area," Engstrom said. "You know the people and they know you."

That relationship translated into large Community Business Bank loans to Engstrom and two of his many partnerships, making him one of the bank's largest borrowers.

In July 2007, Engstrom, his wife and three partners borrowed $2.9 million against vacant land beside a golf course near Marysville. On the same day, he received another $2.9 million for his partnership EDH-16 LLP to buy undeveloped portions of a gated housing project near Folsom Lake. A week later, he borrowed millions more for his company Sycamore Cameron Park LLC to develop commercial property off Highway 50 on the way to Placerville.

"We get multiple quotes from lenders," he said, and the rates at Community Business Bank "were reasonable at the time."

According to deeds of trust and partnership filings, by July 10, 2007, loans to Engstrom and his partners totaled as much as $13.5 million.

A bank's legal lending limit to a single borrower is 25 percent of its capital reserves – its profits plus shareholder investments – and fluctuates as reserves rise or fall. According to data supplied by Community Business Bank, when loans to Engstrom peaked, the bank's limit would have been about $4.7 million.

Call The Bee's Charles Piller, (916) 321-1113. Researchers Pete Basofin and Sheila A. Kern, and reporter Phillip Reese contributed to this report.