Community Business Bank in West Sacramento has weathered the financial crisis with a swagger that competitors might envy. It recently announced plans to increase lending and perhaps buy a bank hammered by the economic downturn.

The small lender can ponder such moves in a dismal economy because it reinforced its capital with about $4 million from the Troubled Asset Relief Program, known as TARP. The deal seems to show the federal bailout at its best – priming the economic pump in a distressed region.

Beneath the surface, Community Business Bank demonstrates flaws in the federal program: TARP props up small banks with risky practices, few strings attached. Rather than enforcing prudence, TARP underwrites business as usual.

A Bee investigation of internal shareholder documents and public lending records found that at Community Business Bank, those likely to benefit most from the taxpayer-funded windfall are a small group of insiders and their associates. From its inception 3 1/2 years ago, the bank has steered many of its assets to a handful of directors, as well as their relatives and business partners.

By early last year those property investors had drawn down as much as one-third of the bank's loan portfolio of more than $100 million, deeds of trust showed. The bank has loaned more to its own directors than about 90 percent of banks "similar in size and economic environment," according to the Federal Deposit Insurance Corp.

Top borrowers included a Community Business Bank board director and another director's brother. They used bank funds as a ready stash for land development even after the market had entered a free fall. Those loans, among others, approached – and might even have breached – state and federal limits designed to prevent excessive lending to a single individual or company.

Today, the bank's portfolio is riddled with problem loans and foreclosed properties, according to federal data and independent ratings.

John A. DiMichele, the bank's president, defended the bank as strong, particularly since the injection of TARP funds.

Regulators have not faulted his lending, he added, and some loans have been partly repaid or sold to other banks. But he declined to discuss specific loans or public records about insider deals.

"Our lending practices are very good" and within legal limits, DiMichele said. "The problem is, the economy sucks."

Yet the bank made loans to build luxury homes in relatively remote areas long after regional property values had begun to collapse. For example, in January 2007 Michael E. Rice, a director of the bank and owner of about 3 percent of its stock, received a $6 million loan to build homes on vacant property at the edge of Vacaville. Not one shovel has broken ground.

Troubled banking giants appropriately have been the focus of attention in the national meltdown. DiMichele and other small bankers complain that they are unfairly tarred with the same brush.

But lenders such as Community Business Bank, which provide economic lifeblood in small cities, typically draw little notice until they fail. In the stricken region surrounding Sacramento, even a small bank failure could prolong the downturn, further depress property values and erode tax revenues as businesses fold for lack of financing.

Of 44 U.S. banks seized by regulators since September, all but five were small, with outstanding loans well under $1 billion; 13 were no larger than Community Business Bank.

According to Bankrate.com, a leading independent evaluator, the bank's overall condition, including the quality of its assets – primarily loans – trailed nearly 95 percent of all banks of its size nationally just weeks before it received TARP funds. Among 183 California banks in its class, Community Business Bank ranked weakest among TARP banks and seventh-weakest overall.

Community Business Bank signals a pervasive problem at small TARP banks across California, most of which have recently suffered massive losses. In general, those with higher rates of insider lending lost the most and carry a far greater proportion of troubled assets, such as past-due loans and foreclosed properties.

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