Some Businesses in Limbo Until Bank Rebuilds

A month after the faltering Los Angeles Community Development Bank shut down its office in the San Fernando Valley, area businesses are anxiously awaiting loans that could determine whether they will thrive or have to cut jobs.

Three Pacoima businesses were among those who hitched their futures to the low-interest lender: a sign maker whose building was destroyed in the Northridge earthquake, a car parts manufacturer that needed money to avoid being swallowed by larger competitors and a bungee cord distributor that had to turn away millions of dollars in business because its three remaining employees were unable to fill all the orders.

Each of the business owners said loans from the Community Development Bank, which closed its Pacoima office, meant the difference between making millions and shutting their doors for good.

The bank, whose assets are federally guaranteed, was formed in response to the 1992 Los Angeles riots to stimulate business growth in depressed areas of the city. It has distributed $120 million in five years, through loans with interest rates of 2% to 4%.

Because of a $24-million loss on a bad loan and a $9-million judgment against the bank, it has cut its staff in half, closed its satellite offices and curtailed most of its lending activity. The businesses in need of new loans from the bank are in limbo, hoping the bank will rebound in time to save their companies.

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Michael Lavallee, owner of Lido Bungee, said at one point he returned a shipment of goods because he could not pay for it. Lavallee had placed the order in anticipation of funds the bank approved nine months earlier but had not released. Near financial ruin, he laid off all 13 of his employees, leaving just his wife and son.

“It was a long time before we got the money,” Lavallee said, “but we never gave up. I’m either too obstinate or too stupid. I had 40 years in the business riding on this, and I knew we could go to $50 [million] or $60 million [in sales] if we had the capital behind us.”

Since Lavallee received the funds, his business has grown to about $20 million in annual sales. His plans for another expansion are tangled in the dealings of the Community Development Bank.

“Stores like Wal-Mart and Sam’s Club buy 17 million of these [bungee cords] a year,” Lavallee said. “Without capital, I can’t keep up with competition, because we have to buy now, ship and wait until we get paid later.”

The three business owners said the inexperience of the Community Development Bank’s original staff members made doing business with them a long and frustrating process.

“It’s hard for me to say anything negative about the [bank],” said Al Gold, owner of Gold Graphics in Pacoima. His company makes the “Valley of the Stars” and “L.A.: A World of Difference” banners that hang from street light poles throughout the city. “That’s kind of like biting the hand that feeds me.

“But having said that, if everybody had the wisdom of hindsight, it would have been nice if the bank had a better cadre of personnel that knew what they were doing. I don’t see that there were any bad guys. If they could be accused of anything, it’s incompetence.”

Gold, a 44-year veteran of the marketing business who studied accounting at USC, said he noticed right away that some of the bank’s loan officers did not know how to read a financial balance sheet--They had never made loans before.

“I had to have my heavy hitters [accountants] teach them what they were supposed to be doing,” he said. “But when dealing with financial people, you don’t want to win the argument and lose the war. We always had to be very political about that.”

New Chief Executive William Chu inherited a legacy of mismanagement, costly lawsuits and bad loans when he took over in January. He trimmed the bank’s administrative costs by closing the satellite offices and laying off 13 of the bank’s 27 workers.

He hired banking experts such as Richard Dominguez, a founder of Industrial Bank, to monitor the loans. He also is working to secure capital from private industry banks that would help fund Community Development Bank loans.

“We are going to curtail some of our lending for the time being until we re-engineer and restructure ourselves and find some additional capital,” Chu said. “We have confirmed that the mission we were originally chartered to do is still valid. Now we want to make sure we are more efficient in dealing with our customers [in outlying areas] and new applicants. And we are looking at the way we handle clients after the loan is done.”

That may mean using Los Angeles City Council members’ staffs to recruit and screen new business, instead of operating satellite offices around the city. It may also mean providing more technical assistance to help ensure clients’ businesses flourish after a loan is made, Chu said.

The new and improved Community Development Bank has shown signs of rejuvenation. Banking experts have helped George Galinas, president of Foothill Automotive Electric, prepare professional financial statements to make the alternator manufacturer more attractive to lenders.

A $1-million loan from the bank in 1997 was enough to help Foothill increase its work force from 60 to 215 employees and its sales by 50% in one year, Galinas said. Now, though, the firm will have to lay off employees if a loan approved two years ago is not released soon, he said. Galinas has had to start the loan process from scratch four times in two years, as new loan officers replaced those who were fired or quit.

“If the money doesn’t come, we’re out of luck,” said Galinas, who moved his company to Pacoima so he could be eligible for the utility breaks and low-interest loans offered in the enterprise zone. “I’ll just have to downsize. That’s not what being in an enterprise zone is about.”

Chu would not say how much money it has loaned in Pacoima.

Despite the challenges, the borrowers’ grumblings carry undertones of gratitude.

“In this business, companies are buying each other and becoming bigger. We would have been pushed out,” Galinas said. “We had shaky ‘bankability’ because we hadn’t been around that long. The CDB was the only one that would work with us.”

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After the 1994 earthquake destroyed his building, Gold, the sign maker, planned to cash in his insurance payment and retire. He discovered his insurance did not cover earthquake damage, and he was forced to build a new plant and continue working. But traditional banks would not lend him money against a crumbled plant.

“Frankly, I’m beholden to [the Community Development Bank],” said Gold, who added he now can qualify for standard loans from traditional banks. “The results were I now have a company that has quadrupled its sales and added 175 employees to the payroll. It turned out how it was supposed to.”

The three Pacoima businesses, along with others around the city with approved loans, will be first in line when the bank begins to release funds. Chu said he expects this to happen within six to nine months, when the bank also will begin to accept new loan applications.

The bank still has $200 million in backing from the federal government. The next generation of borrowers probably will be businesses that learn of the program through City Council offices.

“We will still have representation in all the regions,” Chu said. “There are ways to be in a community without setting up a complete office. Most people know by now, so we don’t have to spend the same amount marketing from our different offices.”