San Rafael’s Tamalpais Bank started out as San Rafael Thrift and Loan 18 years ago, competing against local lenders as well as national banks for the hearts and deposits of Marinites. It later morphed into Tamalpais Bank and began pursuing a business model designed to make it a regional player.
Like so many banks, Tamalpais began chasing real estate loans. In the commercial real estate environment, money flowed like bottled water at a soccer mom convention, deals closed at an almost manic pace and property values only knew one direction: up. And then the wheels came off.
Today, the bank is in rehab mode after the FDIC came to town in September and slapped it with a cease and desist order, telling CEO Mark Garwood and his 70 employees it was no longer business as usual. Among the 16 new requirements:
• Cease the use of brokered deposits (Known as “hot money,” this is large packages of deposits that are shopped by middlemen looking for the largest return. The upside for banks is it boosts their deposit base, giving them more liquidity. The downside is, the deposits are frequently pulled when a better return is found, taking the liquidity with them and leaving the bank with moves made based on the larger deposits.)
• The bank must eliminate from its books all assets classified as losses, either charging them off and taking the hit or collecting on them. This means the bank’s profits will suffer in the near term, at least the next two quarters.
• Cease paying stockholders dividends without FDIC permission.
• Cease making loans to any borrower associated with a loss.
• Raise capital.
• Scale back the number of commercial real estate loans made.
To put the FDIC’s order in perspective, there are 8,192 banks in the United States, and 186 have received some sort of cease and desist order as of October 2009 (that number would be much higher if the FDIC was fully staffed). This means such administrative warnings aren’t as rare as a World Series win by the San Francisco Giants, but they also aren’t as common as yoga studios in Marin.
So a cease and desist order is serious, but certainly not terminal. Unlike lots of other lenders across the country, Tamalpais Bank never got into originating subprime mortgages, but it got stung all the same by the real estate downturn. As of June 2009, commercial real estate, construction, apartments and land loans made up an eye-popping 89.4 percent of the bank’s total loan portfolio, including a bed and breakfast in Mendocino and a hotel development in Carmel. It even approved a luxury second home for $2.9 million in Scottsdale, Ariz.
Banks all over the country are now holding loan portfolios weighted too heavily in real estate, and the near term results won’t be good. Liquidity in the market is bone dry, values are still heading south and the economy is still shedding jobs. Loans backing shopping malls are suspect, as consumers pull back and some retailers consolidate operations or go out of business all together. Hotels are hurting, as people take more conservative vacations and businesses cut back on travel. Apartment owners suffer, as fewer jobs are created and more jobs are lost.
This situation isn’t lost on the FDIC. It’s telling community banks all over the country to reduce exposure to commercial real estate, but the horse is already out of the barn and galloping full speed into an economic nightmare.
So what of Tamalpais Bank’s situation? The bank lost $4.2 million in the second quarter compared to posting a $1.3 million profit one year earlier. It carries 37 nonperforming loans on its books as well as six foreclosed properties (versus 18 bum loans and one property last December). The bank has set aside $14 million to cover possible loan losses.
Bank officials acknowledge the lender made mistakes. Some of the decisions made were about the profit margin on loans, but the overall motivation was growth and self-preservation. Prior to 2008, large banks were in acquisition mode. Tamalpais Bank wanted to remain independent, and the best way was through growing its loan business.
But in 2008, Jamie Williams came on board in the front office just as bank officials began to realize the economy was changing. The wholesale lending division was closed down and with it, a certain amount of risk. The bank began focusing on building core deposits, pushing the retail and consumer sides of the business. Those deposits have grown 17.8 percent this year.
The bank also abandonned its ambitious plans to become a regional powerhouse. Instead, it now concentrates on doing business in Marin and San Francisco. The bank isn’t completely out of the commercial real estate game, but now it only makes loans on properties that are owner-occupied.
Is the bank out of the woods? Nope. It still needs to find a way to deal with the bad loans on its books as well as polishing its image in the community. Over the course of the last two years, the banking industry has taken its lumps—much of it deserved. The TARP bailout, where banks received billions in taxpayer money and then sat on it rather than lend, didn’t do bankers any favors in the public eye. And we now know astronomical salaries and bonuses are standard for many lenders, especially larger banks.
Tamalpais Bank has its own bonus situation, with CEO Mark Garwood picking up $156,000 last January along with then CFO Mark Moulton pocketing $60,000. Moulton moved on to Circle Bank in September, days before the FDIC hit Tamalpais Bank with the cease and desist order.
The negative publicity hasn’t been good for the bank, as some depositors were put off by the FDIC action. But, despite the bank’s losses, Tamalpais Bank has said it will honor its pledge to donate $500,000 this year to nonprofits that have been caught in the down economy. In the meantime, the bank concentrates on retail business and satisfying the Feds. It won’t be easy to square away the bad loans, but insiders at the bank say the lender is in it for the long haul.
