Once a stable and trusted member of the Marin community, Tamalpais Bank’s abrupt closure left unanswered questions about why…and what happens next.
They weren’t at the hotel for a sales meeting, company training or an industry conference. They were from the Federal Deposit Insurance Corporation—and they were in San Rafael to give Tamalpais Bank its last rites.
A source familiar with the bank and the FDIC closing said Tamalpais Bank officials tracked communications between Washington, D.C., and the bank’s home office carefully. The lender failed to raise any investor cash, and so the bank was in play. Either another bank was going to buy it, or the state of California was going to pull the plug and turn the bank over to the FDIC. The Feds had been digging deep into bank records for at least two weeks, according to this source (who spoke on condition of anonymity). Just two days before the bank ultimately closed, the FDIC called and asked more questions, leading Tam employees to think they were safe for at least another week.
But then Friday arrived and so did the Feds, 90 strong, fanning out through all seven Tam Bank branches. At closing time, they walked into the bank lobbies, gathered together the employees and told them they no longer worked for Tamalpais Bancorp. For now, they worked for the FDIC. The Feds explained that, on Monday, they’d draw paychecks with Union Bank printed on them. FDIC staff, joined by officials from Union Bank, then gave Tam employees a few minutes to digest the fact their bank had just disappeared.
Some bank staffers, convinced the Feds still had more homework to do before anything could happen at Tam, had slipped out early that Friday. And when the FDIC did show up to lock the lender down, bank officials sheepishly began calling those employees back into the office.
The bank had been put on public notice in September of last year. The Feds had some concerns with the bank named after Marin’s best-known peak. Specifically, the FDIC told Tam execs its loan underwriting needed to improve, that it had too many commercial real estate loans as a percentage of total loans on its books, and that the bank needed to raise more capital and sell off troubled loans.
With that notice, there was blood in the water. Between the 140 banks that failed in 2009 and the 82 banks that crashed and burned this year (as of June), when a bank received a notice from the FDIC, the clock started on whether it would make changes and survive, at least in the public’s perception. This is largely unfair, since according to the FDIC, just 13 percent of banks that receive such notices go on to fail.
It’s a fair bet that Tamalpais CEO Mark Garwood didn’t have this stat at hand when be began putting out the word that Tamalpais Bank was just fine, thank you very much. He said changes were underway in how the bank was lending and the very areas that caused federal officials concern were already being corrected. As any savvy CEO would, Garwood said these things not only because he wanted the media to settle down. He wanted to make customers and, even more important, future investors, feel as if the bank was solid. In fairness, Garwood and his team had made changes to the bank’s business model, shifting from aspirations of being a regional bank to serving the North Bay.
Hey, wanna know a secret?
Last year, the FDIC targeted IndyMac Bank for closure and began making plans to shutter the institution. At the same time, Senator Charles Schumer (D-N.Y.) released a letter from his office to the FDIC warning the agency that he felt any closure was premature. The letter appeared in the Southern California media and, in the 10 days leading up to the bank’s closure, $1.4 billion in deposits walked out the door. So you can understand the cloak and dagger approach before the banks get locked up.
The FDIC has six teams that operate out of Dallas, and their job is to quietly go around the country and close banks. In the course of reporting this story, the magazine contacted four different FDIC officials via email and phone calls, and some but not all of those attempts were ignored. We filed a Freedom of Information Act request for the type of information that has been made public in the past.
But it isn’t just the Feds who don’t wish to chat about the demise of Tam. Union Bank, the lender who won the bidding process to take over $487.6 million in deposits and $628.9 million in assets won’t comment either. Former Tam employees who now work for Union shy from conversations for fear they’ll anger their new employer.
Former employees who left the bank prior to its closing, like Mike Rice and Mike Mouton (now at Circle Bank in Novato), just want to put the experience behind them. Efforts to talk with former CEO Garwood fell flat. Mark Chapman, a former Tam senior vice president, didn’t want to talk because he was negotiating a new position with Union. Larry Rosenberger, a member of the bank’s board, failed to return a phone call. Gary Tobin, a public relations consultant who represented Tam Bank for years, wouldn’t talk either, other than saying, “Tamalpais Bank served the community very well and was a big part of Marin, working closely with nonprofits. The bank will be deeply missed by those organizations.”
With stealth being the watchword, NorthBay biz relied on documents from the U.S. Securities Exchange Commission, the FDIC, the state of California as well as interviews with sources having intimate knowledge of the bank’s operation to put the story together.
In the beginning…
Founded in 1989 as San Rafael Thrift and Loan, the lender opened its doors in 1991. From humble beginnings in the Mission City, the bank slowly grew to serve all of Marin County, stepping up to aid nonprofits and becoming a part of the community. Along the way, the bank went public in 2004 with a listing on NASDAQ.
It became the sponsor for the annual Heart of Marin nonprofit celebration and a heavy contributor to local causes. Along the way, the bank grew to seven different locations, but never lost track of the communities it served.
But a changing business philosophy and a competitive banking environment altered Tam’s focus, according to a source familiar with the bank’s long-term operation. “It became concerned with growing. It felt it needed to become larger to stay independent or at least not be an acquisition target.”
Tamalpais had historically used a wholesale lending approach, making loans throughout California based on industry and not lender-borrower relationships. But the management’s desire to grow dictated a change in lending models. Tamalpais began to concentrate its efforts on lending in the Bay Area and expanded its retail products as well as developing a wealth management business designed to bring in higher net worth customers. Bank officials also began building loan relationships, a move they hoped would pay dividends in repeat business.
The bank’s board of directors was so pleased with the lender’s 2008 performance, it awarded CEO Garwood a $156,000 bonus while then-CFO Moulton banked a $60,000 bonus. It seemed there were nothing but blue skies and good times ahead for the bank named after the local mountain. Bank analyst BauerFinancial Inc. gave Tam a four-star rating, while noting it carried a high percentage of nonperforming loans.
One of the relationships the bank was building was with the Lembi family of San Francisco. The Lembis were major commercial real estate players in the city, buying apartment complexes at a surprising velocity. But if the speed at which the transactions took place was startling, you couldn’t tell by Tamalpais ledgers. Between December 2007 and October 2008, the bank lent the family $42 million—or better than 75 percent of its available capital.
Tam was seeing the Lembi business through because the credit markets had essentially collapsed in the fall of 2007. The Wall Street lenders the Lembis had used in the past had cut them off, and now bankers at Tam felt like it was their turn for a slice of the profitable commercial real estate pie.
On the other hand, lending 75 percent of your capital to one borrower who was active in just one market, buying just one type of asset, was a little like taking all your eggs, putting them in just one basket, then asking the 49ers’ Vernon Davis—who led the NFL in drops—to hold on to them for you.
According to Foresight Analytics of Oakland, the bank carried a portfolio of commercial mortgages of $230 million in 2007, but a year later, that number had ballooned to $324 million. “That kind of growth by itself might not be a problem, but the bank’s nonperforming loans shot up as well,” says Foresight Managing Director Matt Anderson.
The bank had backed a hotel in Carmel as well as a bed and breakfast in Mendocino. Tam loan officers had even signed off on a trophy second home in Scottsdale, Ariz., to the tune of $2.9 million. And the bank (supposedly) didn’t even write residential loans. It seems the bank management’s game plan of lending only in the Bay Area was more a suggestion than a hard and fast rule.
While the focus on lending was fuzzy, the attention paid to bringing in deposits was laser sharp. The bank had taken to using “hot money.” This is the industry term to describe brokered deposits—deposits placed in the bank by a middleman searching for a high interest rate. While the bank taking the deposit has to pay a higher rate of interest, it also has more capital to lend or invest or, in a tight spot, have the feds count toward its financial health. The downside is that these deposits are oftentimes short-term, deposited in the bank until the broker finds a higher interest rate.
By September of last year, the bank had attracted the interest of the FDIC—and not in a good way. The federal agency sent Tam a “Cease and Desist” letter, warning bank officials to:
• Stop using brokered deposits;
• Eliminate all non-performing loans and assets;
• Cease paying stockholders dividends;
• Raise capital;
• Make no loans to any borrower holding a nonperforming loan; and
• Scale back lending on commercial real estate.
The latter two points arrived a bit late, as the Lembi loans were already turning sour. In the third quarter of 2009, the bank was toting $75 million in bum loans on its books. In November, the bank sold loans totaling $37.4 million for $24.1 million, booking a loss of $13.3 million. At the time, the bank wouldn’t confirm the loans were tied to the Lembis, but they were.
A new year, same old problems
In February of this year, the FDIC sent another missive to Tam, this one a “Supervisory Prompt Corrective Action Directive,” warning the bank to raise capital within 30 days. The agency gave Tam until March 21 to either sell enough shares of stock to raise the needed cash or accept an offer from a bank to buy them out.
Tam officials jettisoned the wealth management business, partnering it with CSI Capital Management in San Francisco. The move failed to bring the bank any capital, though it did dump the unit’s overhead costs.
In the last few months of the bank’s existence, it looked to Wall Street for help in recapitalizing. But according to one source familiar with the endeavor, the bank lacked any real relationships to call on, and efforts at finding investors fell flat. On April 2, the bank sold off $28 million in bum loans at a 45 percent discount, seeing just $15.4 million from the transaction, according to SEC filings.
The bank was late getting its annual report out, but when the report was filed with the SEC (the day before the bank was shut down), it showed $50 million had been set aside for loan losses. Additionally, the bank warned it had failed in its efforts to reach capital levels to satisfy the FDIC, and the bank’s auditors had advised that its efforts to stay in business were in serious doubt.
The day after the report was filed, the state of California revoked Tam’s charter, appointing the FDIC as receiver of the shuttered bank. The Feds had been in negotiations for weeks with eight different banks that sent along their sealed bids the week before Tam was closed. Union Bank won the beauty contest, paying a premium of 2 percent over the value of the bank, according to the FDIC.
NorthBay biz requested the information on who the losing bidders were as well as the amounts of those bids. The magazine was advised that the only way to get that information was to file a formal Freedom of Information Act request or to wait for the information to be posted on the FDIC website. After filing the FOIA request, a representative of the FDIC advised that the request would not be filled due to the fact that such information was being posted in the order in which the banks were closed, and that the agency is about 180 banks behind.
Seems the FDIC is a little understaffed.
The moral of the story?
Nonprofit organizations have quietly wondered how Tam’s demise will affect what they do. Union Bank has already announced that it plans on continuing Tam’s sponsorship of the Heart of Marin. This is good news for organizations trying to make a difference in Marin, but whether Union Bank moves beyond this high-profile event remains to be seen. One long-time observer of the Marin nonprofit scene had this to say: “It will be interesting to see if Union moves beyond what Wells Fargo and Bank of America do. They write some checks—and that’s fine, as far it goes—but they aren’t really involved in the community. That’s the difference between Tamalpais and the rest.”
And what of the other community banks in Marin? With Tam gone and Union taking its place, there are really just two community banks left in town: Circle Bank and Bank of Marin.
Kim Kaselionis, CEO at Circle, says she’s sorry to see Tam go, but her bank welcomes the opportunity to serve Tam’s customers. “We’re planning on opening two new locations, one in Corte Madera (at the Town Center Mall) and the other in Mill Valley,” she says. “And we’ve offered SBA loans for some time, so local businesses that were banking with Tam still have an outlet for those types of opportunities.”
Both Circle and Bank of Marin will welcome former Tam Bank customers. “Our business model is very different from how Tamalpais Bank did things, though both of us are community banks,” says Bank of Marin CEO Russ Colombo. “Our customers are local and our business is local. It’s one of the reasons we’re financially strong.”
Neither Kaselionis nor Colombo wanted to talk about Tamalpais Bank’s demise or the reasons why its doors were closed. But an old banking saw uttered by Colombo sure rang true.
“The worst loans,” he quoted, “are written in the best of times.”
Bill Meagher is contributing editor at NorthBay biz. He covers alternative investments and commercial real estate on a national basis for a Petaluma media company. He’s also at work on one book project while planning another. Reach him at bmeagher@northbaybiz.com.
