Overview

Tamalpais Bancorp, formerly known as Epic Bancorp, was incorporated under the laws of the State of California on December 20, 1988 and is the parent company for the Bank, a California industrial bank established in 1991, which offers a full range of banking services targeting small-to-medium sized businesses, individuals and high-net worth consumers. TWA, formerly known as Epic Wealth Management, established in January 2005, offers investment advisory and financial planning services to the general community and to clients of the Bank to enable them to reach their personal and financial goals.

The Bank operates seven full service branches in Marin County, located north of San Francisco, California and one loan production office located in Santa Rosa, California, which focus principally on origination of SBA and other small business loans. The Bank seeks to focus on relationship banking, providing each customer with a number of services, familiarizing itself with, and addressing itself to, customer needs. These customers demand the convenience and personal service that a local, independent financial institution can offer.

The Bank's deposit products include checking products for both business and personal accounts, tiered money market accounts offering a variety of access methods, tax qualified deposits accounts (e.g., IRAs), and certificates of deposit products. The Bank also offers commercial cash management products and DepositNOW Remote Deposit Capture which is a check clearing tool that allows customers to deposit checks without going to the Bank. A broad range of commercial and retail lending programs include commercial and industrial real estate loans, commercial loans to businesses including SBA loans, mortgages for multifamily real estate, revolving lines of credit and term loans, consumer loans including secured and unsecured lines of credit, land and construction lending for commercial real estate, single family residences, and apartment buildings.

Market Area

The Company is headquartered in Marin County, California, which has a population of 252,485, the second highest household income in the state out of the 3,111 counties nationwide, according to data from the U.S. Census Bureau and USDA. In Marin County, the median price for a single-family home is $850,000, according to DataQuick September 2008 home sales report. The per capita income is $44,962, which is the highest in the nation, and household income is $71,306, which is the second highest in the State, according to data from U.S. Census Bureau. Marin County had $8.2 billion in total deposits as of June 30, 2008 according to data from the FDIC, the most recent date for which data is available.

The Company's market area consists of Marin County and the Greater Bay Area. The Bank's deposit gathering efforts are focused primarily in the Marin County communities surrounding its full service branches.

Company Strategy

During the past several years, the Company has adopted a business strategy of developing a business-based banking approach as a means of increasing market share in Marin County and increasing shareholder value. The Company's strategy of providing financial services and advice to business owners and individuals incorporates a relationship-based approach to customer service and marketing, with an understanding of the balance sheet and income statement profile of clients to even more effectively present loan and deposit products and investment management and financial planning to its constituency. The Company has demonstrated expertise in providing the full service banking needs of its business clients through innovative and flexible financing and cash management services.

The Company has also focused its sales efforts on building the balances of more profitable, noninterest bearing and lower-cost transaction accounts in order to reduce the cost of funds.

Company Risks

Whether or not the Company can achieve its financial goals depends on risks and uncertainties that could be beyond the Company's control. Risks and uncertainties which could affect the ability to grow deposits include, among others:

• competitive pressures in the Bank's marketing area;

• changes in the interest rate environment;

• general economic conditions, nationally, regionally and in the Bank's operating market areas;

• decrease in the value of real property in the Bank's operating market area;

• changes in business conditions and inflation;

• loss of key management; and,

• volatility or significant changes in the equity and bond markets which can affect overall growth and profitability of the wealth advisors business.

Recently, the federal government announced various programs under the Emergency Economic Stabilization Act of 2008 ("the Act") intended to inject liquidity and stabilize the financial industry. The Act includes the Treasury Capital Purchase Program ("TCPP"), Troubled Assets Relief Program ("TARP"), FDIC Temporary Liquidity Guarantee Program ("TLGP") and the Money Market Investor Funding Facility. The Company is assessing the potential impact of its participation in the TARP.

It cannot be determined whether these recent steps taken by the federal government will result in significant improvement in financial and economic conditions affecting the financial services industry. Despite the federal government's recent fiscal and monetary measures, if the U.S. economy were to remain in a recessionary condition for an extended period, this would present additional significant challenges for the U.S. banking and financial services industry.

Management's discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company's financial condition, results of operations, liquidity and interest rate sensitivity.

Critical Accounting Policies

Accounting policies are integral to understanding the results reported. The most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of the current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses

The allowance for loan losses represents management's best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged-off, net of recoveries. The Company evaluates the allowance for loan loss on a monthly basis and believes that the allowance for loan loss is a "critical accounting estimate" because it is based upon management's assessment of various factors affecting the collectability of the loans, including current and projected economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and commitments.

The Company determines the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including all significant credits on an individual basis. The Company segments the loan portfolios into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. The Company analyzes the following components of the portfolio and provides for them in the allowance for loan losses:

• All significant credits, on an individual basis, that are classified doubtful.

• All other significant credits reviewed individually. If no allocation can be determined for such credits on an individual basis, they shall be provided for a part of an appropriate pool.

• All other loans that are not included by the credit grading system in the population of loans reviewed individually, but are delinquent or are classified or designated special mention (e.g. pools of smaller delinquent, special mention and classified commercial and industrial, and real estate loans).

• Homogenous loans that have not been reviewed individually, or are not delinquent, classified, or designated as special mention (e.g. pools of real estate mortgages).

• All other loans that have not been considered or provided for elsewhere (e.g. pools of commercial and industrial loans that have not been reviewed, classified, or designated special mention, standby letters of credit, and other off-balance sheet commitments to lend).

No assurance can be given that the Company will not sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio will not require an increase in the allowance. Prevailing factors in association with the methodology may include improvement or deterioration of individual commitments or pools of similar loans, or loan concentrations.

Results of Operations

Based on historical results and recent investments in branches and TWA operations, management anticipates that the Company will continue to grow in the upcoming quarter. However, due to risk factors that are beyond the control of the Company, actual results could differ from management's estimates. Management's discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company's financial condition, results of operations, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company, including the notes.

For the three months ended September 30, 2008, the Company reported on a consolidated basis, net income of $1,486,000 as compared to $985,000 for the three months ended September 30, 2007, an increase of $501,000, or 50.9%. Diluted earnings per share was $0.39 and $0.25 for the three months ended September 30, 2008 and 2007, respectively, an increase of 56.0%.

For the nine months ended September 30, 2008, the Company reported on a consolidated basis, net income of $3,979,000 as compared to $3,070,000 for the nine months ended September 30, 2007, an increase of $909,000, or 29.6%. Diluted earnings per share was $1.04 for the nine months ended September 30, 2008 as compared to $0.77 for the nine months ended September 30, 2007, an increase of 35.1%.

Total assets reached $679,709,000 as of September 30, 2008, an increase of $122,894,000, or 22.1% from December 31, 2007. Total deposits were $442,400,000 as of September 30, 2008, an increase of $81,225,000, or 22.5% from December 31, 2007. Total loans receivable, net were $568,593,000 as of September, 2008, as compared to $464,699,000 as of December 31, 2007, representing an increase of $103,894,000, or 22.4%.

The increase in net income and fully diluted earnings per share for the three and nine months ended September 30, 2008 over the same period prior year was primarily the result of the following:

• For the three and nine months ended September 30, 2008, interest income increased $1,252,000, or 12.6% and $3,058,000, or 10.5%, respectively, over the same periods last year. The increase in interest income was largely due to an increased earning asset base as a result of an increase in the size of the Bank's loan portfolio partially offset by a decreasing earning asset yield to 6.93% from 7.79%, an eighty six point decrease, and 7.86% to 7.19%, a sixty seven basis point decrease, respectively, for the three and nine months ended 2008 versus 2007.

• Interest expense decreased $441,000, or 8.1% and $1,034,000, or 6.4%, respectively, for the three and nine months ended September 30, 2008 as compared to the same period prior year. The decrease was primarily due to the following.

Interest expense on deposits decreased $1,008,000, or 25.6% and $2,826,000, or 23.3%, respectively, for the three and nine months ended September 30, 2008 as compared to the same period prior year. The decreases are primarily attributable to a decreasing interest rate environment in the first three quarters of 2008 as compared to the same quarters of 2007.

Interest expense on junior subordinated debentures decreased $157,000, or 52.0% and $389,000, or 43.8%, respectively, as a result of the decrease in LIBOR in the first three quarters of 2008 as compared to the same periods prior year. Additionally, in 2007 the Company refinanced $10 million in trust preferred securities with a floating interest rate of three-month LIBOR plus 1.44% from a floating interest rate of three-month LIBOR plus 3.65%.

Partially offsetting these decreases was an increase of $642,000, or 52.8% and $2,062,000, or 67.1%, respectively, in interest expense on borrowed funds as a result of the Bank borrowing more funds to support the loan growth for the three and nine months ended September 30, 2008 as compared to the same periods in 2007.

The Company obtained a new $6 million credit facility in 2008. Thus, there was an increase in interest expense for long term debt of $81,000, or 100%, and $119,000, or 100%, respectively, for the three and nine month period ended September 30, 2008 as compared to the same period prior year.

• Non-interest income decreased $85,000, or 14.0% and $190,000, or 10.2%, respectively, for the three and nine months ended September 30, 2008 as compared to the same period prior year. These decreases are primarily related to the gain on sale of loans of $486,000 which occurred in the first nine months of 2007 versus the gain on sale of loans of $166,000 in the first nine months of 2008. Partially offsetting this decrease, there was an increase in other income for fees generated from retail and commercial banking operations and the Bank Owned Life Insurance asset purchased in April 2007 for the nine months ended September 30, 2008 as compared to the same period prior year.

• The provision for loan losses for the three and nine months ended September 30, 2008 was $653,000 and $1,597,000, respectively, as compared to a provision of $116,000 and $40,000 in the three and nine months ended September 30, 2007. The increase in the provision reflects strong loan growth and an increased allocation for uncertainty in the market This level is considered adequate by management for probable loan losses inherent in the loan portfolio.

• Non-interest expense for the three and nine months ended September 30, 2008 increased $233,000, or 6.6% and $1,087,000, or 10.8%, respectively, over the same period prior year. The increases are primarily attributable to the following.

Planned increases in staff resulted in an increase in salaries and benefits of $357,000, or 19.5% and $845,000, or 15.2%, respectively, in the first, second and third quarters 2008 as compared to the same periods prior year. Professional fees increased $8,000, or 10.3% and $34,000, or 9.6%, respectively, for the three and nine month period ended September 30, 2008 as compared to the same period prior year. Other administrative expenses increased $208,000, or 11.9% in the first nine months of 2008 as compared to the same period in 2007 which was a result of the growth of the Company. Partially offsetting these increases in the third quarter, there was a decrease in other administrative expenses of $71,000, or 9.3% from the third quarter 2008 as compared to the same period prior year. For the nine months ending September 30, 2008, administrative expenses increased 11.8%. There was also a decrease in advertising expense of $10,000, or 10.9% and $72,000, or 23.7%, respectively, for the three and nine month ended September 30, 2008 as compared to the same period prior year.

Financial Condition

For the three and nine month period ended September 30, 2008, the Company's return on average assets ("ROA") was 0.89% and 0.86%, respectively, compared to 0.74% and 0.80%, respectively, for the same period in 2007. The Company's return on average equity ("ROE") was 16.61% and 15.38%, respectively, for the three and nine month period ended September 30, 2008 as compared to the 11.73% and 12.55%, respectively, for the same period last year. The increase in ROE is primarily due to the increase of the net interest income in the first three quarters of 2008 and to the stock buy back program in the third and fourth quarters of 2007. Management continues to balance the desire to increase the return ratios with the desire to increase the Bank's deposit penetration in Marin County and loan growth throughout its lending territories while maintaining superior credit quality. The Bank's market share of total Marin County deposits increased from 4.76% to 5.14%, or an increase of 8.0% for the twelve month period from June 2007 to June 2008 (the latest date for which the information is available).

As of September 30, 2008, consolidated total assets were $679,709,000 as compared to $556,815,000 at December 31, 2007, which represents an increase of 22.1%. Contributing to the growth of assets in 2008 were increases of $105,456,000, or 22.5% in gross outstanding loans, in total investment securities to $2,746,000, or 5.0%, in the surrender value of Bank Owned Life Insurance ("BOLI") of $348,000, or 3.3%, in accrued interest receivable of $453,000, or 14.0%, in other assets of $298,000, or 4.9%, and in FHLB restricted stock of $ 1,544,000, or 22.4% partially offset by a decrease in bank premises and equipment, net of $529,000, or 11.4%. The Federal funds sold balance was $180,000 as of September 30, 2008 compared to $567,000 as of December 31, 2007, a decrease of $386,000, or 68.2%.

As of September 30, 2008, consolidated total liabilities were $643,208,000 as compared to $523,882,000 at December 31, 2007, which represents an increase of 22.8%. Contributing to the increase in liabilities in 2008 was an increase in FHLB advances of $31,578,000, or 21.6% as compared to the same period in 2007. Also, the Company in the first nine months of 2008 obtained a $5 million credit facility from Pacific Coast Bankers Bank. An initial disbursement of $3 million was received on March 31, 2008 and an additional disbursement for $2 million was received in June 2008. The Company obtained an additional $1 million credit facility from Pacific Coast Bankers Bank in June 2008. Both of these increases were primarily utilized to support loan growth and to increase the capital position of the Bank.

Stockholder's equity increased $3,568,000, or 10.8% to $36,500,000 in 2008 as compared to December 31, 2007. The increase was attributable to net income of $3,979,000, amortization of deferred compensation - incentive stock options of $228,000 and stock options exercised of $50,000 partially offset by unrealized security holding loss of $88,000 and $602,000 of cash dividends declared during the period.

As of September 30, 2008 and 2007, TWA had approximately $254 and $272 million in assets under management.

Net Interest Income/Results of Operations

Net interest income is the difference between the interest earned on loans, investments and other interest earning assets, and its interest expense on deposits and other interest bearing liabilities and is the most significant component of the Company's earnings. Net interest income is impacted by changes in general market interest rates and by changes in the amounts and composition of interest earning assets and interest bearing liabilities. Comparisons of net interest income are frequently made using net interest margin and net interest rate spread. Net interest margin is expressed as net interest income divided by average earning assets. Net interest rate spread is the difference between the average rate earned on total interest earning assets and the average rate incurred on total interest bearing liabilities. Both of these measures are reported on a taxable equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest bearing sources of funds, which includes demand deposits and stockholders' equity.

For the three and nine months ended September 30, 2008, rates paid on interest-bearing liabilities declined faster than yields on earning assets, resulting in a forty one and forty four basis point, respectively, increase in net interest margin.

The following tables present average daily balances of assets, liabilities, and shareholders' equity as of September 30, 2008 and 2007, along with total interest income earned and expense paid, and the average yields earned or rates paid and the net interest margin for the three and nine months ended September 30, 2008 and 2007.

                       TAMALPAIS BANCORP AND SUBSIDIARIES
                       Average Balance Sheets (Unaudited)


                                                      For the Three Months Ended

(dollars in thousands)                      9/30/08                                9/30/07

                                           Interest      Yields                    Interest      Yields
                               Average      Income/      Earned/      Average      Income/      Earned/
                               Balance      Expense       Paid        Balance      Expense        Paid

Assets
Investment securities -
Muni's (1,2)                  $   6,733    $      66         5.49 %  $   4,316    $       43        5.58 %
Investment securities -
taxable (2)                      49,546          579         4.65 %     50,845           615        4.80 %
Other investments                 8,367          125         5.94 %      5,123            66        5.11 %
Interest bearing deposits
in other financial
institutions                        713            8         4.46 %        786             9        4.54 %
Federal funds sold                8,649           43         1.98 %      2,132            24        4.47 %
Loans (3)                       570,107       10,399         7.26 %    444,443         9,210        8.22 %

Total Interest Earning
Assets                          644,115       11,220         6.93 %    507,645         9,967        7.79 %
Allowance for loan losses        (5,981 )                               (4,621 )
Cash and due from banks           4,545                                  4,374
Net premises, furniture
and equipment                     4,224                                  4,916
Other assets                     19,289                                 17,825

Total Assets                  $ 666,192                              $ 530,139


Liabilities and
Shareholders' Equity
Interest bearing checking     $   7,128           11         0.61 %  $   7,371            11        0.59 %
Savings deposits (4)            156,724          915         2.32 %    159,732         1,676        4.16 %
Time deposits                   239,709        2,001         3.32 %    177,516         2,249        5.03 %
Other borrowings                176,356        1,858         4.19 %    105,142         1,216        4.59 %
Long Term Debt                    6,000           81         5.37 %          -             -      100.00 %
Junior Subordinated
Debentures                       13,403          145         4.30 %     20,276           302        5.91 %

Total Interest Bearing
Liabilities                     599,320        5,011         3.33 %    470,037         5,454        4.60 %
Noninterest deposits             27,222                                 21,245
Other liabilities                 3,881                                  5,287

Total Liabilities               630,423                                496,569
Shareholders' Equity             35,769                                 33,570

Total Liabilities and
Shareholders' Equity          $ 666,192                              $ 530,139



Net interest income                        $   6,209                              $    4,513

Net interest spread (5)                                      3.60 %                                 3.19 %
Net interest margin (6)                                      3.83 %                                 3.53 %

(1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.

(2) The yields for securities were computed using the average amortized cost and therefore do not give effect for changes in fair value.

(3) Loans, net of unearned income, include non-accrual loans but do not reflect average reserves for possible loan losses.

(4) Savings deposits include Money Market accounts.

(5) Net interest spread is the interest differential between total interest earning assets and total interest-bearing liabilities.

(6) Net interest margin is the net yield on average interest earning assets.