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| TAMB > SEC Filings for TAMB > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-2009
Quarterly Report
This discussion is intended to further the reader's understanding of the consolidated financial condition and results of operation of the Company. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2008. These historical financial statements may not be indicative of the Company's future performance.
Overview
The Company was incorporated under the laws of the State of California on December 20, 1988. On October 28, 2008, the Board of Directors of the Company elected to apply to the Board of Governors of the Federal Reserve System to become a BHC. On the same date, the Board of Directors of the Bank elected to apply to the California Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC") to convert the Bank's charter from a California industrial bank to a California state commercial bank.
On January 30, 2009, the Company filed amended Articles of Incorporation of the Bank with the Secretary of State of the State of California whereby the Bank converted from a California industrial bank to a California state chartered commercial bank. On January 30, 2009, the Company also notified the Federal Reserve Bank of San Francisco and the FDIC that the amendment to the Bank's Articles of Incorporation amending the purpose clause to provide that the Bank is authorized to conduct a commercial banking business was filed with the California Secretary of State.
On January 30, 2009, the Bank converted form a California industrial bank to a California chartered commercial bank, and the Company became a BHC under the Bank Holding Company Act of 1956, as amended, ("BHCA"). As a BHC, the Company is subject to regulation and examination by the Federal Reserve Bank under the BHCA. Tamalpais Bancorp is also treated as a BHC under the California Financial Code. As such, the Company and its subsidiaries are subject to periodic examination by, and may be required to file reports with, the DFI.
As of September 30, 2009, the consolidated Company is comprised of three entities, the Company, the Bank and Tamalpais Wealth Advisors ("TWA"), both of which are wholly owned subsidiaries of the Company. San Rafael Capital Trusts II and III (the "Trusts") are wholly-owned unconsolidated subsidiaries that were formed during 2006 and 2007, respectively, for the purpose of enabling the Company to issue junior subordinated debentures and accordingly, the investment activities related to the issuance, investment and debt service payments associated with the $3.1 million and $10.3 million, respectively, of junior subordinated debentures are so reflected.
In connection with recent turmoil in the California economy and California real estate market, the Bank recorded a net loss of $9.4 million for the nine months ended September 30, 2009. This loss was primarily attributable to the increases in our loan loss provision as the Company experienced a significant increase in nonperforming assets. Nonperforming assets totaled $17.2 million at year end 2008, up from $4.3 million at the end of third quarter 2008. The increase in nonperforming assets has continued through 2009 and was $77.3 million as of September 30, 2009. Small business owners and investors have seen reduced revenues due to declining economic activity and rising unemployment has caused some borrowers to become delinquent on loan payments as savings accounts and other liquidity sources are depleted. Additionally, the value of land and construction loans have been severely impacted by the decline in home values. The net loss has had a negative impact on our liquidity and capital adequacy and has resulted in actions by our regulators to restrict our operations as noted in Note 1 to the unaudited consolidated financial statements contained in this report. In response to those regulatory actions, we have implemented a remediation plan and are pursing alternative capital and liquidity options.
Tamalpais Bank
The Bank was established in 1991 and is subject to primary supervision, periodic examination and regulation by the DFI and by the FDIC as the Bank's primary federal regulator. The Bank, now a California chartered commercial bank, has its deposits insured by the FDIC to the extent provided by law. The Bank operates seven full service branches in Marin County, located north of San Francisco, California. The Bank offers a full range of banking services targeting small-to-medium sized businesses, individuals and high-net worth consumers. The Bank seeks to focus on relationship-based community 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 attracts deposits, loans and lines of credit from small-to-medium sized businesses, not-for-profit organizations, individuals, merchants, and professionals who live and/or work in the communities comprising the Bank's market areas.
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 courier service is available to the Bank's professional and business clients. Additionally, the Bank offers its depositors 24-hour access to their accounts by telephone and to both consumer and business accounts through its Internet banking products. The Bank's ATM network is linked to both the STAR and PLUS networks and is also a member of the MoneyPassฎ nationwide network whereby customers have access to more than 24,000 surcharge-free ATMs.
The Bank's lending programs include commercial and retail lending programs including 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 and the highest per capita income out of the 3,111 counties nationwide, according to data from the U.S. Census Bureau. In Marin County, the median price for a single-family home is $735,000, according to DataQuick's September 2009 home sales report, down $115,000, or 13.5% from the same period a year ago. The per capita income is $44,962, which is the highest in the nation, and household income is $83,870, which is the second highest in the State, according to data from U.S. Census Bureau. Marin County had $9.2 billion in total deposits as of June 30, 2009 according to data from the FDIC, the most recent date for which data is available.
The Company's market area consists primarily of Marin and San Francisco Counties and to a lesser degree the Greater Bay Area including Alameda, Contra Costa, San Mateo, Santa Clara, Sonoma and Napa counties. The Bank's deposit gathering efforts are focused primarily in the Marin County communities surrounding its full service branches.
Calendar year 2008 and the first nine months of 2009 were challenging times not only on the national level, but within the state of California, and more specifically, the Company's primary market area. The ongoing recession that began in the fourth quarter of 2007 has severely impacted the national, state and local housing markets. The unemployment rate in California has increased dramatically, rising to 12.2% as of September 30, 2009, up from 7.8% as of September 30, 2008. The unemployment rate in Marin County has increased from 4.7% as of September 30, 2008 to 8.0% as of September 30, 2009. Although the Company's market areas have historically weathered economic downturns better than other areas of the State, the decline in home values and rising unemployment, among other factors, have affected the ability of borrowers to satisfy their financial obligations on a national, state, and local level.
The Company has adopted a business strategy of developing a business-based banking approach as a means of increasing market share in Marin County. The Company's strategy of focusing on business owners and individuals residing in the Company's market area and providing them with financial services and advice to help them grow and prosper incorporates a relationship-based approach to customer service and marketing. The Company has demonstrated expertise in providing the full service banking needs of its business clients through appropriate financing and cash management services. The Company has also focused its sales efforts through its Marin County based team of business banking professionals on building the balances of more profitable, noninterest bearing and lower cost transaction accounts from within our market area in order to reduce the cost of funds and dependence on brokered deposits.
Management has embarked upon several ongoing strategic initiatives to strengthen the Company's financial position, reduce credit and funding risk, and lower the cost of funds. In the first quarter of 2009, the Bank eliminated wholesale commercial and multifamily lending through mortgage brokers, closed the loan production office in Santa Rosa, and eliminated SBA lending outside the Company's Bay Area footprint. We believe this will allow us to focus solely on in-market customers with whom we can develop a complete banking relationship. It also allows the Company to reduce the level of wholesale funding, as loan portfolio growth will be limited to customers with whom the Bank has a deposit relationship, including low cost transaction and checking accounts. The Company believes this strategy will increase franchise value and strengthen the balance sheet. Additionally, the employees and directors of the Company maintain a high level of involvement and visibility within the community and not-for-profit sector.
The Company also added experience and depth to its credit administration team. In the fourth quarter of 2008, management hired a Chief Credit Officer with extensive in-market commercial lending experience and in the first quarter of this year added managers with specific experience in portfolio management and loan administration. In the second quarter of 2009, the Bank promoted Jamie Williams, who has over twenty years of experience working in the Marin County banking industry, to be a market President of the Bank. Management also obtains, from time to time, independent third party reviews of the loan portfolio from outside consultants who have bank regulatory or credit experience and are familiar with applicable regulatory guidelines and industry practices. All of these actions enable the Company to continue to be proactive in monitoring credit quality now and in the future.
In addition, the Company is taking steps to enhance the capital position of the Bank and the Company. In this regard, the Company is planning to moderate the rate of growth, control overhead, sell certain nonperforming loans and retain earnings. The Board of Directors has suspended paying dividends on its shares of common stock and has deferred payments on the Company's trust preferred securities to prudently manage its capital position. The Board of Directors is also evaluating other alternative strategies, including raising capital, and has engaged a financial advisor.
The Bank is focused on reducing its reliance on brokered deposits and FHLB funding and on reducing its cost of funds by acquiring small business and consumer deposits through its team of business banking professionals and through its retail branches. As a result of these efforts, FHLB borrowings have decreased $33 million, or 18% in the first nine months of 2009 while noninterest bearing deposits increased $8.4 million, or 25.3% compared to December 31, 2008.
The Company's strategy incorporates:
tailoring loan and deposit products such as business lines of credit,
commercial real estate, term loans and cash management services to
small-to-medium sized businesses;
growing business banking by expanding the team of experienced business
bankers focusing on relationship banking including generating business
deposits and related loan opportunities;
controlling general and administrative expenses;
increasing core deposits while reducing volatile funding sources;
increasing capital and related ratios;
focusing on credit quality with C&I, and a relationship oriented
commercial lending and a diversified loan portfolio;
increasing non-interest income to a greater portion of total revenue;
and,
utilizing new technologies to better meet the financial needs of
businesses and professionals.
The Bank has ongoing programs to evaluate the adequacy of its allowance for loan losses in the current economic conditions. These programs use quantitative analysis to stress test the credit risk inherent in the loan portfolio under various default assumptions and incorporate current industry probabilities of default. In addition, the Bank has enhanced its process of evaluating nonperforming loans for impairment. This process involves, among other factors, obtaining updated appraisals, current financial statements, current credit reports, and verifying current net worth and liquidity positions of selected borrowers. The ongoing viability of businesses are also evaluated, including land and construction loans that have been impacted by the downturn in home values.
Critical Accounting Policies
The 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 result in valuation methods being well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to provide a process whereby changing methodologies will be implemented 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. Management also obtains, from time to time, independent third party reviews of the loan portfolio from outside consultants who have bank regulatory or credit experience and are familiar with applicable regulatory guidelines and industry practices.
The Bank determines the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including an analysis of all significant credits on an individual basis. The Bank 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 Bank 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 are provided for as 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.
Available-for-Sale Securities
Available-for-sale securities are required to be carried at fair value. This is a "critical accounting estimate" in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments to the available-for-sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and shareholders' equity.
Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The Company uses an estimate of future earnings to support the position that the benefit of the deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and the net income will be reduced.
Stock-Based Compensation
The Company recognizes compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company records compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that were outstanding on January 1, 2006 and for all awards granted after that date as they vest. The fair value of each option is estimated on the date of grant and amortized over the service period using an option pricing model. Critical assumptions that affect the estimated fair value of each option include expected stock price volatility, dividend yield, option life and the risk-free interest rate.
Fair Value
Effective January 1, 2008, the Company adopted enhanced disclosures about financial instruments carried at fair value. These disclosures establish a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
Accounting Change
For a description of the recent pronouncements applicable to the Company, see Note 3 to the Unaudited Consolidated Financial Statements included in this report.
SUMMARY
Recent Developments
The U.S. and global economies have experienced and are experiencing significant stress and disruptions in the financial sector. Dramatic slowdowns in the housing industry with falling home prices and increasing foreclosures and unemployment have created strains on financial institutions, including government-sponsored entities and investment banks. As a result, many financial institutions have sought and continue to seek additional capital or to merge with larger and stronger institutions.
Recently, the federal government announced various programs under the Emergency Economic Stabilization Act of 2008 ("EESA") intended to inject liquidity and stabilize the financial industry. EESA includes the Troubled Assets Relief Program ("TARP") (which includes the TARP Capital Purchase Program), FDIC Temporary Liquidity Guarantee Program ("TLGP") and the Money Market Investor Funding Facility. In the fourth quarter of 2008, the Bank elected to participate in the TLGP program, which provides unlimited FDIC insurance coverage, effective October 14, 2008, on transaction accounts until December 31, 2009. This insurance is in addition to the temporary FDIC increase in insurance coverage from $100,000 to $250,000 on all deposit accounts.
It cannot be determined whether these recent steps taken by the federal government will result in significant improvement in the financial and economic conditions affecting the banking 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.
The Company has implemented an aggressive action plan to reduce nonperforming assets. A first major step of the plan taken in October was to offer $37.4 million of nonperforming loans for sale. Additionally, in October 2009 the borrower paid off $3.9 million nonperforming loan for a modest gain relative to its carrying value.
In 2008, the Federal Reserve lowered its Federal funds rate (the rate at which banks may borrow from each other) by two hundred basis points resulting in lower deposit rates being offered by the Bank, which positively affected the interest margin. However, the variable rate loans adjusted downward with the decline in the Prime Rate, subject to any contracted floor rates. Even though these changes resulted in improvements to the net interest margin in the three and nine months ended September 30, 2009 as compared to the same period in the prior year, these improvements were significantly reduced by the increase in nonperforming assets, which decreased the yield of the loan portfolio for the respective periods.
For the three months ended September 30, 2009, the Company reported on a consolidated basis, a net loss of $5,098,000 as compared to net income of $1,486,000 for the three months ended September 30, 2008, a decrease of $6,583,000 or 443.1%. Diluted and basic (loss)/earnings per share was $(1.33) and $0.39, respectively, for the three months ended September 30, 2009 and September 30, 2008, a decrease of $(1.72), or 441.0%.
For the nine months ended September 30, 2009, the Company reported on a consolidated basis, a net loss of $9,433,000 as compared to net income of $3,979,000 for the nine months ended September 30, 2008, a decrease of $13,412,000 or 337.1%. Diluted and Basic (loss)/earnings per share was $(2.47) and $1.04, respectively, for the nine months ended September 30, 2009 and September 30, 2008, a decrease of 337.5%.
Results for the third quarter 2009 were negatively impacted by the substantial increase in the provision for loan losses. The ongoing and deepening recession has caused a continuing decline in real estate values and has reduced the liquidity and net worth of businesses and consumers in the Company's market area. The loan loss provision in the three months ended September 30, 2009 was $9,431,171, as compared to $653,000 in the three months ended September 30, 2008. The increased provision was attributable to a $50.3 million increase in nonperforming loans in the third quarter 2009.
The loan loss provision in the nine months ended September 30, 2009 was $23,435,171 million compared to $1,596,957 million in the first nine months of 2008. The large year-to-date 2009 loss provision reflected deterioration in regional economic conditions, decline in regional real estate values and updated assessments of the financial condition of borrowers.
The allowance for loan losses as a percent of total loans was increased to 4.56% as of September 30, 2009, up from 1.37% as of December 31, 2008 to better position the Company to manage through a prolonged economic downturn.
Net interest income before provision for loan losses in the third quarter of $5,387,000 decreased 13.2% over the same quarter last year. The decline is primarily attributable to the non-recognition of $1,093,000 of accrued interest income for the large balance of nonperforming loans during the third quarter of 2009. For the same reasons the net interest margin for the third quarter 2009 declined to 3.10% from 3.83% in the same quarter last year.
For the year-to-date, net interest income of $18,427,000 was 7.7% higher than for the same period last year. The Bank increased deposits 7.1% year-to-date and 11.5% over the last twelve months and increased noninterest-bearing deposits to $41,671,000, up 25.3% for the year-to-date and 38.3% over the last twelve months. The success in generating low-cost deposits combined with the beneficial effects of loans with interest rate floors and initial fixed rates were primary factors in increasing net interest income for year-to-date. The increase in net interest income was partially offset by the increase in nonperforming assets and by the lack of a dividend from Federal Home Loan Bank restricted stock. The Company recognized $18,000 income on Federal Home Loan Bank restricted stock in the first three quarters of 2009 as compared to $330,000 in the first three quarters of last year.
The decrease in net income and fully diluted earnings per share for the three and nine months ended September 30, 2009 over the same period in 2008 was primarily the result of the following:
For the three and nine months ended September 30, 2009, interest income decreased $1,424,000, or 12.7% and $885,000, or 2.8%, respectively, which was primarily attributable to a decrease in . . .
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