As the former chief executive of Fair Isaac Corp., Larry E. Rosenberger knows a thing or two about credit risk. Now he's taking one, by extending a $500,000 loan to the cash-strapped Tamalpais Bancorp.
The San Rafael, Calif., company, where Rosenberger is a director, is in technical default on two other loans totaling $6 million. If Tamalpais doesn't remedy the situation, its lender could foreclose on the collateral: the company's $703 million-asset bank.
Tamalpais has not said how it would use the proceeds from Rosenberger's loan. But industry watchers said the company will probably use the money to set up a reserve account with its lender, Pacific Coast Bankers' Bank.
Doing so would cure the default but would hardly end Tamalpais' problems. Regulators have ordered the Tamalpais Bank subsidiary to boost its capital ratios. Hence Rosenberger's unsecured loan may be as important for its imprimatur as for the cash.
"As we have been forced to remember, banks rely on confidence in strength and stability, and a bank's holding company defaulting is not a good sign," said Rusty LaForge, a lawyer at McAfee & Taft in Oklahoma City. "It is good to see that one of its directors believes in that bank and is willing to make an unsecured loan to the company at a low rate. That shows a lot of confidence in the organization."
Neither Rosenberger, Tamalpais nor Pacific Coast would comment for this story.
Rosenberger was the president and CEO of Fair Isaac, the proprietor of the FICO credit scoring system, in the 1990s. He remained with the Minneapolis company and is now its first research fellow.
His loan to Tamalpais has a three-year term and carries an annual interest rate of 0.75%. Rosenberger, who owns a stake of less than 1% in Tamalpais, got a warrant for 12,500 shares, exercisable at $6 a share, in return for the credit.
Tamalpais shares have lost nearly 80% of their value since Jan. 1. They closed at $1.89 apiece Tuesday.
The $664 million-asset Pacific Coast, of San Francisco, made the two loans to Tamalpais last year to help it shore up capital and for general corporate purposes. It was unclear whether Tamalpais has missed any payments, but in July it agreed to set up a $775,000 reserve account with the bankers' bank.
By that point, however, Tamalpais' bank was no longer well capitalized. With a total risk-based capital ratio of 9.7% at June 30, it was only adequately capitalized under typical regulatory standards.
The bank was therefore prohibited from upstreaming cash to the holding company, which did not have enough liquidity to establish the reserve account. On Sept. 3 Pacific Coast told Tamalpais it was in default.
Since the required reserve account and the Rosenberg loan are both six-figure sums, "the two separate announcements seem connected," LaForge said. "You have to speculate, because they haven't been clear, that that is what it is for."
Even with the immediate problem of satisfying the loan terms apparently being addressed, Tamalpais has struggles ahead.
"Capital and liquidity are a concern," said Edward Timmons, an analyst at Sterne Agee & Leach Inc. "It seems like some sort of capital raise is going to be necessary. … I don't think they can do it in the public market. They need to look for a partner or a private-equity investment, and that is going to come at significant dilution."
On Sept. 14 Tamalpais Bank signed a cease-and-desist order with the Federal Deposit Insurance Corp. and California Department of Financial Institutions. The order requires, among other things, that the bank boost its total risk-based capital ratio to 12% by Dec. 31. In case it fails to accomplish this, it must also come up with a plan to sell itself.
Tamalpais said in a securities filing that it "is planning to moderate the rate of growth, control overhead and retain earnings." The board voted to suspend dividends to common shareholders and to defer payments on trust-preferred securities, and it is exploring a capital raise, the filing said.
In the second quarter, the company lost $4.3 million, compared to a $1.3 million profit a year earlier. According to the FDIC, 96% of Tamalpais Bank's $595 million portfolio is real estate loans and roughly half is commercial real estate credits.