Exchange Bank CEO quits suddenly

Exchange Bank's top executive, J. Barrie Graham, resigned unexpectedly as president and chief executive officer of Sonoma County's oldest and largest commercial bank.

Colleagues inside and outside the bank were stunned by the news as it spread rapidly Tuesday across the county's business community.

"It was a surprise," said Exchange Bank's veteran Chairman C. William Reinking, who will lead the bank in the wake of Graham's departure. "We feel we have the ability to handle the situation and run the bank effectively."

Exchange Bank, one of the most visible companies in Sonoma County, is navigating through turbulent times.

The Santa Rosa bank has suffered losses in two of the past three quarters -- its first in at least 50 years, according to bank officials -- and its stock has lost half its value over the past two years.

The bank and Graham shed little light on the reasons behind the abrupt resignation.

"I've very much enjoyed my 14 years at the bank. Now it's time to move on to pursue other interests," Graham said in a brief statement.

Graham, a former U.S. Marine with a no-nonsense demeanor, was just the sixth president of the 118-year-old bank.

He joined Exchange Bank in 1995, leaving Wells Fargo & Co. to become the bank's chief operating officer. In 2003, Graham replaced Reinking as CEO and led the bank as it shifted strategy to pursue growth more aggressively.

The bank opened its first office outside Sonoma County, a lending branch in Sacramento, as Sonoma County builders moved into the Central Valley and scrambled to develop subdivisions.

Exchange Bank has long been a key lender for local builders. But the real estate slump hit builders hard, and Exchange Bank has felt the blows.

"I always like to say we're intelligent risk takers. That may prove to be wrong now," Reinking said.

The bank reported $3.1 million in losses for the second quarter, largely because of construction loans that went sour.

Exchange Bank wrote off $14.5 million in bad loans during the first half of this year, compared with $500,000 a year ago, said Bruce DeCrona, the bank's chief financial officer.

To make sure it had enough cash to cover the unpaid loans, Exchange Bank set aside $16.3 million for anticipated loan losses in the period, compared with $1.5 million a year ago.

Overall, 5 percent of the bank's $1.2 billion loan portfolio is 90 days or more overdue or not accruing interest -- about 10 times what the bank aims for, DeCrona said.

Exchange Bank's losses, however, are not tied to subprime loans or the type of investments in mortgage-backed securities that brought down IndyMac, American Home Mortgage and other lenders.

"We did not go out of our market to make exotic loans to unknown people. We stayed with our bread-and-butter underwriting and made loans to customers we knew," DeCrona said.

While the losses are a blow, they do not threaten the bank's long-term health, said Fred Ptucha, investment adviser for Financial West Group in Santa Rosa and longtime analyst of bank stocks.

"The bank has plenty of capital to cover their losses," Ptucha said.

Still, Exchange Bank could end the year with a loss as officials tap income to write off bad loans and sell foreclosed properties.

"It tells you a higher percentage of their loans are involved in construction. The bank made a lot of money on these loans. It was probably the most dynamic area of growth in their loan portfolio," Ptucha said. "With hindsight you could say they did go too far. But these were developers with multimillion-dollar net worth that Exchange Bank had longtime relationships with."

Bank officials defended their lending standards and the decision to expand into the Sacramento area.

"The speed at which this thing fell apart was just unheard of," Reinking said. "You work with builders both in good times and challenging times."

The bank is now charting its course under the direction of a pair of familiar executives. Reinking, who served as CEO of Exchange Bank for 18 years until he retired from day-to-day management in 2003, is returning to his job as CEO. William Schrader, the current chief operating officer, takes over as president of the bank.

Reinking and Schrader announced Graham's resignation in a meeting with senior management Monday. Later in the day, Reinking sent an e-mail to the bank's 470 employees announcing Graham's resignation.

Both Reinking and Schrader said Graham was not forced out or shouldering the blame for losses from development loans.

"That's not how we do business," Schrader said.

Exchange Bank built a reputation as a conservative, risk-averse bank that practiced careful, steady expansion and produced generous returns for shareholders. Bank officials said the strategy has not changed, and they remain confident in the bank's long-term health.

"Our customers need to know that it's going to be business as usual," Schrader said. "We're going to come out of it with strong liquidity and strong capital."

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.