Exchange Bank suspends dividend

Exchange Bank announced Friday it was suspending its quarterly dividend for the first time in more than 60 years, saying that losses on bad construction loans had forced the Santa Rosa bank to halt the regular payment to its shareholders.

The move, approved Tuesday by the board of directors, is aimed at strengthening the balance sheet of Sonoma County’s largest and oldest bank.

“Suspending the dividend was a difficult but necessary decision — it is the most fiscally responsible and prudent choice for the bank at this time and for its future success,” CEO William Reinking said in a statement.

The cut could have a ripple effect throughout the community. Every year thousands of Santa Rosa Junior College students receive scholarships funded by dividends paid to the Doyle Trust, the bank’s single largest shareholder.

The trust has given away more than $76 million to 112,000 SRJC students over 58 years, one of the largest and most wide-reaching philanthropic programs in Sonoma County.

“Will it impact the scholarship funds? Of course it will,” said Bob Agrella, SRJC president. “But do we have the ability to continue to assist students to attend and get through the college? Absolutely.”

In the short run, the dividend cuts will be felt directly by the relatively small number of shareholders at the closely held bank, which was founded by the Doyle family in 1890. There are 240 registered shareholders, but because some brokers hold shares for clients, there may be a total of about 1,000 shareholders, said Fred Ptucha, a Santa Rosa investment adviser who tracks bank stocks.

While the bank said it is working diligently to restore the dividend as quickly as possible, its nine-member board decided its first priority was to shore up its financial position by increasing cash reserves to compensate for bad loans.

Exchange Bank reported its first quarterly loss in at least a half-century in December and posted another loss in June, the result of a risky bet on builders in the Sacramento region near the peak of the housing boom.

Its top executive, Barrie Graham, resigned last month, telling friends that he took responsibility for the bank’s misfortunes. Reinking, the bank’s longtime chairman, returned as CEO.

The bank is saddled with $57.3 million in loans to borrowers who have fallen more than 90 days behind on their payments, more than any other Sonoma County-based lender, according to an analysis of data reported to federal bank regulators in June.

About three-fourths of Exchange Bank’s problem construction loans were made to builders with projects in the Sacramento area, according to bank officials. The bank has declined to identify its borrowers, citing privacy laws.

The 118-year-old bank has ample resources to absorb the delinquent loans, which account for 4.7 percent of its $1.2 billion loan portfolio. It is widely viewed as well-capitalized using an industry yardstick for solvency. On Friday, Exchange Bank said its core businesses are “performing well,” pointing to growth in deposits and commercial loans.

But the nonperforming construction loans will likely result in a loss for the year, the bank said in a statement Friday.

“The real estate industry is facing historic challenges and even conservative lending to experienced developers has come under unprecedented pressure,” Reinking said. “We have made appropriate and prudent changes to our lending practices, and we believe the problems are contained.”

Friday’s announcement marks the first time since 1946 that Exchange Bank has suspended its quarterly dividend. The bank does not yet know when it will resume dividends, Reinking said.

Ptucha, an adviser with Financial West Group in Santa Rosa, predicted the bank would also suspend its fourth-quarter dividend and its annual special bonus, something it has not missed in 16 years.

He predicted the dividends would resume next year in the first or second quarter.

Since 1999, the bank has paid quarterly dividends of $1 per share, or $4 per year. Any extra has been tacked on at the end of the year in a special bonus. For 2007, that bonus was $2.10, or a total of $6.10 per share for the year.

Those kinds of returns have made Exchange Bank an excellent investment over the years, Ptucha said. Its stock has slid since May 2006, when it traded at $158 a share. It bottomed at $57 a share last week and closed at $65 on Friday.

“Exchange Bank has weathered many economic cycles in 118 years,” Reinking said. “The current downturn in this isolated segment of our loan portfolio is yet another challenge we are facing and are determined to overcome.”