Exchange Bank gets $43 million from feds

<p>The Treasury Department has injected more than $50 million into two Santa Rosa banks -- Exchange Bank and Summit State Bank -- as part of the $700 billion rescue plan to stabilize the nation's financial system.</p><p>The infusion, announced Tuesday, will enable Exchange and Summit State to make more loans to local companies and individuals, executives at both banks said.</p><p>"Using our fortified capital base to make loans and provide financial services to businesses and consumers in this community is the best thing we can do to help reignite business activity and promote the recovery of our local economy, and it is what we intend to do," said William Schrader, Exchange Bank president.</p><p>In an effort to unlock frozen credit markets and stimulate the U.S. economy, Congress approved the $700 billion financial bailout in October. The Treasury Department has been using the money to buy stock in U.S. banks, hoping that the sudden inflow of cash will prompt banks to start making loans.</p><p>"Part of the problem in the economy right now is that there is a contraction of lending. This loosens things up," said Dennis Kelley, Summit State Bank's chief financial officer.</p><p>While most of the bailout money and public attention has been targeted at large banks, smaller community banks across the country have been lining up to apply for funding under the Troubled Asset Relief Program, or TARP.</p><p>So far, the Treasury Department has invested $162 billion in local banks through the program, with stock purchases ranging from $1.5 million to $25 billion per bank.</p><p>Exchange Bank received $43 million and Summit State Bank received $8.5 million, the maximum amounts allowed based on risk associated with total loans and investments by each bank.</p><p>Another North Bay lender, Bank of Marin, received $28 million from the program earlier this month. The Novato bank has 12 branches in Marin and Sonoma counties and $985 million in assets.</p><p>Exchange Bank is the largest and oldest local bank in Sonoma County, with 21 branches and $1.6 billion in assets. Summit State Bank has five branches and $350 million in assets.</p><p>In order to sell stock to the government, banks must apply for the program and obtain approval from federal banking regulators.</p><p>The Treasury Department's investment in the banking system could relieve some of the concern about the health of local banks, said Fred Ptucha, who tracks community bank stocks as investment adviser for Financial West Group in Santa Rosa.</p><p>"I would say this is a credit to any bank," Ptucha said. "It's going to enable them to be more aggressive lenders to businesses that need it, because it's still real tough to get loans right now."</p><p>Exchange Bank was hit harder than any other local bank when the real estate bubble burst. The bank has lost money in three of the past four quarters -- including an $11.5 million loss in the third quarter, its largest in at least six decades -- as it sets aside cash to cover defaults on construction loans.</p><p>Summit State saw its string of profits interrupted in the third quarter, when it reported a one-time $2.3 million charge for investments in Fannie Mae, Freddie Mac, Lehman Brothers and other corporations ravaged by the subprime meltdown.</p><p>By accepting money from the Treasury Department, both banks are giving up a partial ownership stake to the U.S. government.</p><p>In exchange for the infusion, Exchange and Summit State agreed to sell preferred stock to the Treasury Department. The banks will pay the government a 5 percent annual dividend over the next five years. Then, the dividend rises to 9 percent annually, providing an incentive for banks to repay the federal government sooner.</p><p>The Treasury Department also receives options to purchase common stock.</p><p>Banks are restricted from raising dividends to ordinary shareholders during the first three years the Treasury Department holds the stock.</p><p>Exchange Bank stopped paying dividends in September after its recent losses. The move led to the suspension of the Doyle Scholarships to SRJC students, which are funded by Exchange Bank dividends.</p><p>Bank officials are confident regulators would approve a resumption of dividend payments to its shareholders when the bank returns to profitability.</p><p>"We're not concerned with that. We believe they will be reasonable," said Craig Van Selow, vice president of retail banking.</p><p>You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.</p>