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Exchange Bank continues recovery
Published: Friday, January 28, 2011 at 3:00 a.m.
Last Modified: Friday, January 28, 2011 at 10:14 a.m.
Exchange Bank reported its first annual profit in three years on Thursday, a strong signal it might renew funding for the Doyle scholarship this year.
Sonoma County's largest and oldest community bank earned $10.2 million last year — a stark reversal from annual losses of $18.5 million in 2008 and $3.9 million in 2009.
The bank is now one step closer to restoring its dividend, which had funded the Doyle scholarships at Santa Rosa Junior College for 60 years until it was suspended in 2008.
The bank expects to announce a renewal of the dividend by year's end, possibly even mid-year, according to multiple sources close to the bank. The bank's president, Bill Schrader, declined to comment on an exact renewal date but did acknowledge the bank had taken a big step forward.
“I can't point to a specific date on the calendar, but we are closer than ever before,” said Schrader, who has led the three-year effort to restore the bank's financial health. “We're coming back.”
Bob Agrella, president of Santa Rosa Junior College, laughed with joy Thursday when he learned of the bank's $10.2 million annual profit.
“I think it is just great news,” he said. “It is a great indication that the bank is strong and we'll see the Doyle back in the not too distant future.”
If a dividend was issued this summer, it might be possible to distribute scholarship money to students sometime during the fall semester, he said. Otherwise the money would be dispensed next year, because it will take several months to reinstate the program and review scholarship applications.
Ben Stone, director of the county's Economic Development Board, said the bank's health is a bellwether for the overall local economy.
“It's kind of one of our vital signs,” he said. “It's a good indicator that our economic pulse is coming back.”
Still, bank executives are quick to caution their repair work is far from over.
Unemployment remains high in Sonoma County at 10 percent, and for many people it hardly feels like a recovery, Schrader said. The bank remains concerned that additional borrowers could default as they struggle to pay bills.
“We are so widely invested across this economy,” Schrader said. “And nearly everyone is struggling at this point.”
The bank had outstanding loans of $1.05 billion, which were nearly all given to local businesses and residents, down from $1.09 billion at the end of 2009.
Deposits also declined slightly to $1.29 billion, down from $1.32 billion at the end of 2009.
Also hurting the recovery is the housing market. It has shown little sign of improvement, with prices actually declining during the second half of last year.
“That darn housing market,” said Bruce DeCrona, the bank's chief operating officer. “And the wine market might have bottomed out, but many of those borrowers are still struggling.”
The bank has been forced to work through wave after wave of troubled loans as the recession took its toll on local businesses and residents.
The bank was first hit hard by defaulting real estate developers in 2008. It took heavy criticism from some investors for lending money to real estate projects in Sacramento, which defaulted when the economy soured.
About 90 percent of the bank's loan troubles in the first quarter of 2009 were in construction and development. Then, as the recession broadened to all sectors of the economy, the bank began seeing defaults from a wide range of the community.
The bank has steadily regained its health by writing off bad loans and working with struggling borrowers to devise new repayment plans.
A year ago, the bank created three benchmarks it needed to hit before its board members would reinstate the dividend.
First was a consistent pattern of profits, which the bank has established. It posted fourth-quarter earnings of $2.2 million on Thursday, marking its seventh straight profitable quarter.
The second benchmark is an improvement in the local economy.
Third was a reduction in the bank's troubled loans and the number of properties it had seized in foreclosure. The bank has decreased its nonperforming assets from $75 million in 2008 to $52.7 million at the end of 2010. The goal is to reduce that figure to about $35 million.
The bank had to write off 60 percent fewer defaulted loans last year, compared to 2009, and it has increased its reserves for future loan troubles to $33.1 million, according to Thursday's results.
Overall, assets declined to $1.52 billion at year's end, down from $1.55 billion at the end of 2009.
Whenever the dividend is reinstated, it will initially only be a fraction of what it once was.
“It will have to come back gradually,” Schrader said.
The bank's 2010 profits were only half that earned during the boom years, when it earned $19.5 million in 2005 and $21.6 million in 2006.
The bank, which received $45 million in federal assistance funds in 2008, must repay the money or obtain approval from federal regulators before it can resume dividends to shareholders.
Agrella, who retires as president of the Junior College in June, said he expects the college will use about 75 percent of whatever it receives from the bank to immediately fund the Doyle scholarship, and place the remaining portion into reserves.
“I would try to set some aside to build up the Doyle's reserve,” he said. “But that is a strategy call for the new president and the financial aid staff.”
The previous reserve, which had dwindled down to $200,000, ran out during the fall semester.
The scholarship fund receives 50.4 percent of the bank's dividend, an arrangement that was established by the bank's founder, Frank Doyle.
Schrader repeatedly stressed one point Thursday: The bank's board of directors will not renew the dividend until they are certain Exchange Bank will remain healthy even if the economy continues to stagnate.
“As a 120-year-old institution, we take a longer view about this marketplace,” Schrader said. “A second dip is not likely. But what also is looking less likely is a robust recovery this year.”
Exchange Bank's stock closed at $48 a share Thursday, down 10 cents in over-the-counter trading. Its shares, which hit $158 in May 2006, tumbled to a low of $29 in April 2009 before mounting a slow and uneven recovery that began to pick up momentum last March. Over the last 10 months, the bank's shares have climbed 30 percent.
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