A marked improvement in loan quality helped Exchange Bank earn an after-tax profit of $4.41 million in the third quarter of 2013, an increase of 37 percent from a year earlier.

Sonoma County's largest community bank reported Thursday that its assets increased 6 percent in the quarter from a year earlier to $1.73 billion. Deposits increased 8 percent to $1.53 billion.

Bank President William R. Schrader suggested the high level of profit shouldn't be a "reoccurring expectation" but the performance showed the bank is on the right track.

Moreover, he said, the quality of its loan portfolio "reflects the fundamental strength of the bank."

Interest income declined 4 percent for the quarter from a year earlier to $16.4 million. But expenses for possible loan losses declined 86 percent to $250,000.

As well, non-interest income increased 24 percent to nearly $6.8 million. The bank said a significant portion of the increase came from "non-reoccurring insurance investment gains."

The 123-year-old bank suffered steep losses in 2008 and 2009. A year ago it restored its dividend for the first time in four years and this summer increased the quarterly dividend to 30 cents.

The dividend will provide more than $1 million a year to the Doyle Trust, which funds the Doyle Scholarship for Santa Rosa Junior College students. Fifty-one percent of the bank's cash dividend goes to the trust.

This quarter the bank's loan portfolio increased 3.5 percent from a year earlier to $1.05 billion, but the gains came solely from real estate loans. Consumer and commercial loans have declined on a year-over-year basis for at least six consecutive quarters.

"There's still a tentativeness that we see with our business owners," Schrader said. Owners need more confidence in the economy before they borrow to buy new equipment and make other capital investments.

It may take longer to see much growth in consumer borrowing with home equity loans. "Consumers really learned a lesson in this downturn about being overleveraged," said Greg Jahn, the bank's chief financial officer.

The bank continues to see strength in such local sectors as tourism, technology, food processing and agriculture. This year's harvest appears very favorable to grape growers and wineries, said Schrader.

The bank in 2008 borrowed $45 million from the U.S. Treasury Department under the Troubled Asset Relief Program, or TARP. Since the Treasury sold those assets to institutional investors last year, the bank has purchased back about $30 million of the securities and plans to purchase an additional $6 million by the end of the year, Schrader said.

(You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com.)