Exchange Bank of Santa Rosa expanding wealth management business with another acquisition

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Typically, Exchange Bank sits on the sidelines when it comes to mergers and acquisitions because half of the bank’s stock shares are owned by a trust formed by its founder.

Since the bank only can use cash to buy assets to grow the business, management has to be particularly choosy when pursuing deals. Exchange has decided that managing wealthy clients’ money has great promise.

The Santa Rosa-based bank said Sunday it has expanded its trust and investment management business for the second time in the past year, reaching an agreement to buy the California trust and wealth management unit of American Trust and Savings Bank of Dubuque, Iowa. The operation is based in San Mateo.

Exchange Bank is paying $375,000 to acquire about $80 million in investment assets to manage, said Greg Jahn, executive vice president. The pending deal is subject to approval by state regulators.

The acquisition follows the bank’s October purchase of the trust department of First Northern Bank based in the Sacramento area. Exchange paid $150,000 for $40 million in investment assets that it will manage, Jahn said. Both deals are cash transactions.

The activity comes as Exchange Bank has quietly built a wealth management business, which totals about $1.1 billion of assets under management, according to bank officials. Income from that business, derived from fees and charges, increased 9 percent from $6.7 million in 2017 to $7.3 million last year. Bank executives refer to the wealth management unit as the “best kept secret.”

It represents a growth sector for Exchange Bank, which has overall assets of $2.6 billion. That’s helpful for the bank because its ownership structure makes it much more difficult for the institution to buy other community banks outright, said Gary Hartwick, the bank president. That is a typical way many banks grow their portfolio. For example, AltaPacific Bank of Santa Rosa grew by acquiring three banks from 2012 to 2017.

“We are not normally in the M&A market,” Hartwick said.

That’s because Exchange Bank’s founder Frank Doyle wanted the bank to be locally owned, so he placed his equity stake — 50.44 percent of the common stock — in a perpetual trust. The trust funds the Frank P. Doyle and Polly O’Meara Doyle Scholarship Fund for eligible students at Santa Rosa Junior College. The scholarships have helped thousands of local residents. The trust received about $3.3 million in Exchange Bank stock dividends during 2018.

The trust’s ownership stake in Exchange makes it prohibitive for the bank to buy other institutions using its stock.

“We have to grow organically versus making an acquisition,” Hartwick said. “These (wealth management deals) are some unique opportunities for the bank.”

The growth of the bank’s investment management portfolio has coincided with John Mackey joining Exchange almost two years ago as senior vice president and managing director. His job is to help lead the wealth management business, which has grown to give Exchange Bank the sixth-largest trust portfolio among community banks in California.

Mackey previously worked as senior vice president of Comerica Bank in the wealth management division in Silicon Valley. Given the personal wealth in the tech sector, the bank views the South Bay as a prime growth target.

“There’s a huge benefit to this community for having that diversification and being able to grow and not be completely dependent on Sonoma County,” Mackey said.

Exchange Bank is specifically targeting families with assets from $1 million to $5 million — a group larger banks and brokerages typically pass on in their effort to court even wealthier clients.

“Just about every large trust company in America has an office in Silicon Valley,” Mackey said. The trust operations are there to serve families with a net worth of $10 million, as well as families with a net worth of $25 million to $50 million, he said.

Exchange Bank officials touted benefits it can provide its wealthy clients such as fiduciary duty, which means the bank has an obligation to act primarily for the benefit of the clients. That’s a contrast to firms that have a lesser standard to find investments that are suitable for their clients.

The bank’s advisors receive no commissions or hidden compensation. And the bank serves as a neutral third-party entity handling estate matters for family members after a death.

“We aren’t a household name on the peninsula,” Mackey said. “The people we need to know, know us and know our reputation.”

The investment management business eventually can help Exchange Bank grow in Northern California in other areas, Hartwick said. The bank has 18 branches in Sonoma County, as well as a commercial lending office in Roseville.

Unlike Exchange Bank, most banks enter a new territory through a new lending office in the area, he said.

“Down the road we will look to expanding that regional office into something more than just trust and investments,” he said of the San Mateo office.

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com.

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