Communication is critical to sealing a bank merger (or not), as evidenced by a recent turn of events in California.

Heritage Oaks Bancorp in Paso Robles seemed close to hammering out its sale to an unnamed community bank but was unable to get a satisfactory response about a potential regulatory concern on the suitor's end. The $2 billion-asset Heritage Oaks instead agreed to sell itself last month to Pacific Premier Bancorp in Irvine for $406 million.

Heritage Oaks' senior management in late October uncovered the potential regulatory issue while conducting due diligence on the other institution, prompting CEO Simone Lagomarsino to ask whether the other bank's CEO had discussed the matter with regulators.

The CEO "indicated that he had not discussed possible implications with the regulators and that … he had not had any conversations with his regulators about the possible [M&A] transaction," according to a recent filing tied to Heritage Oaks' pending sale to Pacific Premier.

Lagomarsino spent a month trying to get clarity from the other CEO, but never did, the filing said. By late November, the Heritage Oaks' board decided to end discussions with the unnamed institution.

"The board concluded … that Party A had not acted with urgency at any point in the transaction process, including with respect to gaining comfort from its regulators regarding its regulatory issue," the filing said.

It was an odd outcome. All of the unnamed bank's offers during negotiations seemed superior to what Pacific Premier had pitched — even offering a variable exchange ratio. The bank paid a consistent dividend, while Pacific Premier did not. The unsuccessful suitor had even submitted a draft definitive agreement that "was somewhat more acquiree-friendly" than what Heritage Oaks had seen from Pacific Premier, the filing said.

However, Pacific Premier distinguished itself by proactively talking to its regulators, reporting that "those conversations were generally positive."

Context is important.

Heritage Oaks at the time was close to being freed from a regulatory order tied to its compliance with the Bank Secrecy Act. Management and the board were worried that a potential issue at the other bank could impede regulatory approval for any deal reached, the filing said.

Heritage Oaks' November 2014 order had actually influenced prior merger conversations.

A Southern California business bank contacted the company in mid-2015 about a possible deal. The companies entered into a confidentiality agreement and held several in-person meetings before breaking off talks, in part because Heritage Oaks "wanted to focus its attention on addressing the … consent order."

Pacific Premier and Heritage Oaks also flirted with a deal in August 2015, going as far as Pacific Premier providing a letter of intent. A few weeks later, Heritage Oaks' board determined that it would be better for shareholders if the company focused its efforts on the consent order instead of actively pursuing a deal.

It took three new overtures in the spring and summer of last year, including one from Pacific Premier, to persuade Heritage Oaks to revisit selling, the filing revealed.

Heritage Oaks, meanwhile, showed it could be proactive when an issue arose on its end. At one point during last fall's negotiations, Pacific Premier raised an undisclosed "diligence issue" that was serious enough to spur Heritage Oaks to hire an unnamed consultant to review the matter. The consultant's report found that Heritage Oaks was not exposed "to risks any different than other financial institutions."

The filing also made it clear that Lagomarsino, a former American Banker Community Banker of the Year, was heavily involved in the lengthy selling process, handling multiple negotiations, frequently updating the board and its executive committee and coordinating with the outside consultant, among other things.

Those efforts will seemingly pay off for Lagomarsino in the form of $2.3 million in cash severance. Lagomarsino, who is set to join Pacific Premier's board, will also receive $1.5 million in cash salary to be paid in equal annual installments over 15 years.

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