Inside a small bank's struggle to find a buyer

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AltaPacific Bancorp in Santa Rosa, Calif., got a lot of nibbles — but few bites — from other banks before it agreed this summer to be sold to Banner Corp.

The story behind the deal reveals the challenges that even willing sellers face when trying to find the right buyer.

The $436 million-asset AltaPacific had discussions with at least nine financial institutions, including an unnamed credit union, before agreeing in July to be sold to Banner in Walla Walla, Wash., for $87.4 million, according to a regulatory filing tied to the deal.

AltaPacific began seeking a buyer in July 2018 in response to “persistently high” compliance costs, a “proliferation of technology” demands that surpassed its scale and resources and “strong competition” from banks, credit unions and fintechs, the filing said. AltaPacific’s relatively illiquid stock was another factor.

The company’s investment bank contacted 14 financial institutions between August 2018 and November 2018, including banks based outside of California. Only two institutions, including Banner, entered into confidentiality agreements.

Some of the out-of-state banks said they were not interested in California, while others were not in the market for acquisitions, the filing said.

An unnamed California bank inquired about a deal on Aug. 28 of last year. Despite conducting some due diligence, it walked away just a few weeks later. No reason was given in the filing.

Another California bank expressed interest in late summer, but AltaPacific’s board nixed conversations, citing the suitor’s illiquid stock and a belief that the companies’ business culture and strategies were not a good match.

A Midwest bank also showed “some interest” in early September before determining that its expansion plan “did not include entry into” Southern California, the filing said. Another potential suitor, a California bank, broke off talks in early October after its own stock plunged and showed no immediate signs of recovery.

Conversations between Banner and AltaPacific began on Sept. 26, focusing on the companies’ cultures and the “complementary nature” of their branches and strategies, the filing said. Two days later, Banner entered into a confidentiality agreement to obtain nonpublic information.

During a Nov. 7 meeting, AltaPacific’s board instructed the company’s investment bank to solicit a nonbinding indication of interest from Banner.

In late November, Banner proposed an all-stock transaction that valued AltaPacific at $92.7 million and requested a 120-day exclusivity period.

AltaPacific’s board determined at a Dec. 5 meeting that the merger with Banner “had the potential to maximize value for … shareholders,” the filing said. Still, the directors instructed AltaPacific’s investment bank to seek a deal valued at about $107.7 million, along with a 60-day exclusivity period.

Banner came back on Dec. 14 with an offer that valued AltaPacific at roughly $97.5 million, with a 90-day exclusivity period. AltaPacific’s board declined the counteroffer to “explore other opportunities,” the filing said. Still, executives at AltaPacific and Banner agreed to stay in communication.

Between December and February, AltaPacific’s investment bank contacted four banks, a California business development company and a Western credit union to gauge interest in a deal. The four banks passed.

While the business development company expressed an interest, it eventually walked away in April. The credit union withdrew after concluding it had no interest in branches in Southern California.

Another potential buyer surfaced in mid-February, but AltaPacific determined that a deal “would not be in the best interests of the shareholders.” As it did in one of the earlier cases, it cited the suitor’s illiquid stock and a business culture and strategies that “were not aligned,” the filing said.

AltaPacific garnered more interest from banks attending the Western Bankers Association’s annual conference, held last March in Hawaii. The company’s executives met with two interested banks at the March conference, including one based in California that was the same size as AltaPacific.

One of the banks passed for undisclosed reasons. AltaPacific opted against the potential merger of equals, citing “differing business and operating strategies,” the other bank’s illiquid stock and a belief that a merger “would effectively result in a transfer of control of AltaPacific to [the other bank] without payment of an adequate control premium,” the filing said.

By early April, the AltaPacific board decided to schedule an meeting with Mark Grescovich, Banner’s president and CEO, and Peter Conner, the company’s chief financial officer. The meeting took place on April 16.

Banner on May 7 proposed an all-stock deal with a minimum value of $88.6 million, with fixed- and floating-rate scenarios based on the price of Banner’s stock immediately before closing. AltaPacific countered with an offer with a value of roughly $92.3 million.

A week later, Banner presented a new proposal valued at $86.1 million, based on its stock price at that time. The filing gives no other reason why this amount was lower than the one pitched earlier in the month. The draft merger agreement also included a clause requiring AltaPacific to have a specified amount of adjusted tangible common equity at closing.

In late June, Banner notified AltaPacific that it “had discovered that certain of its value assumptions underlying the exchange ratio … were not supported,” though the filing provided no additional details. As a result, Banner lowered the exchange ratio of its offer by 1.8%.

AltaPacific and Banner also agreed to a double-trigger provision to allow either company to terminate the deal based on the performance of Banner’s stock. At July 12, the deal had a value of $85.4 million.

AltaPacific’s board unanimously approved the merger on July 23. The deal, which was announced the next day, is expected to close in the fourth quarter. It priced AltaPacific at 168% of its tangible book value.

AltaPacific “is a respected business-focused bank, and we consider it a compliment they chose us as their merger partner,” Grescovich said in a press release announcing the deal. “This is an excellent addition … because it provides scale to our California franchise with attractive core deposits, commercial banking relationships and a similar credit culture.”

Banner will have more than $1 billion in assets in Southern California when the deal closes.

Banner expects the transaction to be immediately accretive to its earnings per share, excluding merger-related expenses. It should take less than three years for Banner to earn back any dilution to its tangible book value.

Banner plans to cut roughly 45% of AltaPacific’s annual noninterest expenses, including three branch closings. The company expects to incur about $9.4 million in merger-related expenses.

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