Proxy Statement of
Commerce Bank of Temecula Valley
Prospectus of
AltaPacific Bancorp
PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
To the shareholders of Commerce Bank of Temecula Valley:
The board of directors of Commerce Bank of Temecula Valley, which we sometimes refer to as Commerce Bank,
has agreed to a merger of Commerce Bank with and into AltaPacific Bank, a wholly-owned subsidiary of AltaPacific
Bancorp. The details of the merger are set forth in the Agreement and Plan of Reorganization and Merger, dated as of
September 1, 2016, between AltaPacific Bancorp and Commerce Bank, which we refer to as the merger agreement.
If the merger is completed, each shareholder of Commerce Bank will receive either 1.1377 shares of AltaPacific
Bancorp common stock or $10.00 in cash for each share they own, or a combination of both, subject to proration and
allocation to ensure that 50% of the outstanding shares of Commerce Bank are exchanged for shares of AltaPacific Bancorp
common stock and 50% are exchanged for cash. Depending on the per share market price of AltaPacific Bancorp common
stock at the close of the merger, the value of the stock consideration may be somewhat more or less than that of the cash
consideration.
Shares of AltaPacific Bancorp common stock are traded on the OTC-Pink under the symbol “ABNK.” On
August 31, 2016, the day before the first public announcement of the merger, the closing share price of AltaPacific Bancorp
common stock was $9.60, and on March 8, 2017, the latest practicable trading date before the printing of this proxy
statement/prospectus, the closing share price of AltaPacific Bancorp common stock was $10.70.
Shares of Commerce Bank common stock are also traded on the OTC-Pink under the symbol “CKTM.” On
August 31, 2016, the day before the first public announcement of the merger, the closing share price of Commerce Bank
common stock was $7.50, and on March 8, 2017, the latest practicable trading date before the printing of this proxy
statement/prospectus, the closing share price of Commerce Bank common stock was $10.75.
Shareholders of Commerce Bank will be asked to vote to approve the merger agreement and the merger at a special
meeting of shareholders as described below. We cannot complete the merger unless we obtain the required approval of the
shareholders of Commerce Bank. The merger agreement must be approved by the affirmative vote of at least a majority of
the shares of Commerce Bank common stock outstanding as of the record date for the special meeting.
This document, which serves as the proxy statement for the special meeting of shareholders of Commerce Bank and
the prospectus for the shares of AltaPacific Bancorp common stock to be issued in the merger, includes detailed information
about the special meeting, the merger, the documents related to the merger and related matters, and other items being voted
upon at the meeting. We urge you to read this proxy statement/prospectus carefully, including the considerations
discussed under “RISK FACTORS” beginning on page 26, and the appendices thereto, which include the merger
agreement.
Your vote is very important. Whether or not you plan to attend the special meeting, please take the time to vote by
completing and mailing the enclosed proxy card.
The shares of AltaPacific Bancorp common stock to be issued in the merger are not savings accounts, deposits
or other obligations of any bank or savings association and are not insured by any federal or state governmental
agency. Neither the California Department of Business Oversight, the Securities and Exchange Commission, any state
securities regulator, the Federal Deposit Insurance Corporation, the Federal Reserve Board nor any other bank
regulatory agency has approved or disapproved of the securities to be issued in connection with the merger or
determined if this proxy statement/prospectus is accurate or complete. This proxy statement/prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer,
solicitation or sale is not permitted or would be unlawful under the securities laws of any such jurisdiction. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated March 15, 2017, and is first being mailed to the shareholders of Commerce
Bank of Temecula Valley on or about March 15, 2017.
25220 Hancock Avenue, Suite 140
Murrieta, California 92562
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held April 14, 2017 – 5:30 p.m.
To: The Shareholders of Commerce Bank of Temecula Valley:
A special meeting of shareholders of Commerce Bank will be held at the headquarters office of Commerce Bank
located at 25220 Hancock Avenue, Murrieta, Suite 140, California 92562, on April 14, 2017, at 5:30 p.m. (local time), for the
purpose of considering and voting upon the following matters:
1.
Approval of the Merger Agreement and Merger. To approve the Agreement and Plan of Reorganization and
Merger, dated September 1, 2016, by which Commerce Bank will be merged with and into AltaPacific Bank, as
more fully described in the accompanying proxy statement/prospectus. A copy of the merger agreement is
attached as Appendix A to this proxy statement/prospectus.
2.
Adjournment. To approve any adjournment or postponement of the special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes in favor of the merger agreement or for any other legally
permissible purpose.
Only shareholders of record at the close of business on February 16, 2017, are entitled to notice of, and to vote at,
the special meeting.
Shareholders are entitled to assert dissenters’ rights with respect to the proposal to approve the merger agreement
and the merger. Your dissenters’ rights are conditioned on your strict compliance with the requirements of Chapter 13 of the
California Corporations Code, which we refer to as the Corporations Code. A copy of the applicable sections of Chapter 13
of the Corporations Code is attached as Appendix B to this proxy statement/prospectus.
The board of directors of Commerce Bank has determined that the merger is advisable and in the best interests of
Commerce Bank shareholders based upon its analysis, investigation and deliberation and recommends that shareholders of
Commerce Bank vote “FOR” approval of the merger agreement and the merger.
The board of directors of Commerce Bank also recommends that shareholders vote “FOR” adjournment of the
special meeting to a later date or dates if necessary, to solicit additional proxies if there are not sufficient votes in favor of the
merger agreement or for any other legally permissible purpose.
Whether or not you plan to attend the special meeting, please sign, date and return the enclosed proxy card in
the postage-paid envelope provided, so that as many shares as possible may be represented. The vote of every
shareholder is important and we will appreciate your cooperation in returning your executed proxy promptly. Each proxy is
revocable and will not affect your right to vote in person if you attend the special meeting. If you hold your shares in
certificate form and attend the special meeting, you may simply revoke your previously submitted proxy and vote your shares
at that time. If your shares are held by a broker or otherwise not registered in your name, you will need additional
documentation from your record holder to vote your shares personally at the special meeting. If you hold your shares in
certificate form, please indicate on the proxy card whether or not you expect to attend.
We appreciate your continuing support and look forward to seeing you at the special meeting.
DATED: March 15, 2017
By Order of the Board of Directors
Dr. Richard Shuman
Corporate Secretary
Please do not send in your stock certificates at this time. If the merger is approved, you will be sent
instructions regarding your election as to the type of consideration you would prefer to receive in the merger. If the
merger is completed, you will be sent instructions regarding the surrender of your stock certificates.
Important notice regarding the availability of proxy materials for the special meeting to be held on April 14,
2017: This proxy statement/prospectus is available at www.commercebanktv.com.
ii
TABLE OF CONTENTS
TABLE OF CONTENTS............................................................................................................................................................ iii
APPENDICES ............................................................................................................................................................................ vi
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER .................................................. 1
Questions and Answers about the Special Meeting ................................................................................................................ 1
Questions and Answers About the Merger Agreement and the Merger ................................................................................. 3
WHERE YOU CAN FIND MORE INFORMATION................................................................................................................. 6
SUMMARY................................................................................................................................................................................. 7
Parties to the Merger Agreement (See pages 80 to 116) ......................................................................................................... 7
Special Meeting of Shareholders (See pages 41 to 46) ........................................................................................................... 7
The Merger Agreement (See pages 66 to 76) ......................................................................................................................... 7
The Merger (See pages 47 to 66) ............................................................................................................................................ 7
Consideration to be Paid to the Holders of Commerce Bank Common Stock (See page 47) ................................................. 8
United States Federal Income Tax Consequences (See pages 77 to 79) ................................................................................. 8
Regulatory Approvals Must Be Obtained Before the Merger Will Be Completed (See page 64) .......................................... 8
Approval of a Majority of Shares of Commerce Bank Stock Entitled to Vote at the Special Meeting
is Required for the Merger to be Consummated (See page 62)......................................................................................... 9
Recommendation of Commerce Bank’s Board of Directors (See pages 53 to 55) ................................................................. 9
A Majority of Commerce Bank’s Directors and All of its Executive Officers Have Entered into Voting Agreements
(See page 43)..................................................................................................................................................................... 9
Opinion of Commerce Bank’s Financial Advisor (See pages 55 to 59) ................................................................................. 9
Commerce Bank’s Directors and Executive Officers may have interests in the merger that differ from interests of
Commerce Bank Shareholders generally (See pages 60 to 62) ......................................................................................... 9
Conditions that Must Be Satisfied Prior to Closing the Merger (See pages 72 to 73) .......................................................... 11
Closing the Merger (See pages 75 to 76) .............................................................................................................................. 11
Termination of the Merger Agreement (See pages 74 to 75) ................................................................................................ 11
Accounting Treatment (See pages 62 to 63) ......................................................................................................................... 12
AltaPacific Bancorp’s and AltaPacific Bank’s Management and Operations After the Merger (See page 59) .................... 12
Differences in Your Rights as a Shareholder of Commerce Bank versus AltaPacific Bancorp (See pages 118 to 120) ...... 12
Commerce Bank Dissenters’ Rights (See pages 63 to 64) .................................................................................................... 12
ALTAPACIFIC BANCORP SELECTED CONSOLIDATED FINANCIAL DATA ............................................................... 13
COMMERCE BANK SELECTED FINANCIAL DATA ......................................................................................................... 15
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................................................. 17
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ..................... 21
COMPARATIVE MARKET PRICE DATA AND DIVIDEND INFORMATION .................................................................. 23
Markets; Holders................................................................................................................................................................... 23
Comparative Per Share Market Value Prices ........................................................................................................................ 23
Dividends .............................................................................................................................................................................. 24
RISK FACTORS ....................................................................................................................................................................... 26
Risks Relating to the Merger ................................................................................................................................................ 26
Risks Relating to AltaPacific Bancorp Common Stock ........................................................................................................ 29
Risks Relating to the Businesses of AltaPacific Bancorp and AltaPacific Bank and to the Banking Industry in General ... 31
A WARNING ABOUT FORWARD-LOOKING STATEMENTS .......................................................................................... 41
THE SPECIAL MEETING ....................................................................................................................................................... 41
General .................................................................................................................................................................................. 41
Date, Time and Place of the Special Meeting ....................................................................................................................... 42
Record Date for the Special Meeting; Stock Entitled to Vote .............................................................................................. 42
Quorum ................................................................................................................................................................................. 42
Purposes of the Special Meeting ........................................................................................................................................... 42
Recommendation of the Commerce Bank Board of Directors.............................................................................................. 42
Number of Votes ................................................................................................................................................................... 42
Votes Required; Voting Agreements .................................................................................................................................... 43
Voting of Proxies .................................................................................................................................................................. 43
Abstentions and Broker Non-Votes ...................................................................................................................................... 44
Dissenters’ Rights ................................................................................................................................................................. 44
Other Matters ........................................................................................................................................................................ 45
Solicitation of Proxies ........................................................................................................................................................... 45
Security Ownership of Certain Beneficial Owners and Management................................................................................... 45
iii
PROPOSAL NO. 1 THE MERGER AGREEMENT AND THE MERGER............................................................................. 47
Structure of the Merger ......................................................................................................................................................... 47
Merger Consideration ........................................................................................................................................................... 47
Election Procedure ................................................................................................................................................................ 48
Allocation Calculation .......................................................................................................................................................... 49
Background of the Merger .................................................................................................................................................... 50
Commerce Bank’s Reasons for the Merger; Recommendation of Commerce Bank’s Board of Directors .......................... 53
Opinion of Commerce Bank’s Financial Advisor ................................................................................................................. 55
Board of Directors, Management and Operations After the Merger ..................................................................................... 59
Director and Executive Officer Voting, Non-Solicitation and Non-Competition Agreements ............................................. 59
Interests of Directors and Officers in the Merger ................................................................................................................. 60
Accounting Treatment of the Merger.................................................................................................................................... 62
Shareholder Approval ........................................................................................................................................................... 63
Dissenters’ Rights of Commerce Bank Shareholders ........................................................................................................... 63
Regulatory Approvals Required for the Merger ................................................................................................................... 64
Resale of AltaPacific Bancorp Common Stock .................................................................................................................... 65
Exchange of Certificates ....................................................................................................................................................... 65
THE MERGER AGREEMENT ................................................................................................................................................ 66
Explanatory Note Regarding the Merger Agreement ........................................................................................................... 66
Representations and Warranties of the Parties ...................................................................................................................... 66
Conduct of the Parties Prior to Completion of the Merger ................................................................................................... 68
Agreements of Commerce Bank Relating to Alternative Acquisition Proposals .................................................................. 71
Conditions to Both Parties’ Obligations Under the Merger Agreement ............................................................................... 72
Conditions to AltaPacific Bancorp’s Obligations Under the Merger Agreement ................................................................. 72
Conditions to Commerce Bank’s Obligations Under the Merger Agreement....................................................................... 73
Termination; Effect of Termination ...................................................................................................................................... 74
Amendment, Extension and Waiver ..................................................................................................................................... 75
Employee Benefits ................................................................................................................................................................ 75
Expenses ............................................................................................................................................................................... 75
Closing; Effective Time of the Merger ................................................................................................................................. 75
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER .................................. 77
INFORMATION ABOUT ALTAPACIFIC BANCORP AND ALTAPACIFIC BANK.......................................................... 80
AltaPacific Bancorp and AltaPacific Bank ........................................................................................................................... 80
Supervision and Regulation .................................................................................................................................................. 83
Properties .............................................................................................................................................................................. 89
Legal Proceedings ................................................................................................................................................................. 89
Management’s Discussion and Analysis of Financial Condition and Results of Operations................................................ 89
Directors and Executive Officers of AltaPacific Bancorp .................................................................................................. 105
Executive Officer and Director Compensation ................................................................................................................... 107
Related Party Transactions ................................................................................................................................................. 109
INFORMATION ABOUT COMMERCE BANK ................................................................................................................... 110
General ................................................................................................................................................................................ 110
Strategy ............................................................................................................................................................................... 110
Services Offered ................................................................................................................................................................. 110
Marketing Focus ................................................................................................................................................................. 112
Service Area........................................................................................................................................................................ 112
Competition ........................................................................................................................................................................ 113
Employees........................................................................................................................................................................... 113
Properties ............................................................................................................................................................................ 113
Legal Proceedings ............................................................................................................................................................... 114
Executive Officer and Director Compensation ................................................................................................................... 114
Related Party Transactions ................................................................................................................................................. 116
DESCRIPTION OF ALTAPACIFIC BANCORP COMMON STOCK ................................................................................. 116
General ................................................................................................................................................................................ 116
Voting Rights ...................................................................................................................................................................... 117
Dividends ............................................................................................................................................................................ 117
Miscellaneous ..................................................................................................................................................................... 117
iv
COMPARISON OF THE RIGHTS OF COMMON STOCK SHAREHOLDERS OF
ALTAPACIFIC BANCORP AND COMMERCE BANK ............................................................................................... 118
PROPOSAL NO. 2 DISCRETIONARY AUTHORITY TO ADJOURN ............................................................................... 121
General ................................................................................................................................................................................ 121
Vote Required ..................................................................................................................................................................... 121
Recommendation of the Board of Directors of Commerce Bank ....................................................................................... 121
LEGAL MATTERS................................................................................................................................................................. 122
INDEPENDENT AUDITORS ................................................................................................................................................ 122
OTHER MATTERS ................................................................................................................................................................ 122
INDEX TO FINANCIAL STATEMENTS ............................................................................................................................. 123
v
APPENDICES
Appendix A
Agreement and Plan of Reorganization and Merger, dated as of September 1, 2016, between AltaPacific
Bancorp and Commerce Bank of Temecula Valley, including exhibits thereto (including forms of
Director Non-Competition and Voting Agreement, Executive Voting and Non-Solicitation Agreement,
Option Cancellation Agreement, and Indemnity Agreement)
Appendix B
Selected sections of Chapter 13 of the California Corporations Code (Dissenters’ Rights)
Appendix C
Fairness Opinion of The Findley Group
vi
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
This question and answer summary highlights selected information contained in other sections of this proxy
statement/prospectus and is intended to answer questions that you, as a shareholder of Commerce Bank, may have regarding
the special meeting and the merger. AltaPacific Bancorp and Commerce Bank urge you to carefully read this entire proxy
statement/prospectus, including its appendices.
Questions and Answers about the Special Meeting
Q:
Why have you sent me this document?
A:
This document is being delivered to you because it is serving as both a proxy statement for Commerce
Bank and a prospectus of AltaPacific Bancorp. It is a proxy statement because it is being used by the Commerce Bank board
of directors to solicit the proxies of its shareholders in connection with the special meeting of shareholders. It is a prospectus
because AltaPacific Bancorp is offering shares of its common stock to shareholders of Commerce Bank in the merger as
described below.
This proxy statement/prospectus contains important information regarding the proposed merger, as well as
information about AltaPacific Bancorp and Commerce Bank. It also contains important information about what Commerce
Bank’s board of directors and management considered when evaluating this proposed merger. We urge you to read this
proxy statement/prospectus carefully, including the merger agreement which is attached to this proxy statement/prospectus as
Appendix A and is incorporated herein by reference, and the other appendices.
Q:
When and where will the special meeting be held?
A:
The special meeting will be held at the headquarters office of Commerce Bank located at 25220 Hancock
Avenue, Murrieta, Suite 140, California 92562, on April 14, 2017, at 5:30 p.m. (local time).
Q:
Who is entitled to vote at the special meeting?
A:
Commerce Bank shareholders of record as of the close of business on February 16, 2017 will be entitled to
vote at the special meeting.
Q:
What am I being asked to vote on at the special meeting?
A:
Commerce Bank is holding the special meeting to ask its shareholders to consider and vote to:
•
•
Q:
A:
the following:
Q:
approve the merger agreement and the merger; and
approve any adjournment or postponement of the special meeting if necessary, to solicit additional
proxies if there are not sufficient votes in favor of the merger agreement and the merger or for any
other legally permissible purpose.
How does the Commerce Bank board of directors recommend that I vote on each proposal?
A majority of the Commerce Bank board of directors recommends that you vote “FOR” the approval of
•
the merger agreement and the merger; and
•
the adjournment or postponement of the special meeting, if necessary, to solicit additional proxies
if there are not sufficient votes in favor of the merger agreement or for any other legally
permissible purpose.
How many votes do I have and how do I vote at the special meeting?
A:
You are entitled to one vote for each share that you owned as of the record date for the special meeting.
You may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to any of the proposals presented at the special meeting.
Whether or not you plan to attend the special meeting, we urge you to vote by proxy to ensure your vote is counted. If you
hold your shares in certificate form, you may still attend the special meeting and vote in person even if you have already
voted by proxy.
1
Q:
•
To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it
promptly in the envelope provided. If you return your signed proxy card before the special
meeting, your shares will be voted as you direct.
•
You may also vote utilizing the Internet or telephone as set forth on the enclosed proxy card.
•
If you hold your shares in certificate form and wish to vote in person, simply attend the special
meeting and you will be given a ballot when you arrive. If you hold your shares in street name,
you will need to obtain a legal proxy from your broker to enable you to vote in person at the
meeting.
What if my shares are held in street name by my broker or other nominee?
A:
If you hold your shares in “street name” through a broker or other nominee, you should have received a
proxy card and voting instructions with these proxy materials from that organization rather than from Commerce Bank.
Your broker or nominee cannot vote your shares unless you provide instructions on how to vote them. To vote your
shares, follow the voting instructions your broker or nominee provided when forwarding these proxy materials to you and
complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the
Internet as instructed by your broker or nominee. To vote in person at the special meeting, you must obtain a valid proxy
from your broker or nominee. If you do not provide voting instructions to your broker, bank or agent, this will have the
same effect as a vote “AGAINST” the merger agreement. Your abstention or non-vote will have no effect on the outcome
of the proposal to adjourn and reconvene the special meeting. See “THE SPECIAL MEETING – Abstentions and Broker
Non-Votes” on page 44.
Q:
May I revoke or change my vote after I have provided proxy instructions?
A:
Yes. If you hold shares in certificate form, you may revoke or change your proxy at any time before the
time your proxy is voted at the special meeting by: (i) filing with Commerce Bank’s Corporate Secretary an instrument
revoking it or a duly executed proxy bearing a later date; (ii) appearing and voting in person at the special meeting or (iii) if
you have voted your shares by Internet or telephone, recording a different vote, or by signing and returning a proxy card
dated as of a date that is later than your last Internet or telephone vote. Your attendance alone at the special meeting will not
revoke your proxy. If you have instructed a broker or other nominee to vote your shares, you must follow directions received
from your broker or other nominee in order to change those instructions.
Q:
What happens if I don’t vote?
A:
If you do not vote by either returning your proxy card, voting by phone or Internet, or attending the special
meeting and voting in person, it will have the same effect as voting your shares “AGAINST” the merger agreement and the
merger.
Q:
What happens if I sign and return my proxy card without indicating how I wish to vote?
A:
If you sign and return your proxy card without indicating how to vote on any particular proposal, your
proxy will be voted “FOR” the merger and the adjournment proposal, as recommended by Commerce Bank’s board of
directors.
2
Questions and Answers About the Merger Agreement and the Merger
Q:
What will Commerce Bank shareholders receive in the merger?
A:
If the merger is completed, shareholders of Commerce Bank will be entitled to receive, for each share of
Commerce Bank common stock they own, either 1.1377 shares of AltaPacific Bancorp common stock or $10.00 in cash, or a
combination of both, subject to proration and allocation to ensure that 50% of outstanding Commerce Bank shares are
exchanged for shares of AltaPacific Bancorp common stock and 50% are exchanged for cash. For purposes of this 50-50
split, the shares of AltaPacific Bancorp common stock have been valued at $8.79 per share by the parties, even though the
actual market price will fluctuate and will therefore likely have a different per share value at the effective time of the merger.
Because the per share market price of AltaPacific common stock will fluctuate prior to the consummation of the merger, the
exact value of the per share stock consideration will not be known at the time of the special meeting. In addition, if too many
shareholders elect one form of consideration over the other, any given shareholder may not receive the form of merger
consideration he or she elected. As a result, it is not possible to predict the exact value of the merger consideration any given
shareholder will receive. For more information see “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE
MERGER — The Merger Consideration, and — Allocation Calculation” on pages 47 and 49.
Q:
Is the value of the per share consideration that a Commerce Bank shareholder receives expected to
be substantially equivalent regardless of which election he or she makes?
A:
We would expect that the respective values of the per share cash consideration and per share stock
consideration will be relatively close to each other, but due to market fluctuations there can be no guarantee that this will be
the case. The merger consideration was structured so that 50% of the outstanding shares of Commerce Bank stock would be
exchanged for cash, and 50% for stock. For purposes of this 50-50 split, the shares of AltaPacific Bancorp stock were valued
at $8.79 per share, which was the tangible book value of such stock as of March 31, 2016, resulting in a per share stock
consideration value of approximately $10.00 for each share of Commerce Bank stock. Depending on the per share market
price of AltaPacific Bancorp common stock at the close of the merger, the value of the per share stock consideration may be
somewhat more or less than that of the per share cash consideration. Based on the trading price of AltaPacific Bancorp
common stock on March 8, 2017, the value of the per share stock consideration would be $12.17 per share. However, it is
impossible to predict what that value will be at the close of the merger.
Q:
Will the value of the merger consideration change between the special meeting and the time the
merger is completed?
A:
While the value of the cash portion of the consideration is fixed at $10.00 per share, the value of the stock
portion of the merger consideration will fluctuate between the date of the special meeting and the completion of the merger
based upon the market value of AltaPacific Bancorp common stock. If any portion of the merger consideration you receive is
in the form of stock, whether because you elect all or a portion of stock or because more shareholders elected to receive cash
than was available, fluctuation in the market price of AltaPacific Bancorp common stock after the special meeting will
change the value of the per share merger consideration that you will receive.
Q:
How do I elect the form of consideration I prefer to receive?
A:
Each Commerce Bank shareholder will be sent an election form and related instructions, which will be
mailed to Commerce Bank shareholders no less than 35 days prior to the anticipated effective time of the merger or on such
other date as Commerce Bank and AltaPacific Bancorp mutually agree, which we refer to as the “mailing date.” The election
form will allow a Commerce Bank shareholder to indicate whether the shareholder elects to receive (i) AltaPacific Bancorp
common stock for all of such shareholder’s shares, (ii) cash for all of such shareholder’s shares, or (iii) a mixture of
AltaPacific Bancorp common stock and cash for such shareholder’s shares, all subject to the proration provisions of the
merger agreement. To make a valid election, a Commerce Bank shareholder must submit a properly completed and signed
election form so that it is actually received by Computershare, AltaPacific Bancorp’s exchange agent, on or prior to the
election deadline in accordance with the instructions on the election form. See “PROPOSAL NO. 1 – THE MERGER
AGREEMENT AND THE MERGER — Election Procedure” on page 48.
Q:
May I submit an election form if I vote against the merger?
A:
Yes. You may submit an election form even if you vote against the merger. However, if you are a
dissenting shareholder, your election will have no effect and you will instead receive the fair market value for your shares as
3
defined in the Corporations Code. See “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER –
Dissenters’ Rights of Commerce Bank Shareholders” beginning on page 63.
Q:
May I change my election once it has been submitted?
A:
Yes. You may revoke your election with respect to all or a portion of your shares of Commerce Bank
common stock by delivering written notice of your revocation to the exchange agent by the election deadline. If an election
is properly revoked with respect to shares of Commerce Bank common stock, the holder will be deemed to have made no
election with respect to such shares unless and until a new election form is submitted, which must be received by the
exchange agent by the election deadline. You will not be entitled to revoke or change your election after the election
deadline.
Q:
What happens if I do not make an election prior to the deadline?
A:
If you fail to submit a valid election form to the exchange agent prior to the election deadline, then you will
be deemed to have made no election and will receive either shares of AltaPacific Bancorp common stock, cash or a
combination of shares of AltaPacific Bancorp common stock and cash for your shares, depending on the elections made by
other shareholders.
Q:
Will I receive the form of merger consideration that I elect?
A:
Not necessarily. This will depend primarily on elections made by other shareholders. There is no way to
predict what elections different shareholders will make, and the aggregate amounts of cash and stock to be issued in the
merger are fixed in the merger agreement. As a result, there is no assurance that any given shareholder will receive the form
of consideration he or she elects. If Commerce Bank shareholders elect to receive more of one form of consideration than is
available, we will allocate the available amount among the Commerce Bank shareholders electing to receive that form of
consideration, and those Commerce Bank shareholders will receive the other form of consideration for the balance of their
Commerce Bank shares. For a detailed description of these allocation procedures, please see “PROPOSAL NO. 1 – THE
MERGER AGREEMENT AND THE MERGER — Allocation Calculation.”
Q:
What will holders of outstanding stock options receive in the merger?
A:
Holders of outstanding stock options under the Commerce Bank 2007 Stock Option Plan shall be entitled to
exercise such options in connection with the merger. Any option holder electing to exercise outstanding stock options will
receive the same merger consideration as any other Commerce Bank shareholder. As of February 16, 2017, Commerce Bank
had options outstanding to purchase 193,641 shares of its common stock, at an average per share exercise price of $9.65 per
share. The total number of shares issued and cash paid will be increased if outstanding stock options are exercised prior to
the effective time of the merger. Option holders who choose to execute cancellation agreements instead of exercising their
stock options will be entitled to receive the difference between $10.00 per share and the exercise price.
Q:
Will I receive any fractional shares of AltaPacific Bancorp common stock as part of the merger
consideration?
A:
No. AltaPacific Bancorp will not issue fractional shares in the merger. As a result, the total number of
shares of AltaPacific Bancorp common stock that you will receive in the merger will be rounded to the nearest whole
number. You will receive a cash payment for the value of any remaining fraction of a share of AltaPacific Bancorp common
stock that you would otherwise have been entitled to receive.
Q:
agreement?
Do Commerce Bank shareholders have dissenters’ rights with respect to approval of the merger
A:
Yes. Holders of Commerce Bank common stock have dissenters’ rights in accordance with the provisions
of Chapter 13 of the Corporations Code. In order to exercise dissenters’ rights, a shareholder does not need to affirmatively
vote against the merger agreement, but instead need only not vote in favor of the merger agreement. However, a shareholder
choosing to exercise his or her dissenters’ rights must also comply with the provisions of Chapter 13 of the Corporations
Code. A copy of the applicable sections of Chapter 13 of the Corporations Code is included with this proxy
statement/prospectus as Appendix B. Please also read the section entitled “PROPOSAL NO. 1 – THE MERGER
AGREEMENT AND THE MERGER – Dissenters’ Rights of Commerce Bank Shareholders” beginning on page 63.
4
Q:
Why has the Commerce Bank board of directors approved the merger?
A:
The board of directors of Commerce Bank has considered a number of available strategic options and in the
opinion of a majority of Commerce Bank’s directors, none of these options, including remaining independent, is likely to
create value for Commerce Bank shareholders greater than that created by the proposed transaction with AltaPacific Bancorp.
However, four of Commerce Bank’s 11 directors disagreed with this conclusion and voted against the merger at the board
meeting at which the merger was approved. Please read the section entitled “PROPOSAL NO. 1 – THE MERGER
AGREEMENT AND THE MERGER – Commerce Bank’s Reasons for the merger; Recommendation of Commerce Bank’s
Board of Directors” beginning on page 53.
Q:
When do you expect the merger to be completed?
A:
AltaPacific Bancorp and Commerce Bank are working to complete the merger in the second quarter of
2017. However, the merger is subject to various conditions, including approval by the shareholders of Commerce Bank.
Due to possible factors outside our control, it is possible that the merger will be completed at a later time, or not at all. There
may be a substantial amount of time between the special meeting and the completion of the merger.
Q:
meeting?
What happens if I sell my shares after the record date for the special meeting, but before the special
A:
If you transfer your shares after the record date for the special meeting but before the date of the special
meeting, you will retain your right to vote at the special meeting. However, you will not have the right to receive any shares
of AltaPacific Bancorp common stock in exchange for your former shares of Commerce Bank common stock if and when the
merger is completed. In order to receive shares of AltaPacific Bancorp common stock in exchange for your shares of
Commerce Bank common stock, you must hold your Commerce Bank common stock through the completion of the merger.
Q:
Should I send in my certificates now?
A:
No. Please do not send in your stock certificates at this time. If the merger is approved by the
shareholders, you will be sent instructions regarding the surrender of your stock certificates and your election as to the type
of consideration you would prefer to receive in the merger.
Q:
What should I do now?
A:
After reading this proxy statement/prospectus, you should vote on the proposals. You may also vote by
telephone or the Internet by following the instructions on your proxy card. Or indicate on your proxy card how you
want to vote, then sign and mail your proxy card in the enclosed return envelope in time to be represented at the special
meeting.
If the merger is consummated, the exchange agent for the merger will mail to each holder of record of a Commerce
Bank stock certificate a letter of transmittal with instructions on how to exchange their Commerce Bank stock certificates for
the merger consideration. If you are a Commerce Bank shareholder and own your shares in certificate form, you should
immediately locate and make sure you have possession of the certificates evidencing your Commerce Bank common stock as
you will need to surrender them in order to receive the merger consideration. If your certificate(s) for Commerce Bank
common stock is/are lost, stolen, or destroyed, you are urged to immediately notify Computershare at (800) 522-6645
so that a “stop transfer” instruction can be placed on your shares of Commerce Bank stock underlying your lost
certificate(s) to prevent transfer of ownership to another person. Computershare will send you the forms to permit
the issuance of a replacement certificate(s).
Q:
When can I sell the shares of AltaPacific Bancorp common stock that I receive in the merger?
A:
You may sell the shares of AltaPacific Bancorp common stock you receive in the merger without
restriction unless you are considered an “affiliate” of AltaPacific Bancorp. See “PROPOSAL NO. 1 – THE MERGER
AGREEMENT AND THE MERGER – Resale of AltaPacific Bancorp common stock” on page 65.
5
Q:
Who can help answer my other questions?
A:
If you have more questions about the merger or the special meeting, or if you need additional copies of this
document or the enclosed proxy card, you may direct your questions to Donald W. Murray, Chairman, President and CEO or
LouEllen Ficke, Executive Vice President, Commerce Bank of Temecula Valley, 25220 Hancock Avenue, Suite 140,
Murrieta, California 92562, telephone: (951) 973-7400.
WHERE YOU CAN FIND MORE INFORMATION
Neither AltaPacific Bancorp nor Commerce Bank has a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor is either subject to the reporting requirements of
Section 13(a) or 15(d) of the Exchange Act, and, accordingly, neither company files documents and reports with the
Securities and Exchange Commission. The historical financial statements of AltaPacific Bancorp are included elsewhere in
this proxy statement/prospectus.
Both Commerce Bank and AltaPacific Bank file call reports with the FDIC, all of which are available electronically
at the FDIC’s web site at http://www.fdic.gov.
Commerce Bank’s Proxy Statement for its 2016 Annual Meeting of Shareholders and 2015 Annual Report to
Shareholders are available electronically at www.commercebanktv.com. You may also request copies of these documents, as
well as additional copies of this proxy statement/prospectus, at no cost by contacting Commerce Bank at the following
address:
Commerce Bank of Temecula Valley
25220 Hancock Avenue, Suite 140
Murrieta, California 92562
(951) 973 7400
Attention: LouEllen Ficke
Neither AltaPacific Bancorp nor Commerce Bank has authorized anyone to give any information or make any
representations about the merger, the merger agreement or either of the parties thereto that is different from, or in addition to,
that contained in this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not
rely on it. The information contained in this statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another date applies.
6
SUMMARY
This summary highlights selected information from this proxy statement/prospectus. Because this is a summary, it
does not contain all of the information that may be important to you. You should carefully read this entire document and the
other documents we refer to in this proxy statement/prospectus before you decide how to vote. These references will give you
a more complete description of the merger agreement and the merger and the other matters to be considered at the special
meeting. We have included page references in this summary to direct you to more complete descriptions of the topics
provided elsewhere in this proxy statement/prospectus.
Parties to the Merger Agreement (See pages 80 to 116)
AltaPacific Bancorp is a California corporation headquartered in Santa Rosa, California, and is a registered bank
holding company under federal banking laws. AltaPacific Bancorp is the holding company for AltaPacific Bank, a California
state-chartered bank also headquartered in Santa Rosa. AltaPacific Bank operates five branches (including its main office
and corporate headquarters) in Santa Rosa, Ontario, Riverside, Covina, and Temecula, California. At December 31, 2016,
AltaPacific Bancorp had total assets of $351.4 million, total deposits of $276.7 million and total shareholders’ equity of $57.2
million.
AltaPacific Bancorp’s principal executive offices are located at 4845 Old Redwood Highway, Santa Rosa,
California 95403, telephone: (707) 236-1500.
Commerce Bank is a California state-chartered bank with one office, its headquarters office, located in Murrieta,
California. At December 31, 2016, Commerce Bank had total assets of $74.7 million; total deposits of $61.6 million, and
total shareholders’ equity of $13.0 million.
Commerce Bank’s principal executive offices are located at 25220 Hancock Avenue, Suite 140, Murrieta, California
92562, telephone: (951) 973-7400.
Special Meeting of Shareholders (See pages 41 to 46)
Commerce Bank will hold a special meeting of shareholders at its headquarters office, located at 25220 Hancock
Avenue, Murrieta, Suite 140, California 92562, on April 14, 2017, at 5:30 p.m. (local time). The Commerce Bank board of
directors has set the close of business on February 16, 2017, as the record date for determining shareholders entitled to notice
of, and to vote at, the special meeting. On that date, there were 1,616,041 shares of Commerce Bank common stock
outstanding.
At the special meeting, holders of Commerce Bank common stock will be asked to consider and vote on the
following proposals:
•
a proposal to approve the Agreement and Plan of Reorganization and Merger, dated September 1, 2016, by
which Commerce Bank will be merged with and into AltaPacific Bank, as more fully described in this
proxy statement/prospectus; and
•
a proposal to approve any adjournment or postponement of the special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes in favor of the merger agreement or for any other legally
permissible purpose.
The Merger Agreement (See pages 66 to 76)
The merger agreement is the legal document that contains the terms that govern the merger process, including the
issuance of the merger consideration as a result of the merger. Please read the entire merger agreement which is attached to
this proxy statement/prospectus as Appendix A.
The Merger (See pages 47 to 66)
Under the terms of the merger agreement, Commerce Bank will be merged with and into AltaPacific Bank,
AltaPacific Bank will continue the commercial bank operations of the combined banks under its California charter and as the
wholly-owned bank subsidiary of AltaPacific Bancorp, and AltaPacific Bancorp will issue shares of its common stock and
cash to Commerce Bank shareholders pursuant to the terms of the merger agreement. A copy of the merger agreement
between AltaPacific Bancorp and Commerce Bank is attached to this proxy statement/prospectus as Appendix A.
7
Consideration to be Paid to the Holders of Commerce Bank Common Stock (See page 47)
If the merger is completed, shareholders of Commerce Bank will be entitled to receive, for each share of Commerce
Bank common stock they own, either 1.1377 shares of AltaPacific Bancorp common stock or $10.00 in cash, or a
combination of both, subject to proration and allocation to ensure that 50% of outstanding Commerce Bank shares are
exchanged for shares of AltaPacific Bancorp common stock and 50% are exchanged for cash. For purposes of this 50-50
split, the shares of AltaPacific Bancorp common stock have been valued at $8.79 per share by the parties, which was the
tangible book value of such stock as of March 31, 2016. As the trading price of AltaPacific Bancorp common shares
fluctuates from time to time, the actual value of the stock consideration will likely be different at the effective time of the
merger. It is not possible to predict whether this value will be more or less than that of the cash consideration. The value of
the per share stock consideration based on an assumed value of AltaPacific Bancorp common stock of $8.79 per share is the
same $10.00 per share of Commerce Bank common stock as the cash consideration. Based on the trading price of
AltaPacific Bancorp common stock on March 8, 2017 the latest practicable date before the printing of this proxy
statement/prospectus, the value of the per share stock consideration would be $12.17 per share, and the value of the per share
merger consideration for a shareholder receiving 50% cash and 50% stock would be $11.09. However, it is impossible to
predict what the value will be at the close of the merger.
United States Federal Income Tax Consequences (See pages 77 to 79)
AltaPacific Bancorp and Commerce Bank intend that the merger will qualify as a “reorganization” within the
meaning of Section 368(a) of the Internal Revenue Code, and it is a condition to AltaPacific Bancorp’s obligation to
complete the merger that it receive an opinion from its independent auditors, Vavrinek, Trine, Day & Co., LLP (“Vavrinek”),
to the effect that the merger will so qualify. Accordingly, U.S. holders (as defined in the section entitled “PROPOSAL NO. 1
– THE MERGER AGREEMENT AND THE MERGER – Material United States Federal Income Tax Consequences of the
Merger” beginning at page 77) of Commerce Bank common stock generally will not recognize gain or loss for U.S. federal
income tax purposes upon the exchange of their shares of Commerce Bank common stock for AltaPacific Bancorp common
stock. U.S. holders who receive cash (other than cash received in lieu of a fractional share of AltaPacific Bancorp common
stock) and AltaPacific Bancorp common stock will recognize gain, but will not recognize any loss, for U.S. federal income
tax purposes in an amount equal to the lesser of (1) the amount of cash received (other than cash received in lieu of a
fractional share of AltaPacific Bancorp common stock) and (2) the excess, if any, of (x) the sum of the amount of such cash
and the fair market value of the AltaPacific Bancorp common stock received in the merger, over (y) the U.S. holder’s tax
basis in the shares of Commerce Bank common stock surrendered in the merger. In addition, U.S. holders will recognize
gain or loss attributable to cash received in lieu of a fractional share of AltaPacific Bancorp common stock. U.S. holders who
receive only cash in the merger and U.S. holders who dissent and receive cash for their dissenting shares will recognize a
taxable gain or loss. For a description of the material U.S. federal income tax consequences of the merger, see “PROPOSAL
NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Material United States Federal Income Tax Consequences
of the Merger” beginning on page 77. Commerce Bank shareholders are strongly urged to consult with their tax advisors
concerning the U.S. federal income tax consequences of the merger to them, as well as the effects of state and local, foreign
and other tax laws.
Regulatory Approvals Must Be Obtained Before the Merger Will Be Completed (See page 64)
AltaPacific Bancorp has agreed to use its best efforts to obtain all regulatory approvals required to complete the
merger, including the approvals from the Federal Reserve Bank of San Francisco, which we refer to as the Federal Reserve;
and the California Department of Business Oversight, Division of Financial Institutions, which we refer to as the DFI.
AltaPacific Bancorp has also filed an application with the California Commissioner of Business Oversight, Division of
Corporations, which we refer to as the DOC, for a permit under Corporations Code Section 25121 qualifying the maximum
number of shares of AltaPacific Bancorp common stock that may be issued in the merger following a public hearing on the
fairness of the terms and conditions of the merger agreement under Corporations Code Section 25142. AltaPacific Bancorp
and AltaPacific Bank have filed the requisite applications to obtain the required regulatory approvals. In obtaining the
required regulatory approvals, AltaPacific Bancorp and AltaPacific Bank are not required to agree to any condition that
(i) requires AltaPacific Bancorp or AltaPacific Bank to pay any amounts (other than customary filing fees), or divest any
banking office or line of business or operations, or (ii) imposes any condition, requirement or restriction upon AltaPacific
Bancorp or AltaPacific Bank, that individually or in the aggregate would reasonably be expected to impose a materially
burdensome condition on AltaPacific Bancorp or AltaPacific Bank, as applicable, or otherwise would materially alter the
economics of the merger for AltaPacific Bancorp. As of the date of this proxy statement/prospectus, the required permit
from the DOC and regulatory approvals of the merger from the Federal Reserve and the DFI have all been received. The
approvals by the regulators do not constitute an endorsement of the merger.
8
Approval of a Majority of Shares of Commerce Bank Stock Entitled to Vote at the Special Meeting is Required for the
Merger to be Consummated (See page 62)
The affirmative vote of at least a majority of the shares of Commerce Bank common stock outstanding as of the
record date for the special meeting is required to approve the merger agreement and the merger. Each share of Commerce
Bank stock outstanding on the record date for the special meeting will be entitled to one vote for each share held. As of
February 16, 2017, which is the record date for the special meeting, there were 1,616,041 shares of Commerce Bank common
stock outstanding. Therefore, the affirmative vote of at least 808,021 shares of Commerce Bank common stock is required to
approve the merger agreement and merger. Abstentions, failures to vote and broker non-votes will have the same effect as
votes “AGAINST” approval of the merger agreement. As of the record date, seven of Commerce Bank’s directors and all of
its executive officers, owning a total of approximately 285,862 voting shares (not including vested option shares), or
approximately 17.7% of Commerce Bank’s outstanding shares of common stock, have committed to vote these shares “FOR”
the approval of the merger agreement and merger. As of that same date, four of Commerce Bank’s directors, owning a total
of approximately 609,561 voting shares (not including vested option shares), or approximately 37.7% of Commerce Bank’s
outstanding shares of common stock, have indicated that they intend to vote their shares “AGAINST” the approval of the
merger agreement and merger.
Recommendation of Commerce Bank’s Board of Directors (See pages 53 to 55)
On September 1, 2016, a majority of Commerce Bank’s directors approved the merger agreement and the merger.
These directors believe that the merger agreement’s terms are fair and in the best interests of Commerce Bank’s shareholders.
Accordingly, they recommend a vote “FOR” the proposal to approve the principal terms of the merger agreement and the
merger. Four of Commerce Bank’s 11 directors disagreed with the majority’s determination and voted against the merger
agreement and the merger. The conclusions of Commerce Bank’s board of directors regarding the merger agreement are
based upon a number of factors which are discussed more fully under the section entitled “PROPOSAL NO. 1 – THE
MERGER AGREEMENT AND THE MERGER – Commerce Bank’s Reasons for the Merger; Recommendation of
Commerce Bank’s Board of Directors” beginning on page 53.
A Majority of Commerce Bank’s Directors and All of its Executive Officers Have Entered into Voting Agreements
(See page 43).
As of the record date, Commerce Bank’s directors and executive officers owned approximately 895,423 voting
shares (not including vested option shares), or approximately 55.4% of Commerce Bank’s outstanding shares of common
stock. Seven of Commerce Bank’s directors and all of its executive officers, owning a total of 285,862 voting shares or
approximately 17.7% of Commerce Bank’s outstanding shares of common stock as of the record date, have entered into
separate written agreements in which they have agreed, among other things, to vote their shares “FOR” the approval of the
merger agreement and the merger. A copy of the form of voting agreement separately executed by each of these directors is
attached as Exhibit A and a copy of the form of voting agreement separately executed by each of the executive officers is
attached as Exhibit B to the merger agreement which is attached to this proxy statement/prospectus Appendix A and is
incorporated herein by reference. Four of Commerce Bank’s directors, owning a total of approximately 609,561 voting
shares or approximately 37.7% of Commerce Bank’s outstanding shares as of the record date, have declined to enter into
such voting agreements and have indicated that they intend to vote their shares “AGAINST” the approval of the merger
agreement and merger.
Opinion of Commerce Bank’s Financial Advisor (See pages 55 to 59)
In deciding to approve the merger, Commerce Bank’s board of directors considered, among other things, the opinion
of The Findley Group (“Findley”), Commerce Bank’s financial advisor, regarding the fairness, from a financial point of
view, of the merger consideration to be received by Commerce Bank’s shareholders as a result of the merger agreement and
the merger. Findley’s written opinion is attached as Appendix C. You should read it carefully to understand the assumptions
made, matters considered and limitations of the review undertaken by Findley in providing its opinion. Findley’s written
opinion is addressed to Commerce Bank’s board of directors and does not constitute a recommendation as to how any
holder of Commerce Bank common stock should vote with respect to the merger agreement and the merger.
Commerce Bank’s Directors and Executive Officers may have interests in the merger that differ from interests of
Commerce Bank Shareholders generally (See pages 60 to 62)
Commerce Bank’s directors and executive officers may have economic interests in the merger that are different
from, or in addition to, those of Commerce Bank shareholders generally. The Commerce Bank board of directors considered
9
these interests in its decision to adopt and approve the merger agreement and to recommend approval of the merger
agreement and the merger to Commerce Bank’s shareholders. Some of the interests of Commerce Bank’s directors and
executive officers include:
•
AltaPacific Bank has entered into an employment agreement with Donald Murray, Chairman of the Board,
President and Chief Executive Officer (CEO) of Commerce Bank, for a period of two (2) years
commencing on the effective date of the merger. Mr. Murray will serve as Executive Vice President, report
to AltaPacific Bank’s President/Chief Operating Officer (President/COO), and provide leadership in
planning and implementing the conduct of AltaPacific Bank’s business and affairs in Riverside and North
San Diego Counties and other regions within Southern California, subject to the direction of AltaPacific
Bank’s President/COO. Mr. Murray will receive a base salary of $190,000 per year; eligibility for a bonus
in the discretion of AltaPacific Bank’s CEO; reimbursement of business expenses; eligibility to participate
in all employee benefit plans maintained by AltaPacific Bank, a car allowance of $750 per month, cell
phone reimbursement of $100 per month; and stock options to purchase 10,000 shares of AltaPacific
Bancorp common stock. The agreement also provides that Mr. Murray shall receive the balance of his
salary (plus any accrued but unused vacation) through the end of the agreement term if he is terminated
without cause during the first 23 months of the term; and for a period of 30 days after the date of
termination if so terminated during the final month of the term;
•
AltaPacific Bank has also entered into an employment agreement with LouEllen Ficke, Executive Vice
President and Chief Financial Officer (CFO) of Commerce Bank, for a period of one (1) year commencing
on the effective date of the merger. Ms. Ficke will serve as Senior Vice President, report to Mr. Murray,
and provide leadership in the retention of customers, planning and implementing the conduct of AltaPacific
Bank’s business and affairs in Riverside and North San Diego Counties, subject to the direction of Mr.
Murray. Ms. Ficke will receive a base salary of $80,000 per year; eligibility for a bonus in the discretion of
AltaPacific Bank’s CEO; reimbursement of business expenses; eligibility to participate in all employee
benefit plans maintained by AltaPacific Bank, cell phone reimbursement of $100 per month; and stock
options to purchase 2,000 shares of AltaPacific Bancorp common stock. The agreement also provides that
Ms. Ficke shall receive the balance of her salary (plus any accrued but unused vacation) through the end of
the agreement term if she is terminated without cause during the first 11 months of the term; and for a
period of 30 days after the date of termination if so terminated during the final month of the term;
•
Donald Murray, Chairman of the Board, President and CEO of Commerce Bank; LouEllen Ficke,
Executive Vice President and Chief Financial Officer; and Carl Patsko, Executive Vice President and Chief
Credit Officer; have each executed employment agreements with Commerce Bank which provide that that
upon consummation of the merger agreement and the merger, they would be entitled to receive payments
upon termination equal to two years of annual salary plus medical benefits in effect at termination.
Specifically, the salary payments would be $380,000, $310,000 and $280,000 for Mr. Murray, Ms. Ficke
and Mr. Patsko, respectively, plus certain additional benefits. At the close of the merger Mr. Murray’s and
Ms. Ficke’s employment agreements with Commerce Bank will be terminated upon payment of their
$380,000 and $310,000 severance amounts, respectively, and will be superseded by their employment
agreements with AltaPacific Bank;
•
Commerce Bank anticipates that some of its officers and employees at the effective time will remain
officers and employees of AltaPacific Bank, respectively, and as such will be entitled to participate in all
employee benefits and benefit programs of AltaPacific Bank on the same basis as similarly situated
employees of AltaPacific Bank. The merger agreement provides that full-time employees of Commerce
Bank who are not retained by AltaPacific Bank following the close of the merger will be entitled to certain
severance benefits, unless such employee has an employment agreement or other agreement or arrangement
otherwise providing for severance payments;
•
Commerce Bank has previously granted stock options to certain executive officers and directors under its
2007 Stock Option Plan. In accordance with the terms of the plan, all options to purchase shares of
Commerce Bank common stock will become 100% vested and fully exercisable for a designated period of
time prior to the effective time of the merger and contingent upon the consummation of the merger. Any
option holder electing to exercise outstanding stock options prior to the merger will receive the same
merger consideration as any other Commerce Bank shareholder. Option holders who choose to execute
cancellation agreements instead of exercising their stock options will be entitled to receive the difference
between $10.00 per share and the exercise price; and
•
pursuant to the terms of the merger agreement, AltaPacific Bancorp has agreed to (i) maintain and preserve
the indemnification rights of Commerce Bank directors and officers after the completion of the merger, (ii)
10
execute new indemnification agreements with the directors and officers of Commerce Bank, and (iii) allow
Commerce Bank to purchase “tail coverage,” for a period of three years, in order to continue providing
liability insurance to the officers and directors of Commerce Bank. See “PROPOSAL NO. 1 – THE
MERGER AGREEMENT AND THE MERGER – Interests of Directors and Executive Officers in the
Merger – Protection of Directors, Officers and Employees” beginning on page 60.
Conditions that Must Be Satisfied Prior to Closing the Merger (See pages 72 to 73)
In addition to obtaining the necessary approval of the shareholders of Commerce Bank, the parties’ obligations to
close the merger depend on other conditions being met prior to the completion of the merger, including but not limited to:
•
receipt of required regulatory approvals for the merger without the imposition of any condition or
restriction that would require any divestiture or non-customary payments, or reasonably be expected to
impose a materially burdensome condition on AltaPacific Bank or otherwise would materially alter the
economics of the merger for AltaPacific Bancorp;
•
absence of injunction or other legal prohibition against the merger;
•
issuance by the DOC of a permit qualifying the maximum number of shares of AltaPacific Bancorp
common stock that may be issued in the merger following a public hearing on the fairness of the terms and
conditions of the merger agreement;
•
receipt by Commerce Bank of a written opinion from its financial advisor, Findley, stating that the per
share merger consideration is fair to shareholders of Commerce Bank from a financial point of view;
•
as of the closing, Commerce Bank's allowance for loan losses, determined in accordance with GAAP, shall
be no less than 1.43% of gross loans;
•
as of the closing, Commerce Bank’s total shareholders' equity, determined in accordance with GAAP, but
excluding any transaction expenses that are within a defined expense cap in the merger agreement, shall be
not less than $12.2 million;
•
as of the closing, Commerce Bank’s total transaction expenses as defined in the merger agreement shall not
exceed $2.4 million minus the amount, if any, by which total data processing contract and other
information technology termination costs are less than $1.0 million;
•
accuracy of each party’s representations and warranties, a material adverse effect has not occurred, and
compliance in all material respects by each party with its covenants under the merger agreement;
•
AltaPacific Bancorp must have received an opinion dated as of the date of the closing of the merger, from
its independent auditors, Vavrinek, Trine, Day & Co., LLP, to the effect that the merger will qualify as a
“reorganization” within the meaning of Section 368(a) of the Internal Revenue Code; and
•
all holders of Commerce Bank stock options shall have agreed that their options, except to the extent not
otherwise exercised, will terminate at the effective time of the merger.
Certain of the above conditions are reciprocal and others apply to only one or the party to the transaction. See
detailed description of these conditions on pages 72 and 73 below.
Closing the Merger (See pages 75 to 76)
If shareholder approval is received as planned, and if all other conditions to the merger have either been met or
waived, we anticipate that the merger will close in the second quarter of 2017. However, we cannot assure you whether or
when the merger will actually close.
Termination of the Merger Agreement (See pages 74 to 75)
The obligations of the parties to consummate the merger are subject to certain closing conditions, some of which
may not be waived by a party, including but not limited to the receipt of all required shareholder and regulatory approvals
and other governmental consents, and some conditions which may be waived by a party in its discretion. The failure of a
condition to the closing of the merger, to the extent not waived, may result in a termination of the merger agreement and the
merger.
In addition, the parties can mutually agree to terminate or extend the merger agreement. Either party can terminate
the merger agreement in the event of a material breach or the occurrence of certain other events.
11
Commerce Bank has agreed to pay a termination fee of $500,000 to AltaPacific Bancorp if Commerce Bank
breaches the “non-solicitation” provisions of the merger agreement, or the board of directors of Commerce Bank changes its
favorable recommendation of the merger agreement. Such “non-solicitation” provisions of the merger agreement include (i)
entry into a definitive agreement providing for a superior proposal as defined in the merger agreement, (ii) Commerce Bank’s
failure to reaffirm the Commerce Bank board’s recommendation, (iii) a tender or exchange offer has been commenced and
the Commerce Bank board fails to recommend against such offer, or (iv) Commerce Bank intentionally breaches certain
provisions of the merger agreement, including provisions related to the Commerce Bank shareholders’ meeting to be called
for the purpose of submitting the merger agreement to the Commerce Bank shareholders; withdraws or modifies the
Commerce Bank board’s recommendation; or engages in certain solicitation activities for another acquisition transaction.
In the event the merger agreement is terminated due to a failure to obtain the approval of Commerce Bank’s
shareholders, then Commerce Bank will be obligated to pay a termination fee of $200,000. If the merger agreement is
terminated due to a breach by either party of its representations and warranties or obligations under the merger agreement,
then the breaching party will be obligated to pay $200,000 to the non-breaching party.
Accounting Treatment (See pages 62 to 63)
AltaPacific Bancorp will account for the merger using the acquisition method of accounting. Under this method of
accounting, the assets and liabilities of Commerce Bank acquired are recorded at their respective fair value as of the
completion of the merger, and are added to those of AltaPacific Bancorp and AltaPacific Bank.
AltaPacific Bancorp’s and AltaPacific Bank’s Management and Operations After the Merger (See page 59)
The directors and executive officers of AltaPacific Bancorp and AltaPacific Bank immediately prior to the merger
will continue to be the directors and executive officers AltaPacific Bancorp and AltaPacific Bank, respectively, after the
merger.
Differences in Your Rights as a Shareholder of Commerce Bank versus AltaPacific Bancorp (See pages 118 to 120)
As a Commerce Bank shareholder, your rights are currently governed by Commerce Bank’s Articles of
Incorporation and Bylaws, the Corporations Code and the California Financial Code (the “Financial Code”). If you do not
exercise your dissenters’ rights, your shares of Commerce Bank common stock will be automatically converted into the right
to receive the per share merger consideration for each share of Commerce Bank common stock you hold at the closing of the
merger. If you receive AltaPacific Bancorp common stock in exchange for all or a portion of your Commerce Bank shares,
your rights as a AltaPacific Bancorp shareholder will be thereafter governed by AltaPacific Bancorp’s Articles of
Incorporation and Bylaws and by the Corporations Code, and by limited provisions of the Financial Code. The rights of
AltaPacific Bancorp shareholders differ from those of Commerce Bank shareholders in certain respects. Most of these
differences will result from the provisions in AltaPacific Bancorp’s Articles of Incorporation and Bylaws that differ from
those of Commerce Bank. Certain additional differences will arise from the fact that AltaPacific Bancorp is a bank holding
company and Commerce Bank is a stand-alone California chartered bank which is subject to certain provisions of the
Financial Code that do not apply to bank holding companies.
Commerce Bank Dissenters’ Rights (See pages 63 to 64)
Holders of Commerce Bank common stock will have dissenters’ rights with respect to the proposal to approve the
merger agreement and the merger. Commerce Bank shareholders of record who do not vote in favor of the merger, and who
otherwise comply with provisions of the Corporations Code with respect to dissenters’ rights, will be entitled to receive cash
in the amount equal to the fair market value, as determined by Commerce Bank, or, if required, by a court of law, of their
shares of Commerce Bank common stock as of September 1, 2016, the day of and immediately prior to the first public
announcement of the merger, excluding any change in such value as a consequence of the proposed merger.
The text of the applicable sections of Chapter 13 of the Corporations Code governing dissenters’ rights is attached to
this proxy statement/prospectus as Appendix B. We urge you to carefully read the procedures set forth in Appendix B, as
failure to comply with these procedures will result in the loss of dissenters’ rights under the Corporations Code.
12
ALTAPACIFIC BANCORP SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial information for AltaPacific Bancorp for each
of the years in the five year period ended December 31, 2015, and for the nine-month periods ended September 30, 2016 and
2015. This information has been derived from and should be read in conjunction with the consolidated financial statements
of AltaPacific Bancorp, including the notes to such consolidated financial statements, which are included elsewhere in this
document, and should also be read in conjunction with “INFORMATION ABOUT ALTAPACIFIC BANCORP AND
ALTAPACIFIC BANK – Management’s Discussion and Analysis of Financial Condition and Results of Operations”
beginning on page 89.
As of and for the
nine months ended
September 30,
2016
2015
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Per Share and Other Data:
Basic income (loss) per share
Diluted income (loss) per share
Shares outstanding at end of period
Weighted average shares outstanding
Basic
Diluted
Book value per common share
Cash dividends per share
Balance Sheet Summary Data:
Total assets
Loans, net
Allowance for loan and lease losses
Total deposits
Total shareholders’ equity
Other Balance Sheet Data:
Cash and cash equivalents
Interest-bearing bank balances
Investments and Fed Funds sold
Loans, net of deferred fees,
before allowance
Other assets
Demand deposits
NOW accounts
Money market accounts
Savings accounts
Time certificates of deposit
Other borrowings
Junior subordinated debentures
Other liabilities
Asset Quality
Non-accrual loans
Loans past due 90 days
or more and still accruing
Other real estate owned
Total non-performing assets
As of and for the years ended December 31,
2015
2014
2013
2012
(Dollars in thousands, except per share data)
2011
$ 15,316
1,089
14,227
100
$ 15,973
988
14,985
205
$ 20,607
1,330
19,277
390
$ 17,469
1,265
16,204
625
$ 11,140
905
10,235
410
$ 10,760
993
9,767
300
$ 5,668
516
5,152
(123)
14,127
734
9,243
5,618
2,261
3,357
14,780
744
8,837
6,687
2,760
3,927
18,887
1,129
11,218
8,798
3,527
5,271
15,579
1,516
11,308
5,787
2,360
3,427
9,825
428
7,901
2,352
915
1,437
9,467
851
7,913
2,405
624
1,781
5,275
(47)
4,562
666
362
304
0.58
0.57
5,961,601
0.68
0.66
5,667,162
0.92
0.89
5,667,927
0.57
0.56
5,826,446
0.23
0.23
6,120,524
0.30
0.30
6,242,681
0.08
0.08
3,869,393
5,739,391
5,879,826
9.61
−
5,778,439
5,959,021
9.03
−
5,750,427
5,951,246
9.23
−
5,998,437
6,157,801
8.38
−
6,189,411
6,210,078
7.84
−
6,032,756
6,032,756
7.66
−
3,869,393
3,885,084
6.81
−
384,110
235,914
3,336
295,675
57,292
344,908
222,464
2,994
252,535
51,156
345,747
222,230
3,235
262,433
52,303
340,672
222,534
2,746
262,511
48,841
238,900
141,162
2,070
168,995
47,983
216,277
97,172
1,659
161,940
47,397
115,319
58,574
1,300
76,400
26,334
41,277
996
74,897
9,026
−
82,004
15,271
−
77,006
3,274
980
84,532
6,079
−
74,872
21,805
−
81,408
4,060
249
41,548
239,250
14,037
93,185
10,725
164,890
3,008
23,867
20,000
5,612
5,477
222,464
16,002
74,128
12,124
140,925
2,478
22,879
30,000
5,504
5,656
225,465
15,984
78,057
12,364
139,592
2,713
29,707
20,000
5,531
5,480
225,280
15,899
64,065
11,846
133,375
2,801
50,424
20,555
5,423
3,342
143,232
7,235
34,016
2,343
115,045
872
16,719
20,000
−
1,922
98,831
8,235
28,498
2,952
106,811
338
23,341
5,000
−
1,940
59,874
3,770
18,783
879
48,884
151
7,703
12,000
−
585
234
625
533
3,106
110
152
-
−
337
571
−
448
1,073
−
448
981
−
448
3,554
−
591
701
−
591
743
−
766
766
13
As of and for the
nine months ended
September 30,
2016
2015
Performance Ratios:1
Return on average assets2
Return on average equity3
Net interest margin4
Dividend payout ratio
Efficiency ratio5
Equity to assets ratio6
Net loans to deposit ratio
Asset Quality Ratios:1
Allowance for loan losses
to total loans
Non-accrual loans to total loans, gross7
Non-performing assets to total assets7
Allowance for loan losses
to non-performing loans
Net loan losses (recoveries)
to average loans
Regulatory Capital Ratios:8
Tier 1 capital to adjusted average assets
(leverage ratio)
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
1
As of and for the years ended December 31,
2015
2014
2013
2012
(Dollars in thousands, except per share data)
2011
1.23%
8.24%
5.59%
−
61.68%
15.18%
80.92%
1.54%
10.41%
6.59%
−
56.18%
15.10%
88.09%
1.54%
10.37%
5.63%
−
54.97%
15.29%
85.91%
1.10%
7.07%
5.18%
−
63.81%
15.61%
85.82%
0.63%
3.02%
4.71%
−
74.10%
20.90%
84.76%
1.07%
4.83%
5.06%
−
74.52%
28.55%
61.03%
0.31%
1.14%
5.65%
−
89.36%
26.99%
8.37%
1.39%
0.10%
0.15%
1.33%
0.56%
0.48%
1.41%
0.24%
0.29%
1.17%
1.38%
1.28%
1.43%
0.08%
0.29%
1.65%
0.15%
0.35%
2.17%
−
0.66%
479.04%
606.94%
88.41%
1881.82%
−
1425.64%
−
1091.45%
(0.06)%
−
(0.03)%
(0.05)%
(0.03)%
−
15.0%
14.5%
15.0%
13.8%
18.6%
19.1%
23.4%
18.5%
18.0%
18.1%
15.8%
21.2%
25.9%
28.2%
18.5%
19.6%
18.0%
19.2%
18.1%
19.3%
15.8%
16.8%
21.2%
22.2%
25.9%
26.9%
28.2%
29.4%
2
Asset quality ratios are end of period ratios. Performance ratios are based on average daily balances during the periods indicated.
Net income divided by average total assets.
3
Net income divided by average shareholders' equity.
4
Net interest income as a percentage of average interest-earning assets.
5
Noninterest expense divided by the sum of net interest income before provision for loan losses and total noninterest income excluding securities gains and
losses.
6
Average equity divided by average total assets.
7
Performing TDRs are not included in nonperforming loans and are therefore not included in the numerators used to calculate these ratios.
8
For definitions and further information relating to regulatory capital requirements, see “INFORMATION ABOUT ALTAPACIFIC BANCORP AND
ALTAPACIFIC BANK –Supervision and Regulation – Capital Adequacy Guidelines” herein.
14
COMMERCE BANK SELECTED FINANCIAL DATA
The following selected financial data with respect to Commerce Bank’s balance sheets for each of the years in the
five year period ended December 31, 2015 and its statements of income for the same have been derived from Commerce
Bank’s audited financial statements. The selected financial data for the nine months ended September 30, 2016 and 2015
have been derived from Commerce Bank’s unaudited financial statements. Such interim financial statements include all
adjustments that are, in the opinion of management, necessary to present fairly Commerce Bank’s financial information for
the interim periods presented.
As of and for the
nine months ended September 30,
2016
2015
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income taxes (benefit)
Net income (loss)
Per Share and Other Data:
Basic income (loss) per share
Diluted income (loss) per share
Shares outstanding at end of period
Weighted average shares outstanding
Basic
Diluted
Book value per common share
Cash dividends per share
Balance Sheet Summary Data:
Total assets
Loans, net
Allowance for loan and lease losses
Total deposits
Total shareholders’ equity
Other Balance Sheet Data:
Cash and cash equivalents
Interest-bearing bank balances
Investments and Fed Funds sold
Loans, net of deferred fees,
before allowance
Allowance for loan and lease losses
Other assets
Demand deposits
NOW accounts
Money market accounts
Savings accounts
Time certificates of deposit
Other borrowings
Other liabilities
Capital accounts
Total liabilities and shareholders’
equity
Asset Quality
Non-accrual loans
Loans past due 90 days
or more and still accruing
Other real estate owned
Total non-performing assets
$ 2,382
153
2,229
-
As of and for the years ended December 31,
2015
2014
2013
2012
(Dollars in thousands, except per share data)
$ 2,076
145
1,931
-
$ 2,806
195
2,611
-
$ 2,674
184
2,490
90
$ 2,356
170
2,186
-
$ 2,389
210
2,179
-
2011
$ 2,269
249
2,020
69
2,229
483
2,245
467
(2,449)
2,916
1,931
173
1,934
170
1
169
2,611
453
2,608
456
(101)
557
2,400
429
2,583
246
1
245
2,186
188
2,795
(421)
1
(422)
2,179
292
2,636
(165)
1
(166)
1,951
277
2,552
(324)
1
(325)
1.90
1.60
1,587,041
0.11
0.09
1,504,041
0.37
0.31
1,504,041
0.16
0.14
1,504,041
(0.28)
(0.23)
1,502,374
(0.11)
(0.09)
1,502,374
(0.22)
(0.18)
1,502,374
1,535,166
1,809,682
8.29
−
1,504,041
1,809,682
6.16
−
1,504,041
1,809,682
6.42
−
1,504,041
1,809,682
6.03
−
1,502,374
1,818,015
5.85
−
1,502,374
1,814,042
6.09
−
1,502,374
1,776,042
6.16
−
71,143
54,156
782
57,834
13,152
71,706
46,833
771
61,982
9,261
61,812
47,240
773
51,684
9,655
60,346
40,978
774
50,880
9,076
57,358
42,114
661
48,433
8,786
53,085
33,381
1,029
43,792
9,142
45,978
33,988
1,043
36,632
9,257
2,195
8,686
−
1,257
20,331
−
1,460
9,624
−
1,522
14,747
−
1,269
10,988
−
1,539
16,455
−
993
9,614
−
54,585
782
6,106
25,691
7,903
13,904
4,051
6,285
157
13,152
48,375
771
3,284
24,985
8,469
16,416
4,243
7,869
462
9,261
48,013
773
3,489
17,866
7,368
14,819
4,616
7,014
473
9,655
41,752
774
3,099
16,018
7,502
14,193
3,789
9,378
390
9,076
42,775
661
2,986
15,429
8,306
10,657
3,720
10,321
139
8,786
34,410
1,029
1,711
12,571
6,929
9,601
2,983
11,707
152
9,142
35,031
1,043
1,383
10,131
4,032
8,476
3,683
10,309
89
9,257
71,143
71,705
61,812
60,346
57,358
53,086
45,978
210
441
400
904
492
498
587
−
−
210
−
−
441
−
−
400
−
−
904
−
−
492
−
239
737
−
570
1,157
15
As of and for the
nine months ended September 30,
2016
2015
1
Performance Ratios:
Return on average assets2
Return on average equity3
Net interest margin4
Dividend payout ratio
Efficiency ratio5
Equity to assets ratio6
Net loans to deposit ratio
Asset Quality Ratios:1
Allowance for loan losses
to total loans
Non-accrual loans to total loans, gross7
Non-performing assets to total assets7
Allowance for loan losses
to non-performing loans
Net loan losses (recoveries)
to average loans
Regulatory Capital Ratios:8
Tier 1 capital to adjusted average assets
(leverage ratio)
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
1
As of and for the years ended December 31,
2015
2014
2013
2012
(Dollars in thousands, except per share data)
2011
5.47%
32.87%
4.55%
−
82.78%
18.28%
93.64%
0.34%
2.46%
4.26%
−
91.92%
15.01%
75.56%
0.83%
6.02%
4.32%
−
85.12%
17.09%
91.40%
0.40%
2.74%
4.30%
−
88.49%
18.02%
80.54%
(0.80)%
(4.74)%
4.39%
−
117.73%
17.73%
86.95%
(0.32)%
(1.80)%
4.25%
−
106.68%
23.16%
76.23%
(0.67)%
(3.47)%
4.28%
−
111.10%
23.93%
92.78%
1.42%
0.38%
0.38%
1.62%
0.93%
0.93%
1.61%
0.83%
0.83%
1.85%
2.16%
2.16%
1.55%
1.15%
1.15%
2.99%
1.45%
2.13%
2.98%
1.68%
3.25%
3.72%
1.75%
1.93%
0.86%
1.34%
2.07%
1.78%
(0.02)%
0.01%
(0.05%)
0.98%
0.04%
0.22%
14.71%
12.85%
13.99%
14.26%
15.74%
16.88%
18.82%
18.28%
18.28%
19.56%
15.01%
15.01%
16.26%
17.09%
17.09%
18.35%
−
18.02%
19.28%
−
17.73%
18.98%
−
23.16%
24.43%
−
23.93%
25.20%
−
2
Asset quality ratios are end of period ratios. Performance ratios are based on average daily balances during the periods indicated.
Net income divided by average total assets.
3
Net income divided by average shareholders' equity.
4
Net interest income as a percentage of average interest-earning assets.
5
Noninterest expense divided by the sum of net interest income before provision for loan losses and total noninterest income excluding securities gains and
losses.
6
Average equity divided by average total assets.
7
Performing TDRs are not included in nonperforming loans and are therefore not included in the numerators used to calculate these ratios.
8
For definitions and further information relating to regulatory capital requirements, see “INFORMATION ABOUT ALTAPACIFIC BANCORP AND
ALTAPACIFIC BANK –Supervision and Regulation – Capital Adequacy Guidelines” herein.
16
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The acquisition by AltaPacific Bancorp of Commerce Bank will be accounted for under the acquisition method of
accounting under GAAP. Under this method, Commerce Bank’s assets and liabilities as of the date of the acquisition will be
recorded at their respective fair values and added to those of AltaPacific Bancorp. Any excess of the purchase price for
Commerce Bank over the fair value of the identifiable net assets acquired (including core deposit intangibles) will be
recorded as goodwill. The goodwill, if any, resulting from the acquisition will not be amortized to expense, but instead will
be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to
its implied fair value, and a charge will be made to earnings. If the purchase price is less than the fair value of the identifiable
net assets acquired, a bargain purchase gain will be recorded on the acquisition date. Core deposit and other intangibles with
definite useful lives recorded by AltaPacific Bancorp in connection with the acquisition will be amortized to expense over
their estimated useful lives. The financial statements of AltaPacific Bancorp issued after the acquisition will reflect the
results attributable to the acquired operations of Commerce Bank beginning on the date of completion of the acquisition. If
the merger is completed, shareholders of Commerce Bank will be entitled to receive, for each share of Commerce Bank
common stock they own, either 1.1377 shares of AltaPacific Bancorp common stock or $10.00 in cash, or a combination of
both, subject to proration and allocation to ensure that 50% of outstanding Commerce Bank shares are exchanged for shares
of AltaPacific Bancorp common stock and 50% are exchanged for cash. It is anticipated that Commerce Bank security
holders will own approximately 13.5% of the voting stock of the combined company after the merger.
The following unaudited pro forma combined consolidated balance sheet as of September 30, 2016 and unaudited
pro forma combined consolidated statements of operations for the nine months ended September 30, 2016 and the year ended
December 31, 2015 combine the historical financial statements of AltaPacific Bancorp and Commerce Bank. The unaudited
pro forma financial statements give effect to the proposed merger as if the merger occurred on September 30, 2016 with
respect to the balance sheet, and on January 1, 2016 and January 1, 2015 with respect to the statements of operations for the
nine months ended September 30, 2016 and the year ended December 31, 2015, respectively. The unaudited pro forma
financial statements were prepared with AltaPacific Bancorp treated as the acquirer and Commerce Bank as the acquiree
under the acquisition method of accounting. Accordingly, the consideration paid by AltaPacific Bancorp to complete the
merger will be allocated to Commerce Bank’s assets and liabilities based upon their estimated fair values as of the date of
completion of the merger. The allocation is dependent upon certain valuations and other studies that have not been finalized
at the time of the merger announcement; however, preliminary valuations based on the fair value of the acquired assets and
liabilities have been estimated and included in the unaudited pro forma financial statements. At the time of closing the
merger, the allocation process will have progressed to a stage where there will be sufficient information to make a definitive
allocation. As such, the fair values of Commerce Bank’s assets and liabilities will be finalized based upon their relative fair
values as of the date of the completion of the merger. There can be no assurance that the final determination will not result in
material changes. The pro forma calculations, shown below, assume a closing share price of $9.45, which represents the
closing price of AltaPacific Bancorp’s common stock on September 30, 2016.
In connection with the acquisition, AltaPacific Bancorp and Commerce Bank have begun to further develop their
preliminary plans to consolidate the operations of AltaPacific Bancorp and Commerce Bank. Over the next several months,
the specific details of these plans will be refined. AltaPacific Bancorp and Commerce Bank are currently in the process of
assessing the two companies’ personnel, benefits plans, premises, equipment, computer systems and service contracts to
determine where the company may take advantage of redundancies or where it will be beneficial or necessary to convert to
one system. Certain decisions arising from these assessments may involve canceling contracts between either AltaPacific
Bancorp and Commerce Bank and certain service providers. The costs associated with such decisions will be recorded as
expense as incurred and have not been included in the pro forma adjustments to the pro forma combined statements of
operations presented.
Certain reclassification adjustments to pro forma financial statements were made to the pro forma financial
statements to conform to AltaPacific Bancorp’s financial statement presentation.
17
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2016
(Dollars in thousands)
Commerce Bank
of Temecula
Valley
AltaPacific
Bancorp
Pro Forma
Adjustments
Combined
ASSETS
Cash and due from banks
$
Federal funds sold
Cash and cash equivalents
Available-for-sale investment securities
42,273
$
10,881
$
(7,935)
(1)
$
45,219
-
-
-
-
42,273
10,881
(7,935)
45,219
74,897
-
-
239,250
54,938
(2,500)
(2)
291,688
(3,336)
(782)
782
(3)
(3,336)
235,914
54,156
(1,718)
288,352
Premises and equipment
2,947
79
-
3,026
Other real estate owned
337
-
-
337
12,479
2,496
-
14,975
3,424
216
6,377
11,839
3,315
773
Loans, net of fair value adjustments
Less: allowance for loan losses
Net loans
Bank owned life insurance
Intangible assets
Accrued interest receivable and other assets
Total Assets
$
384,110
$
93,185
$
71,143
$
25,691
$
74,897
(1) (4)
10,017
15,927
(2,503)
$
452,750
-
$
118,876
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing
$
Interest bearing
202,490
32,143
-
234,633
Total Deposits
295,675
57,834
-
353,509
Other borrowings
20,000
-
-
20,000
Junior subordinated debentures
5,612
-
-
Other liabilities
5,531
157
2,118
326,818
57,991
2,118
386,927
47,832
16,841
(8,310)
56,363
8,557
(3,689)
3,689
8,557
903
-
-
57,292
13,152
(4,621)
Total Liabilities
5,612
(5)
7,806
SHAREHOLDERS’ EQUITY
Common stock
Retained earnings (accumulated deficit)
Unrealized gain on securities
Total shareholders' equity
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY17
17
$
384,110
$
(Footnote references are to Notes beginning on page 21.)
18
71,143
$
(2,503)
903
(1) (6)
65,823
$
452,750
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands except per share data)
AltaPacific
Bancorp
Interest Income
Loan interest and fees
Investment income
Other
Total interest income
$
13,329
1,904
83
15,316
Interest Expense
Deposits
Other
Total interest expense
$
2,282
100
2,382
Pro Forma
Adjustments
$
Combined
566
566
(2)
$
16,177
1,904
183
18,264
713
376
1,089
152
1
153
-
865
377
1,242
14,227
2,229
566
17,022
100
-
-
100
14,127
2,229
566
16,922
26
708
734
19
306
158
483
-
45
306
866
1,217
5,779
971
1,127
190
-
6,906
1,161
137
2,356
9,243
928
2,245
79
79
Income before
tax provision
5,618
467
487
6,572
Provision (benefit) for
income taxes
2,261
(2,449)
2,888
2,700
2,916
$ (2,401)
Net interest income
before provision
Provision for loan and lease
losses
Net interest income after
provision
Noninterest Income
Service charges
Gain on sale of loans
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Occupancy and equipment
Amortization of core
deposit intangible
Other
Total noninterest expense
Net income
$
Weighted Average Common
Shares Outstanding
Basic
Diluted
Earnings per share
Basic
Diluted18
18
Commerce Bank
of Temecula
Valley
3,357
$
5,739,391
5,879,826
$
$
0.58
0.57
(4)
216
3,284
11,567
$
1,535,166
1,809,682
$
$
(Footnote references are to Notes beginning on page 21.)
19
1.90
1.61
3,872
6,642,180
6,782,615
$
$
0.58
0.57
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2015
(Dollars in thousands except per share data)
AltaPacific
Bancorp
Interest Income
Loan interest & fees
Investment income
Other
Total interest income
$
18,140
2,438
29
20,607
Interest Expense
Deposits
Other
Total interest expense
Net interest income
before provision
$
2,662
144
2,806
Pro Forma
Adjustments
$
Combined
1,072
1,072
(2)
$
21,874
2,438
173
24,485
872
458
1,330
194
1
195
-
1,066
459
1,525
19,277
2,611
1,072
22,960
Provision for loan
and lease losses
Net interest income after
provision
390
-
-
390
18,887
2,611
1,072
22,570
Noninterest Income
Service charges
Gain on sale of loans
Other
Total noninterest income
382
747
1,129
157
229
67
453
-
539
229
814
1,582
7,261
1,406
-
8,667
1,322
253
-
1,575
101
2,534
11,218
949
2,608
153
153
Income before tax
provision
8,798
456
919
Provision (benefit) for
income taxes
3,527
(101)
774
Noninterest expense
Salaries and benefits
Occupancy and equipment
expenses
Amortization of core
deposit intangible
Other
Total noninterest expense
Net income
$
Weighted Average
Common Shares Outstanding
Basic
Diluted
Earnings per share
Basic
Diluted1
1
Commerce Bank
of Temecula
Valley
5,271
$
6,037,948
6,248,808
$
$
0.87
0.84
557
$
145
(4)
254
3,483
13,979
10,173
(7)
4,200
$
1,504,041
1,809,682
$
$
(Footnote references are to Notes beginning on page 21.)
20
0.37
0.31
5,973
6,940,737
7,151,597
$
$
0.86
0.84
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1)
The acquisition will be effected by the issuance of a combination of stock and cash. If the merger is completed,
shareholders of Commerce Bank will be entitled to receive, for each share of Commerce Bank common stock they
own, either 1.1377 shares of AltaPacific Bancorp common stock or $10.00 in cash, or a combination of both, subject
to proration and allocation to ensure that 50% of outstanding Commerce Bank shares are exchanged for shares of
AltaPacific Bancorp common stock and 50% are exchanged for cash.
It is anticipated that Commerce Bank security holders will own approximately 13.5% of the voting stock of the
combined company after the acquisition. The shares of AltaPacific Bancorp common stock issued illustrated in this
pro forma were assumed to be recorded at $9.45 per share, the closing sale price of AltaPacific Bancorp common
stock on September 30, 2016. The final accounting purchase price assigned to record the shares issued in the
acquisition will be based on the closing price of AltaPacific Bancorp common stock on the effective date of the
acquisition. AltaPacific Bancorp and Commerce Bank cannot predict what the value or price of AltaPacific
Bancorp’s common stock will be at the closing of the transaction or how the value or price of AltaPacific Bancorp’s
stock may trade at any time, including the date hereof.
The final allocation of the purchase price will be determined after the acquisition is completed and additional
analyses are performed to determine the fair values of Commerce Bank’s tangible and identifiable intangible assets
and liabilities as of the date the acquisition is completed. Changes in the fair value of the net assets of Commerce
Bank as of the date of the acquisition will likely change the amount of purchase price allocable to goodwill or
bargain purchase gain. The further refinement of transaction costs, changes in Commerce Bank’s shareholders’
equity, including net income, between September 30, 2016 and the date of the acquisition will likely change the
amount of goodwill recorded. The final adjustments may be materially different from the unaudited pro forma
adjustments presented herein. The unaudited pro forma financial information has been prepared to include the
estimated adjustments necessary to record the assets and liabilities of Commerce Bank at their respective fair values
and represents management’s best estimate based upon the information available at this time. These pro forma
adjustments included herein are subject to change as additional information becomes available and as additional
analyses are performed. Furthermore, the final allocation of the acquisition price will be determined after the
consolidation is completed and after completion of a final analysis to determine the fair values of Commerce Bank’s
tangible and identifiable intangible assets and liabilities as of the closing date of the transaction. The final
acquisition accounting adjustments may be materially different from the pro forma adjustments presented herein.
Increases or decreases in the fair value of certain balance sheet amounts including loans, securities, deposits and
related intangibles and debt will result in adjustments to both the balance sheet and statement of operations. Such
adjustments, when compared to the information shown in this document, may change the amount of the purchase
price allocated to goodwill or to a bargain purchase gain while changes to other assets and liabilities may impact the
statement of income due to adjustments in the yield and/or amortization/accretion of the adjusted assets and
liabilities. The unaudited pro forma combined financial statements for the acquisition are included only as of and
for the nine months ended September 30, 2016 and the year ended December 31, 2015. The unaudited pro forma
combined financial information presented herein does not necessarily provide an indication of the combined results
of operations or the combined financial position that would have resulted had the consolidation actually been
completed as of the assumed consummation date, nor is it indicative of the results of operations in future periods or
the future financial position of the combined company.
21
The total estimated purchase price of for the purpose of this pro forma financial information is $16.466 million. The
following table provides the calculation and allocation of the purchase price used in the pro forma financial statements:
Summary of Purchase Price Calculation and Goodwill Resulting from Merger
(Dollars in thousands except per share data)
Purchase Price
AltaPacific Bancorp shares to be issued to Commerce Bank shareholders
Purchase price per AltaPacific Bancorp common share
Value of AltaPacific Bancorp shares to be issued
Cash consideration for Commerce Bank stock
Purchase price
September 30,
2016
$
902,789
9.45
$
$
8,531
7,935
16,466
Commerce Bank’s net assets:
Commerce Bank equity
Transaction costs, net of taxes
Commerce Bank equity, net of transaction costs
13,152
(1,364)
11,788
Fair value adjustments:
Loans, net
Core deposit intangible
Deferred tax assets
Total adjustments of net assets acquired
Fair value of assets acquired
Estimated goodwill
(1,718)
810
19
(889)
10,899
5,567
$
$
2)
Adjustment of $2.5 million to reflect fair values of loans based on current interest rates of similar loans, net of
previous unamortized purchase adjustments. The adjustment will be recognized using the level yield amortization
method based upon the expected life of the loans. This adjustment is expected to increase pro forma pre-tax interest
income by $566,000 during the nine month period ending September 30, 2016 and $1.072 million during the year
ended December 31, 2015.
3)
Adjustment of $782,000 to reflect the removal of the allowance for loan losses in connection with applying
acquisition accounting under ASC 805.
4)
Adjustment of $810,000 to core deposit intangible to reflect the fair value of this asset and the related amortization
and the related amortization adjustment based upon an expected life of 10 years and using a sum of the years digits
method. The amortization of the core deposit intangible is expected to decrease pro forma pre-tax noninterest
expense by $79,000 during the nine month period ending September 30, 2016 and $153,000 during the year ended
December 31, 2015.
5)
Adjustment relates to recognition of estimated merger obligations and costs of $2.118 million pre-tax, and $1.364
million after-tax, expected to be recorded as a liability on the closing date. The adjustment to the statements of
operations relates to the removal of direct incremental transaction costs recorded in the historical financial
statements of both companies.
6)
Adjustment to reflect the cash consideration and issuance of common shares of AltaPacific Bancorp common stock
with no par value in connection with the merger and the adjustments to shareholders’ equity for the reclassification
of Commerce Bank’s historical equity accounts (common stock and accumulated deficit).
22
COMPARATIVE MARKET PRICE DATA AND DIVIDEND INFORMATION
Markets; Holders
Shares of AltaPacific Bancorp common stock are not listed on any exchange or quoted by the Nasdaq® Stock
Market, although they are quoted on the OTC-Pink under the ticker symbol “ABNK.” Trades may also occur in unreported
private transactions. The OTC-Pink is an electronic, screen-based market maintained and operated by the OTC Markets
Group, which imposes considerably less stringent listing standards than the Nasdaq. The OTC-Pink is a regulated quotation
service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities.
Trading in AltaPacific Bancorp common stock has not been extensive and such trades cannot be characterized as
constituting an active trading market. As of March 8, 2017, there were 5,889,601 shares of common stock outstanding, held
by 293 shareholders of record. There were also exercisable options outstanding as of that date to purchase an additional
123,452 shares of AltaPacific Bancorp common stock.
Shares of Commerce Bank common stock are also quoted on the OTC-Pink under the ticker symbol “CKTM.”
Trades may also occur in unreported private transactions. Trading in Commerce Bank common stock has not been extensive
and such trades cannot be characterized as constituting an active trading market. As of March 8, 2017, there were 1,616,041
shares of common stock outstanding, held by 251 shareholders of record. There were also exercisable options outstanding as
of that date to purchase an additional 193,641 shares of Commerce Bank common stock.
Comparative Per Share Market Value Prices
The following table shows the closing per share price of AltaPacific Bancorp common stock and Commerce Bank
common stock as reported on the OTC-Pink on August 31, 2016, the last trading day before AltaPacific Bancorp and
Commerce Bank announced that they had entered into the merger agreement, and on March 8, 2017, the latest practical
trading date before the printing of this proxy statement/prospectus. The equivalent value per share is calculated by
multiplying the per share price of AltaPacific Bancorp common stock by 1.1377, adding the cash consideration price of
$10.00 per share, and then dividing by two.
AltaPacific Bancorp
Common Stock
Commerce Bank
Common Stock
Equivalent Commerce
Bank Price Per Share
August 31, 2016
$9.60
$7.50
$10.46
March 8, 2017
$10.70
$10.75
$11.09
Date
The following table shows the high and low bid prices of AltaPacific Bancorp common stock and of Commerce
Bank common stock for each quarterly period since January 1, 2014 and is based on information provided by the OTC-Pink.
The quotations and the data in the following table do not reflect retail mark-up, mark-down or commissions and do not
necessarily represent actual transactions. The information does not include transactions for which no public records are
available. The trading prices in such transactions may be higher or lower than the prices reported below.
23
Quarter Ended
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
AltaPacific Bancorp
Approximate
Bid Prices
Number of
Shares Traded
High
Low
$10.10
$8.75
127,400
10.85
9.45
121,800
11.00
9.80
125,400
10.50
9.52
247,600
10.70
9.85
113,500
10.20
9.65
122,900
10.20
9.07
240,500
9.95
9.61
115,000
9.94
8.75
113,300
9.60
9.10
212,900
9.75
9.45
73,500
10.80
9.40
182,900
Commerce Bank
Approximate
Bid Prices
Number of
Shares Traded
High
Low
$ 4.50
$3.87
12,400
4.25
3.75
47,100
4.99
4.00
10,300
4.50
4.25
11,000
4.10
3.65
17,631
3.90
3.60
13,581
4.50
3.71
9,127
4.54
4.50
6,610
4.99
4.50
100
7.50
4.99
12,554
10.50
7.50
99,419
10.39
10.05
11,000
The above table shows only historical comparisons. These comparisons may not provide meaningful information to
Commerce Bank shareholders in determining whether to approve the merger agreement and the merger. Commerce Bank
shareholders are urged to obtain current market quotations for AltaPacific Bancorp common stock and Commerce Bank
common stock and to review carefully the other information contained in this proxy statement/prospectus or incorporated by
reference into this proxy statement/prospectus. Historical stock prices are not indicative of future stock prices.
Dividends
AltaPacific Bancorp
To date, AltaPacific Bancorp has not paid any cash dividends, but has paid stock dividends on an annual basis since
2010. AltaPacific Bancorp has no specific plans to pay cash dividends in the immediate future. Any decision to pay cash
dividends will be made by the board of directors in its discretion based on a number of factors including AltaPacific
Bancorp’s earnings and financial condition.
As a bank holding company that currently has no significant assets other than its equity interest in AltaPacific Bank,
AltaPacific Bancorp’s ability to declare dividends depends upon cash on hand as supplemented by dividends from
AltaPacific Bank. AltaPacific Bank’s dividend practices in turn depend upon its earnings, financial position, regulatory
standing, ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by its
board of directors. Bank regulatory authorities also have the ability to restrict or prohibit the payment of dividends if they
find that such payments would be unsafe or unsound. The authority of AltaPacific Bank’s board of directors to declare cash
dividends is also subject to statutory restrictions. Under California banking law, a California state-chartered bank may
declare dividends in an amount not exceeding the lesser of its retained earnings or its net income for the last three years
(reduced by dividends paid during such period) or, with the prior approval of the California Commissioner of Business
Oversight, in an amount not exceeding the greatest of (i) the retained earnings of the bank, (ii) the net income of the bank for
its last fiscal year, or (iii) the net income of the bank for its current fiscal year.
In connection with this merger, AltaPacific Bank paid a dividend to AltaPacific Bancorp in the amount of $8.0
million to finance the cash consideration in the merger. Because of the magnitude of the dividend, it was paid through a
reduction of contributed capital rather than from retained earnings, and required and received the approval of both the DFI
and AltaPacific Bank’s sole shareholder.
AltaPacific Bancorp’s ability to pay dividends is also limited by state law. California law allows a California
corporation to pay dividends if the company’s retained earnings equal at least the amount of the proposed dividend. If a
California corporation does not have sufficient retained earnings available for the proposed dividend, it may still pay a
dividend to its shareholders if immediately after the dividend the sum of the company’s assets (exclusive of goodwill and
deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other
deferred liabilities) and the current assets of the company would be at least equal to its current liabilities, or, if the average of
its earnings before income taxes and before interest expense for the two preceding fiscal years was less than the average of its
interest expense for the two preceding fiscal years, at least equal to 125% of its current liabilities. Most bank holding
companies cannot meet the second test and therefore are eligible to pay dividends only out of retained earnings. In addition,
during any period in which AltaPacific Bancorp has deferred payment of interest otherwise due and payable on its
24
subordinated debt securities, it may not pay any dividends or make any distributions with respect to its capital stock (see Note
11 to the audited Consolidated Financial Statements included herein).
Commerce Bank
To date, Commerce Bank has not paid or declared any dividends. Payment of stock or cash dividends in the future
will depends upon its earnings and financial condition and other factors deemed relevant by the board of directors, as well as
its legal ability to pay dividends, which are discussed below. It is Commerce Bank’s current intention to follow their
strategic plan of retaining earnings to increase capital and provide additional basis for growth. Accordingly, no assurance can
be given that any dividends will be declared in the foreseeable future.
The payment of cash dividends by Commerce Bank is subject to restrictions set forth in the California Financial
Code (the “Financial Code”). Section 1132 of the Financial Code provides that a bank may not make a cash distribution to
its shareholders in excess of the lesser of (a) Commerce Bank’s retained earnings; or (b) Commerce Bank’s net income for its
last three fiscal years, less the amount of any distributions made by Commerce Bank or by any majority-owned subsidiary of
Commerce Bank to the shareholders of Commerce Bank during such period. However, under California Financial Code
Section 1133, a bank may, with the approval of the DFI, make a distribution to its shareholders in an amount not exceeding
the greater of (x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year.
Under Financial Code Section 1134, with prior DFI approval, a bank may make a distribution to its shareholders by means of
redeeming its redeemable shares, and with prior DFI approval as well as the approval of the bank’s outstanding shares, a
bank may make a distribution to its shareholders in connection with a reduction of its contributed capital.
In the event that the DFI determines that the shareholders’ equity of a bank is inadequate or that the making of a
distribution by Commerce Bank would be unsafe or unsound, the DFI may order Commerce Bank to refrain from making a
proposed distribution. The FDIC also has the authority to prohibit a bank from engaging in business practices considered by
the FDIC to be unsafe or unsound.
25
RISK FACTORS
In addition to the other information included in this proxy statement/prospectus and the matters addressed in “A
WARNING ABOUT FORWARD-LOOKING STATEMENTS” on page 41, you should carefully consider the matters described
below in determining whether to approve the merger agreement and the merger. If the merger is consummated, AltaPacific
Bank and Commerce Bank will operate as a combined bank and as a wholly-owned subsidiary of AltaPacific Bancorp in a
market environment that cannot be predicted and that involves significant risks, many of which will be beyond the combined
company’s control.
Risks Relating to the Merger
Because the market price of AltaPacific Bancorp common stock will fluctuate, and because there is no guarantee
as to the mix of stock versus cash consideration that any given shareholder will receive, Commerce Bank shareholders
cannot be certain of the value of the merger consideration they will receive.
If the merger is completed, shareholders of Commerce Bank will be entitled to receive, for each share of Commerce
Bank common stock they own, either 1.1377 shares of AltaPacific Bancorp common stock or $10.00 in cash, or a
combination of both, subject to proration and allocation to ensure that 50% of outstanding Commerce Bank shares are
exchanged for shares of AltaPacific Bancorp common stock and 50% are exchanged for cash. For purposes of this 50-50
split, the shares of AltaPacific Bancorp common stock have been valued at $8.79 per share by the parties, even though the
actual trading value will likely fluctuate and therefore have a different value at the effective time of the merger. While the
value of the cash portion of the consideration is fixed at $10.00 per share, the value of the stock portion of the merger
consideration will fluctuate based upon the market value of AltaPacific Bancorp common stock. Based on the trading price
of AltaPacific Bancorp common stock on March 8, 2017, the value of the per share stock consideration would be $12.17 per
share. For shareholders who receive any portion of their merger consideration in the form of AltaPacific Bancorp stock,
whether because the shareholder elects all or a portion of stock or because more shareholders elected to receive cash than was
available, fluctuation in the market price of AltaPacific Bancorp common stock will change the value of the per share merger
consideration that such shareholder will receive and it is impossible to predict what that value will be at the close of the
merger.
Commerce Bank shareholders may receive a form of consideration different from what they elect.
Although each Commerce Bank shareholder may elect to receive all cash or all AltaPacific Bancorp common stock
in the merger, or a mix of cash and stock, the aggregate amounts of cash and stock to be issued in the merger are fixed in the
merger agreement and there is no way to predict what elections different shareholders will make. As a result, if either the
aggregate cash or aggregate stock elections exceed the maximum available, and you choose the form of consideration that
exceeds the maximum available, some or all of your consideration may be in a form that you did not choose.
The fairness opinion obtained by Commerce Bank from its financial advisor will not reflect changes in the value
of AltaPacific Bancorp common stock or Commerce Bank common stock between the signing of the merger agreement
and completion of the merger.
On August 8, 2016, Commerce Bank’s financial advisor, The Findley Group, presented its opinion to the Commerce
Bank board of directors as to the fairness of the merger consideration to the shareholders of Commerce Bank from a financial
point of view. Findley updated its opinion as of September 1, 2016, and as of that date concluded that the merger
consideration was fair to the shareholders of Commerce Bank from a financial point of view. The merger agreement does not
require that Commerce Bank obtain an updated fairness opinion as a condition to the completion of the merger, and
Commerce Bank does not intend to request that the fairness opinion be updated.
As such, the fairness opinion does not reflect any changes that may occur or may have already occurred after
September 1, 2016 to the operations and prospects of AltaPacific Bancorp, AltaPacific Bank or Commerce Bank; or general
market and economic conditions and other factors that may be beyond the control of the parties to the merger agreement, and
on which the respective original fairness opinion was based. As a result, the current values of the common stock of
AltaPacific Bancorp and Commerce Bank may not be reflected in the fairness opinion. The opinion does not speak as of the
closing of the merger or as of any date other than the date set forth in the fairness opinion. Because Commerce Bank does
not currently intend to request an updated fairness opinion, the fairness opinion will not address the fairness of the merger
consideration or the merger consideration, from a financial point of view, at the time the merger is completed. As a result,
the board of directors of Commerce Bank will not have the benefit of an updated fairness opinion in making its
recommendations to shareholders. For a description of the fairness opinion the Commerce Bank received from Findley, see
26
“PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Opinion of Commerce Bank’s Financial
Advisor” beginning on page 55. For a description of the other factors considered by Commerce Bank’s board of directors in
determining whether to approve the merger, see “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE
MERGER – Commerce Bank’s Reasons for the Merger; Recommendation of Commerce Bank’s Board of Directors”
beginning on page 53. The full text of Findley’s fairness opinion is attached as Appendix C to this proxy
statement/prospectus.
Commerce Bank shareholders will experience a significant reduction in percentage ownership and voting power
of their shares as a result of the merger.
If you elect, or otherwise receive, shares of AltaPacific Bancorp common stock as part or all of your merger
consideration, you will experience a substantial reduction in your percentage ownership interest and effective voting power
after the merger in AltaPacific Bancorp compared to your ownership interest and voting power in Commerce Bank prior to
the merger. If the merger is consummated, it is currently estimated that former Commerce Bank shareholders will own
approximately 13.5% of AltaPacific Bancorp’s outstanding shares.
Commerce Bank will be subject to business uncertainties and contractual restrictions while the merger is pending
that could adversely affect its business.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Commerce
Bank and consequently, if the merger occurs, on AltaPacific Bank and AltaPacific Bancorp. These uncertainties may impair
Commerce Bank’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause
customers and others that deal with Commerce Bank to seek to change existing business relationships with Commerce Bank,
which could negatively affect its results of operations. Retention of certain employees may be challenging while the merger
is pending, as certain employees may experience uncertainty about their future roles with AltaPacific Bank. If key
employees depart, AltaPacific Bancorp’s business following the merger could be harmed and/or Commerce Bank’s business
would be harmed if the merger is not completed and Commerce Bank then continues as an independent bank. In addition,
the merger agreement restricts Commerce Bank from making certain acquisitions and loans and taking other specified actions
until the merger occurs without the consent of or prior notification to AltaPacific Bancorp. These restrictions may prevent
Commerce Bank from pursuing attractive business opportunities that may arise prior to the completion of the merger. See the
section entitled “THE MERGER AGREEMENT—Conduct of the Parties Prior to Completion of the Merger” beginning on
page 68 of this proxy statement/prospectus for a description of the restrictive covenants to which Commerce Bank is subject.
The merger will not be completed unless important conditions are satisfied.
Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. If the
conditions are not satisfied or waived, to the extent permitted by law, the merger will not occur or will be delayed, and each
of AltaPacific Bancorp and Commerce Bank may lose some or all of the intended benefits of the merger. The following
conditions must be satisfied or, with respect to conditions other than shareholder and regulatory approval, waived, if
permissible, before AltaPacific Bancorp and/or Commerce Bank are obligated to complete the merger:
•
approval by the affirmative vote of a majority of Commerce Bank’s outstanding shares as of the record date
for the special meeting;
•
receipt of required regulatory approvals for the merger without the imposition of any condition or
restriction that would require any divestiture or non-customary payments, or reasonably be expected to
impose a materially burdensome condition on AltaPacific Bank or otherwise would materially alter the
economics of the merger for AltaPacific Bancorp;
•
absence of injunction or other legal prohibition against the merger;
•
issuance by the DOC of a permit qualifying the maximum number of shares of AltaPacific Bancorp
common stock that may be issued in the merger following a public hearing on the fairness of the terms and
conditions of the merger agreement;
•
receipt by Commerce Bank of a written opinion from its financial advisor, Findley, stating that the per
share merger consideration is fair to shareholders of Commerce Bank from a financial point of view;
•
as of the closing, Commerce Bank's allowance for loan losses, determined in accordance with GAAP, shall
be no less than 1.43% of gross loans;
27
•
as of the closing, Commerce Bank's total shareholders' equity, determined in accordance with GAAP, but
excluding any transaction expenses that are within a defined expense cap in the merger agreement, shall be
not less than $12.2 million;
•
as of the closing, Commerce Bank’s total transaction expenses as defined in the merger agreement shall not
exceed $2.4 million minus the amount, if any, by which total data processing contract and other
information technology termination costs are less than $1.0 million;
•
accuracy of each party’s representations and warranties, a material adverse effect has not occurred, and
compliance in all material respects by each party with its covenants under the merger agreement; and
•
AltaPacific Bancorp’s independent auditors shall have rendered certain tax opinions.
Failure to complete the merger could negatively impact Commerce Bank’s business, financial condition, results
of operations and/or stock price.
If the merger agreement is terminated and the merger is not completed, the ongoing businesses of Commerce Bank
may be adversely affected. For example:
•
The expenses of Commerce Bank incurred in connection with the merger, such as legal and accounting
fees, must be paid even if the merger is not completed, and such expenses may not be recovered from
AltaPacific Bancorp;
•
Commerce Bank may be required to pay a termination fee of $500,000 or $200,000 to AltaPacific Bancorp
if the merger agreement is terminated under certain circumstances;
•
while Commerce Bank’s management is focused on completing the merger, Commerce Bank could fail to
pursue other beneficial opportunities;
•
pursuant to the merger agreement, Commerce Bank is subject to certain restrictions on the conduct of its
business prior to completing the merger, which restrictions could adversely affect its ability to realize
certain of its respective business strategies;
•
Commerce Bank may experience negative reactions to the termination of the merger from customers,
depositors, investors, vendors and others; and
•
the market price of Commerce Bank’s common stock may decline to the extent that the current market
price reflects a market assumption that the merger will be completed.
In addition, any delay in the consummation of the merger, or any uncertainty about the consummation of the merger,
may adversely affect Commerce Bank’s future business, growth, revenue and results of operations. Further, if the merger
agreement is terminated and Commerce Bank’s board of directors seeks another merger or business combination,
shareholders cannot be certain that Commerce Bank will be able to find a party willing to pay the equivalent or greater
consideration than that which AltaPacific Bancorp has agreed to pay in the merger.
The merger agreement contains provisions that could discourage or make it difficult for a third party to acquire
Commerce Bank prior to completion of the merger.
The merger agreement contains provisions that make it difficult for Commerce Bank to entertain a third-party
proposal for an acquisition of Commerce Bank. These provisions include the general prohibition on Commerce Bank’s
soliciting, initiating, encouraging or participating in discussions or negotiations regarding any acquisition proposal with any
person or entity, and the requirement that Commerce Bank pay a termination fee of $500,000 in the event of a breach by
Commerce Bank of its non-solicitation and shareholder recommendation covenants contained in the merger agreement. See
“PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – The Merger Agreement – Termination;
Effect of Termination” beginning on page 74. These provisions could discourage an otherwise interested third party from
trying to acquire Commerce Bank, even one that might be willing to offer greater value to Commerce Bank’s shareholders
than AltaPacific Bancorp has offered in the merger. Furthermore, even if a third party elects to propose an acquisition, the
termination fee could result in that third party’s offer being of lower value to Commerce Bank’s shareholders than such third
party might have otherwise offered.
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Certain officers and directors of Commerce Bank may have interests that are different from, or in addition to, the
interests of Commerce Bank’s shareholders generally.
Certain of Commerce Bank’s officers and directors have interests in the merger that may influence them to support
or approve the merger and are different from the interests of Commerce Bank shareholders generally. As more fully
described in “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Interests of Directors and
Officers in the Merger” beginning on page 60, these interests include:
•
AltaPacific Bancorp’s agreement to employ Donald Murray, Commerce Bank’s Chairman of the Board,
President and Chief Executive Officer, for a period of two years commencing at the close of the merger, for
which he will receive a base salary of $190,000 per year plus other benefits;
•
AltaPacific Bancorp’s agreement to employ LouEllen Ficke, Commerce Bank’s Executive Vice President
and Chief Financial Officer, for a period of one (1) year commencing at the close of the merger, for which
she will receive a base salary of $80,000 per year plus other benefits;
•
change of control payments totaling $380,000, $310,000 and $280,000 to Commerce Bank’s President and
Chief Executive Officer, Executive Vice President and Chief Financial Officer, and Executive Vice
President and Chief Credit Officer, respectively, plus certain additional benefits; and
•
continued indemnification and insurance coverage for Commerce Bank’s current and past officers and
directors.
You should consider these interests in conjunction with the recommendation of the board of directors of Commerce
Bank with respect to approval of the merger.
We may fail to realize all of the anticipated benefits of the merger if the combined company does not achieve
certain cost savings and other benefits or if AltaPacific Bank and Commerce Bank do not successfully integrate.
AltaPacific Bancorp’s belief that the cost savings and revenue enhancements are achievable is a forward-looking
statement that is inherently uncertain. The combined company’s actual cost savings and revenue enhancements, if any,
cannot be quantified at this time. Actual cost savings and revenue enhancements will depend on future expense levels and
operating levels, the timing of certain events and general industry, regulatory and business conditions. Many of these events
will be beyond the control of the combined company.
Further, if AltaPacific Bancorp is unable to successfully integrate the businesses of AltaPacific Bank and Commerce
Bank, operating results may suffer. AltaPacific Bank and Commerce Bank have operated and, until completion of the merger,
will continue to operate independently of one another. It is possible that the integration process could result in the loss of key
employees, disruption of their ongoing businesses, or inconsistencies in standards, controls, policies or procedures. These
could negatively affect both AltaPacific Bank’s and Commerce Bank’s ability to maintain relationships with customers and
employees, or achieve the anticipated benefits of the merger. As with any completed merger of financial institutions, there
may also be disruptions that cause customers, both deposit and loan, to take their business to competitors.
AltaPacific Bancorp and Commerce Bank will incur significant transaction and merger-related integration costs
in connection with the merger, and these costs may not be offset by the anticipated benefits of the merger.
AltaPacific Bancorp and Commerce Bank expect to incur significant costs associated with completing the merger
and integrating the operations of AltaPacific Bank and Commerce Bank. AltaPacific Bancorp and Commerce Bank are in the
process of assessing the impact of these costs. Although AltaPacific Bancorp and Commerce Bank believe that the
elimination of duplicate costs and the realization of other efficiencies related to the integration of the businesses will offset
incremental transition and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Risks Relating to AltaPacific Bancorp Common Stock
You may not be able to sell your shares at the times and in the amounts you want, as the trading market for
AltaPacific Bancorp stock is not active.
Shares of AltaPacific Bancorp common stock are not listed on any exchange or quoted by the Nasdaq® Stock
Market, although they are quoted on the OTC-Pink under the ticker symbol “ABNK.” The OTC-Pink is an electronic,
screen-based market maintained and operated by the OTC Markets Group, which imposes considerably less stringent listing
29
standards than the Nasdaq. The volume of trading in the common stock of AltaPacific Bancorp is limited and does not
constitute an active trading market, and it is not anticipated that a more active trading market will develop as a result of the
merger. AltaPacific Bancorp does not expect to qualify for or seek a listing on any securities exchange in the foreseeable
future. There can be no assurance that you will be able to sell your shares of AltaPacific Bancorp common stock at any time
in the future or at all, or that an active trading market will develop in the foreseeable future, if ever. See “COMPARATIVE
MARKET PRICE DATA AND DIVIDEND INFORMATION – Market Prices and Dividends — AltaPacific Bancorp
Market Information.”
The price of AltaPacific Bancorp common stock may fluctuate or decrease following the merger, and this may
make it difficult for you to sell shares of common stock at times or at prices you find attractive.
The trading price of AltaPacific Bancorp common stock may fluctuate significantly as a result of a number of
factors, many of which are outside AltaPacific Bancorp’s control. In addition, the stock market is subject to fluctuations in
share prices and trading volumes that affect the market prices of the shares of many companies. These broad market
fluctuations could adversely affect the market price of AltaPacific Bancorp’s common stock. Among the factors that could
affect such stock price in the future are:
•
actual or anticipated fluctuations in AltaPacific Bancorp’s reported operating results and financial
condition;
•
changes in revenue or earnings estimates or publication of research reports and recommendations by
financial analysts;
•
failure to meet analysts’ revenue or earnings estimates;
•
speculation in the press or investment community;
•
strategic actions by AltaPacific Bancorp or its competitors, such as acquisitions or restructurings;
•
actions by shareholders;
•
fluctuations in the stock price, trading volumes, and operating results of AltaPacific Bancorp’s competitors;
•
general market conditions and, in particular, market conditions for the financial services industry;
•
proposed or adopted regulatory changes or developments;
•
anticipated or pending investigations, proceedings, or litigation that may involve or affect AltaPacific
Bank/Bancorp; and
•
domestic and international economic factors unrelated to AltaPacific Bancorp’s performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility
in recent years. As a result, the market price of AltaPacific Bancorp’s common stock has been, and could continue to be,
volatile. The capital and credit markets have been experiencing volatility and disruption for several years, at times reaching
unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability
for certain issuers without regard to the issuers’ underlying financial strength.
AltaPacific Bancorp has not paid cash dividends in the past and has no specific plans to pay cash dividends in the
immediate future.
AltaPacific Bancorp has not paid cash dividends in the past and has no specific plans to declare cash dividends in
the immediate future. Any decision to pay cash dividends will be made by the board of directors in its discretion based on a
number of factors. See “COMPARATIVE MARKET PRICE DATA AND DIVIDEND INFORMATION – Dividends –
AltaPacific Bancorp.”
There is limited public information concerning AltaPacific Bancorp and its business, operations and financial
condition.
There is limited publicly available information about AltaPacific Bancorp. AltaPacific Bancorp’s common stock is
not registered, and AltaPacific Bancorp does not file reports, with the U.S. Securities and Exchange Commission under the
Exchange Act. AltaPacific Bancorp provides investors with periodic financial and other information, but does not make
periodic disclosures of the type that would be available if it were subject to the reporting requirements of the Exchange Act.
30
The holders of our debentures have rights that are senior to those of our shareholders.
AltaPacific Bancorp’s acquisition of Mission Oaks Bancorp included $7,500,000 of junior subordinated debentures
due in 2036. All of these junior subordinated debt securities are senior to the shares of our common stock. As a result, we
must make interest payments on the debentures before any dividends can be paid on our common stock, and in the event of
our bankruptcy, dissolution or liquidation, the holders of debt securities must be paid in full before any distributions may be
made to the holders of our common stock. In addition, we have the right to defer interest payments on the junior
subordinated debt securities for up to five years, during which time no dividends may be paid to holders of our common
stock. While we have no present intention of paying dividends on our common stock in the foreseeable future in any event, if
we were ever to defer interest payments on the junior subordinated debt securities, we would be unable to declare and pay
any dividends on our common stock during such period.
We have limited the circumstances in which our directors will be liable for monetary damages.
AltaPacific Bancorp and AltaPacific Bank each have included in their articles of incorporation a provision to
eliminate the liability of directors for monetary damages to the maximum extent permitted by California law. The effect of
these provisions will be to reduce the situations in which AltaPacific Bank, AltaPacific Bancorp or its shareholders will be
able to seek monetary damages from its directors.
AltaPacific Bancorp and AltaPacific Bank each have also included in their respective bylaws a provision to
indemnify their directors and officers and advance litigation expenses to the fullest extent permitted or required by California
law, including circumstances in which indemnification is otherwise discretionary. Such indemnification may be available for
liabilities arising in connection with this transaction.
AltaPacific Bancorp may seek to raise additional capital following the merger in order to support future organic
growth and/or further acquisitions. Such offering could be dilutive to the holders of its common stock and future
offerings of debt and/or preferred equity securities, which may be senior to AltaPacific Bancorp’s common stock, may
have senior rights for purposes of dividend distributions or upon liquidation, and may adversely affect the value of
AltaPacific Bancorp’s common stock.
It is possible that AltaPacific Bancorp may attempt to increase its capital resources following the merger in order to
take advantage of organic growth and/or growth through acquisition as these opportunities present themselves. Further, if its
capital ratios fall below the recommended levels or required minimums, AltaPacific Bancorp could be forced to raise
additional capital by making additional offerings of common stock, debt or preferred equity securities, including mediumterm notes, senior or subordinated notes or preferred stock. Any offering of common stock could be dilutive to holders of its
common stock. Offerings of debt securities and shares of preferred stock will likely receive distributions of AltaPacific
Bancorp’s available assets prior to the holders of AltaPacific Bancorp’s common stock in any liquidation and have preference
in any dividends or other distributions. Holders of AltaPacific Bancorp’s common stock are not entitled to preemptive rights
or other protections against the issuance of shares of common stock or securities that are senior to the common stock.
Risks Relating to the Businesses of AltaPacific Bancorp and AltaPacific Bank and to the Banking Industry in General
Difficult market conditions have adversely affected and may continue to affect the banking industry.
AltaPacific Bank has been exposed to downturns in the U.S. economy, and particularly the local markets in which it
operates in California. The U.S. economy experienced a severe recession commencing in the fourth quarter of 2007 which,
like many financial institutions, had an adverse impact on the financial condition, results of operations and the level of the
write-downs on loans of AltaPacific Bank. Write-downs caused many financial institutions to seek additional capital, to
merge with larger and stronger institutions and, in many cases, to fail. This market turmoil and the tightening of credit led to
increased levels of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and
reductions in business activity generally.
The economic recovery to date has been weak and economic pressure on consumers and lack of confidence in the
financial markets have continued, to some extent, to adversely affect the business, financial condition and results of
operations of AltaPacific Bank. The Federal Reserve, which has been providing stimulus to the U.S. economy during the
entire economic recovery, announced termination of its quantitative easing program in October 2014.
A worsening of financial conditions would likely exacerbate the adverse effects of these difficult market conditions
on AltaPacific Bank and other financial institutions. In particular:
31
•
AltaPacific Bank and AltaPacific Bancorp are facing increased regulation of the banking industry, including as a
result of recent regulatory reform initiatives by the U.S. government. Compliance with such regulations will increase
costs and may limit the ability of AltaPacific Bank and AltaPacific Bancorp to pursue business opportunities.
•
Market developments, government programs and the winding down of various government programs may continue
to adversely affect customer confidence levels and may cause adverse changes in borrower behaviors and payment
rates, resulting in further increases in delinquencies and default rates, which could affect loan charge-offs and
provisions for credit losses of AltaPacific Bank.
•
The ability of AltaPacific Bank to assess the creditworthiness of its customers or to estimate the values of its assets
and collateral for loans will be reduced if the models and approaches it uses become less predictive of future
behaviors, valuations, assumptions or estimates. AltaPacific Bank estimates losses inherent in its credit exposure,
the adequacy of its allowance for loan losses and the values of certain assets by using estimates based on difficult,
subjective, and complex judgments, including estimates as to the effects of economic conditions and how these
economic conditions might affect the ability of its borrowers to repay their loans or the value of assets.
•
The ability of AltaPacific Bank to borrow from other financial institutions on favorable terms or at all, or to raise
capital, could be adversely affected by further disruptions in the capital markets or other events.
•
Failures of other depository institutions in the markets in which AltaPacific Bank operates and increasing
consolidation of financial services companies as a result of current market conditions could increase the deposits and
assets of AltaPacific Bank, necessitating additional capital, and could also have unexpected adverse effects upon its
ability to compete effectively.
•
Another deterioration in economic conditions or slowdown in growth generally could also adversely affect the
business, financial condition, results of operations and prospects of AltaPacific Bank and AltaPacific Bancorp. Such
a deterioration could result in a variety of adverse consequences, including the following:
•
Loan delinquencies may increase, which would cause AltaPacific Bank to increase loan loss
provisions, reduce its net interest income and its earnings and weaken its balance sheet;
•
Problem assets and foreclosures may increase, which could result in higher operating expenses, as
well as possible increases in loan loss provisions;
•
Demand for AltaPacific Bank’s products and services may decline including specifically, the
demand for loans, which would cause its revenues, which include net interest income and
noninterest income, to decline;
•
Collateral for loans made by AltaPacific Bank may decline in value, reducing a customer’s
borrowing power, and reducing the value of assets and collateral associated with its loans; and
•
Losses or low net income will result in the failure to maximize any deferred tax assets and NOLs.
•
Geopolitical concerns and the heightened risk of terrorism have caused business uncertainty.
•
Stock prices domestically and around the world continue to be sensitive and somewhat volatile in the face of current
geopolitical concerns and the heightened risk of global terrorism. Businesses and the stock markets continue to face
uncertainty created by these shifting geopolitical situations and this could adversely affect operations as well.
•
Commercial loans and commercial real estate loans could adversely affect AltaPacific Bank.
As of September 30, 2016, approximately $16.1 million or 6.7% of AltaPacific Bank’s loan portfolio was
concentrated in commercial loans. In addition, approximately $48.7 million or 20.2% of AltaPacific Bank’s loan portfolio
was concentrated in real estate construction loans (including land and development loans) and approximately $167.4 million
or 69.6% was concentrated in real estate mortgage loans (consisting principally of commercial mortgages). A borrower’s
ability to repay such a loan usually depends upon the profitability of the borrower’s employment, business, or the business
that occupies the relevant real property. As a result, if the business that supports payments on a loan declines, the loan may
go into default and a work-out is difficult. If AltaPacific Bank forecloses on a property serving as security for a loan, which
it cannot always do because commercial loans are not always secured by property, it often takes a long time to dispose of the
property because there are typically few potential purchasers. Should AltaPacific Bank have a number of defaults on these
types of loans, these would have a material impact on its financial condition and results of operations.
AltaPacific Bank faces lending risks, especially with respect to its small- and medium-sized business clients.
The risk of loan defaults or borrowers’ inabilities to make scheduled payments on their loans is inherent in the
banking business. Moreover, AltaPacific Bank focuses primarily on lending to small- and medium-sized businesses. These
businesses may not have the capital or other resources required to weather significant business downturns or downturns in the
markets in which they compete. Consequently, AltaPacific Bank may assume greater lending risks than other financial
32
institutions which have a smaller concentration of those types of loans, and which tend to make loans to larger businesses.
Borrower defaults or borrowers’ inabilities to make scheduled payments may result in losses which may exceed the
allowances for loan losses of AltaPacific Bank. These risks, if they occur, may require higher than expected loan loss
provisions which, in turn, can materially impair the profitability, capital adequacy and overall financial condition of
AltaPacific Bank.
Concentrations of real estate loans could subject AltaPacific Bank to risks in the event of another real estate
recession or natural disaster.
The loan portfolio of AltaPacific Bank is heavily concentrated in real estate loans, particularly commercial real
estate. At September 30, 2016, 91.0% of the loan portfolio of AltaPacific Bank consisted of real estate loans, and a sizeable
portion of the remaining loan portfolio has real estate collateral as a secondary source of repayment or as an abundance of
caution. AltaPacific Bank’s $571 thousand balance of nonperforming assets at September 30, 2016 includes nonperforming
real estate loans totaling $234 thousand, and $337 thousand in foreclosed assets comprised primarily of OREO.
California’s residential real estate market experienced significant deflation in property values during 2008 and 2009,
and foreclosures occurred at relatively high rates during and after the recession. While residential real estate values in the
market areas of AltaPacific Bank currently appear to be stabilized or slightly increasing, if they were to slide further, or if
commercial real estate values decline materially, AltaPacific Bank could experience additional migration into nonperforming
assets. An increase in nonperforming assets could have a material adverse effect on the financial condition and results of
operations of AltaPacific Bank by reducing its income and increasing its expenses. Deterioration in real estate values might
also further reduce the amount of loans AltaPacific Bank makes to businesses in the construction and real estate industry,
which could negatively impact its organic growth prospects. Similarly, the occurrence of a natural disaster like those
California has experienced in the past, including earthquakes, fires, drought and flooding, could impair the value of the
collateral AltaPacific Bank holds for real estate secured loans and negatively impact its results of operations.
In addition, banking regulators give commercial real estate loans extremely close scrutiny due to risks relating to the
cyclical nature of the real estate market and related risks for lenders with high concentrations of such loans. The regulators
have required banks with relatively high levels of commercial real estate loans to implement enhanced underwriting
standards, internal controls, risk management policies and portfolio stress testing, which has resulted in higher allowances for
possible loan losses. Expectations for higher capital levels have also materialized. Any required increase in AltaPacific
Bank’s allowance for loan losses could adversely affect its net income, and any requirement that it maintain higher capital
levels could adversely impact financial performance measures such as earnings per share.
Alta Pacific Bank’s concentration of commercial real estate, construction and land development, and commercial
and industrial loans exposes it to increased lending risks.
Commercial real estate, construction and land development, and commercial and industrial loans, which comprised
approximately 97% of the total loan portfolio of AltaPacific Bank as of September 30, 2016, expose it to a greater risk of loss
than residential real estate and consumer loans, which comprised a smaller percentage of the total loan portfolio.
Commercial real estate and land development loans typically involve larger loan balances to single borrowers or groups of
related borrowers compared to residential loans. Consequently, an adverse development with respect to one commercial loan
or credit relationship exposes us to greater risk of loss than an adverse development with respect to one residential mortgage
loan.
Repayment of commercial loans is often dependent on the cash flows of the borrowers, which may be
unpredictable, and the collateral securing these loans may fluctuate in value.
At September 30, 2016, AltaPacific Bank had $16.1 million or 6.7% of total loans in commercial loans.
Commercial lending involves risks that are different from those associated with real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower
default. AltaPacific Bank’s commercial loans are primarily made based on the cash flows of the borrowers and secondarily
on any underlying collateral provided by the borrowers. A borrower’s cash flows may be unpredictable, and collateral
securing those loans may fluctuate in value. Although commercial loans are often collateralized by equipment, inventory,
accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source
of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among
other things.
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AltaPacific Bank competes against larger banks and other institutions.
AltaPacific Bank competes for loans and deposits with other banks, savings and thrift associations and credit unions
located in AltaPacific Bank’s service areas, as well as with other financial services organizations such as brokerage firms,
insurance companies and money market mutual funds. These competitors aggressively solicit customers within their market
area by advertising through direct mail, the electronic media and other means. Many competitors have been in business
longer, have established customer bases and are substantially larger than AltaPacific Bank. These competing financial
institutions offer services, including international banking services, that AltaPacific Bank can only offer through
correspondents, if at all. Additionally, these competitors have greater capital resources and, consequently, higher lending
limits than AltaPacific Bank. Finally, some competitors are not subject to the same degree of regulation.
AltaPacific Bank faces limits on its ability to lend.
The size of loans AltaPacific Bank can make is limited by regulation based upon the amount of its capital. As of
September 30, 2016, the maximum AltaPacific Bank could lend to one borrower was approximately $15.6 million for
secured loans and approximately $9.4 million for unsecured loans. As of that same date, the maximum Commerce Bank
could lend to one borrower was approximately $3.5 million for secured loans and approximately $2.1 million for unsecured
loans. Even after the merger, the combined lending limit of the two institutions will still be smaller than may be needed to
effectively compete with the larger institutions in AltaPacific Bank’s market areas. Legal lending limits also affect the ability
of AltaPacific Bank to seek relationships with larger and more established businesses. AltaPacific Bank may not be able to
attract and retain customers seeking loans in excess of its lending limits because it cannot make such loans and may not be
able to find other lenders willing to participate in such loans on favorable terms.
Any significant decline in California real estate values could materially impair the profitability and financial
condition of AltaPacific Bank and AltaPacific Bancorp.
A substantial majority of AltaPacific Bank’s and Commerce Bank’s loans are secured by real estate collateral.
Nearly all of the real estate securing these loans is located in California. Real estate values are generally affected by factors
such as:
•
the socioeconomic conditions of the area where real estate collateral is located;
•
fluctuations in interest rates;
•
property and income tax laws;
•
strict water use laws;
•
local zoning ordinances governing the manner in which real estate may be used; and
•
federal, state and local environmental regulations.
Declines in real estate values could significantly reduce the value of the real estate collateral securing AltaPacific
Bank’s loans, increasing the likelihood of defaults. Moreover, if the value of real estate collateral declines to a level that is
not enough to provide adequate security for the underlying loans, AltaPacific Bank will need to make additional loan loss
provisions which, in turn, will reduce its profits. Also, if a borrower defaults on a real estate-secured loan, AltaPacific Bank
may be forced to foreclose on the property and carry it as a nonearning asset which, in turn, may reduce net interest income.
Changing interest rates may adversely affect AltaPacific Bank’s financial performance.
The profitability of AltaPacific Bank largely depends on the difference between the rates of interest it earns on its
loans and investments, and the interest rates it pays on deposits and other borrowings. This relationship, known as the interest
rate margin, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the
volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Fluctuations
in interest rates will affect the demand of customers for the products and services of the combined bank after the merger.
AltaPacific Bank is subject to interest rate risk to the degree that its interest-bearing liabilities reprice or mature more slowly
or more rapidly or on a different basis than its interest-earning assets.
Demand for Loans and Other Bank Services May Decline.
The success of AltaPacific Bank depends on its ability to make and retain loans. Loan demand has been increasing
in California in the last several years. While AltaPacific Bank believes demand for loans in California will remain strong, a
34
decline in demand could impair its ability to achieve the most productive use of its assets. Factors affecting loan demand
include:
•
the economy of California in particular, and the nation generally;
•
the level of business confidence;
•
changes in real estate values;
•
changes in prevailing interest rates and the demand and supply of loans and deposits;
•
changes in investment returns expected by depositors; and
•
availability of alternative lending sources.
AltaPacific Bank may experience greater loan losses which would have an adverse effect on its earnings.
The risk of nonpayment of loans is inherent in banking. Each of the borrowers of AltaPacific Bank may not repay
their loans according to their terms, and collateral securing the payment of those loans may be insufficient to assure
repayment. AltaPacific Bank may experience significant loan losses, which could have a material adverse effect on its
operating results. AltaPacific Bank’s management makes various assumptions and judgments about the collectability of its
loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of its loans.
AltaPacific Bank continuously strives to manage its credit risk by careful underwriting, and also maintains an
allowance for loan losses to provide for loan defaults and nonperformance. The allowance is based on a variety of factors,
including AltaPacific Bank’s historical experience, volume and types of loans, trends in classifications, volume and trend in
delinquencies and non-accruals, national and local economic conditions, and other pertinent information. If AltaPacific Bank
expands into new markets, its determination of the size of the allowance could be understated due to its lack of familiarity
with market-specific factors.
If AltaPacific Bank’s assumptions are incorrect, its current allowance may not be sufficient to cover loan losses, and
adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio.
Material increases to its allowance would materially decrease AltaPacific Bank’s earnings.
In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be
reached, AltaPacific Bank may have to write off certain loans in whole or in part. In such situations, AltaPacific Bank may
acquire real estate or other assets, if any, which secure the loans through foreclosure or other similar available remedies. In
such cases, the amount owed under the defaulted loan may exceed the value of assets acquired. In addition, federal and state
regulators periodically review AltaPacific Bank’s allowance for loan losses and may require it to increase its provision for
loan losses or recognize further loan charge-offs based on judgments different from those of its management.
Therefore, AltaPacific Bank cannot assure you that its monitoring, procedures and policies will reduce certain
lending risks or that its allowance for loan losses will be adequate to cover actual losses. If AltaPacific Bank experiences
greater nonpayment levels than anticipated, or it must increase its allowance, its earnings and overall financial condition, as
well as the value of the common stock of AltaPacific Bancorp, could be adversely affected.
AltaPacific Bancorp and AltaPacific Bank rely on management and other key personnel, and the loss of any of
them may adversely affect operations.
AltaPacific Bancorp and AltaPacific Bank are and will continue to be dependent upon the services of their
respective executive management teams. In addition, AltaPacific Bank will continue to depend on its ability to retain and
recruit key banking officers. The unexpected loss of services of any key management personnel or banking officers could
have an adverse effect on the business and financial condition of AltaPacific Bancorp and AltaPacific Bank because of their
skills, knowledge of the market, years of industry experience and the difficulty of promptly finding qualified replacement
personnel.
An increase in non-performing assets may hurt the business of AltaPacific Bank.
Non-performing assets are mainly loans in which the borrowers are not making their required payments. Nonperforming assets also include loans that have been restructured to permit the borrower to have smaller payments and real
estate that has been acquired through foreclosure of unpaid loans. To the extent that assets are non-performing, AltaPacific
35
Bank would have less cash available for lending and other activities. AltaPacific Bank will continually evaluate the credit
risks of non-performing assets and other problem loans. However, if the economic recovery stalls and conditions worsen, the
level of non-performing assets may rise in the future, which could hurt AltaPacific Bank’s business.
The valuation and write-downs of other real estate owned by AltaPacific Bank may not accurately reflect current
market values or be adequate to address current and future losses, which could affect its financial condition and
profitability.
Although AltaPacific Bank typically obtains appraisals on its other real estate owned prior to taking title to the
properties and at other intervals thereafter, if there is rapid and severe deterioration in the markets in which these properties
are located, there can be no assurance that such valuations accurately reflect the current market value which may be paid by a
willing purchaser in an arms-length transaction. Moreover, there can be no assurance that the losses associated with the other
real estate owned will not exceed the estimated amounts and adversely affect future results of operations. The calculation for
the adequacy of write-downs of AltaPacific Bank’s other real estate owned is based on several factors, including the
appraised value of the real property, economic conditions in the property’s sub-market, comparable sales, current buyer
demand, availability of financing, entitlement and development obligations and costs, and historic loss experience. All of
these factors can cause significant write-downs and can change without notice based on market and economic conditions.
Therefore, the valuation of write-downs of other real estate owned may not accurately reflect current values or be adequate to
address current and future losses, which could affect the financial condition and profitability of AltaPacific Bank.
The Use of Appraisals in Deciding Whether to Make a Loan Secured by Real Property Does Not Ensure the
Value of the Real Property Collateral
In considering whether to make a loan secured by real property, AltaPacific Bank generally requires an appraisal of
the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the
appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, AltaPacific Bank
may not realize an amount equal to the indebtedness secured by the property.
AltaPacific Bank’s Deposit Portfolio Includes Significant Concentrations.
As a business bank, AltaPacific Bank provides services to a number of customers whose deposit levels vary
considerably. At September 30, 2016, 52 customers maintained balances (aggregating all related accounts, including
multiple business entities and personal funds of business owners) in excess of $1 million. This amounted to $122 million or
approximately 41% of AltaPacific Bank’s total customer deposit base. These deposits can and do fluctuate substantially.
The depositors are not concentrated in any industry or business. While the loss of any combination of these depositors could
have a material impact on AltaPacific Bank’s results, AltaPacific Bank expects, in the ordinary course of business, that these
deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one or more of these
depositors, through additional liquidity and business generation in the future. However, should a significant number of these
customers leave AltaPacific Bank, it could have a material adverse impact on AltaPacific Bank.
A Large Percentage of AltaPacific Bank’s Deposits is Attributable to a Relatively Small Number of Customers.
AltaPacific Bank’s 10 largest depositor relationships accounted for approximately 20.3% of its deposits at
September 30, 2016. Its largest depositor relationship accounted for approximately 6.5% of its deposits at September 30,
2016. The loss of one or more of AltaPacific Bank’s 10 largest customers, or a significant decline in the deposit balances due
to ordinary course fluctuations related to these customers’ businesses, in all likelihood would adversely affect the liquidity of
AltaPacific Bank and require it to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a
short term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost
deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income.
The internal controls of AltaPacific Bank and AltaPacific Bancorp may be ineffective.
Each of AltaPacific Bank and AltaPacific Bancorp regularly reviews and updates its internal controls, disclosure
controls and procedures and corporate governance policies and procedures. As a result, AltaPacific Bank and AltaPacific
Bancorp may incur increased costs to maintain and improve their controls and procedures. Any system of controls, however
well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. The process of integrating the operations and systems of AltaPacific Bank and
Commerce Bank could cause an interruption of, or deterioration in, the controls or procedures. Any failure or circumvention
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of the controls or procedures of AltaPacific Bank or failure to comply with regulations related to controls and procedures
could have a material adverse effect on the business, results of operations and financial condition of AltaPacific Bank.
The banking industry is highly regulated and governmental regulation may affect the operations and activities of
AltaPacific Bank.
Federal bank regulatory agencies regulate many aspects of the operations of AltaPacific Bank. Many of the
regulations are intended to protect depositors, the public or the FDIC insurance funds, not shareholders. As a result,
governmental regulations may constrain the operations and activities of AltaPacific Bank. These areas include:
•
the kinds of loans that can be made and lending practices;
•
dividend policy;
•
the capital that must be maintained;
•
the kinds of activities we may engage in;
•
the kinds and amounts of investments we can make;
•
how much must be set aside for loan loss reserves;
•
how much interest we can pay on demand deposits;
•
insurance of deposits and the premiums AltaPacific Bank must pay for this insurance; and
•
how much cash AltaPacific Bank must set aside as reserves for deposits.
Banking laws and regulations change from time to time. Bank regulation can affect the ability of AltaPacific Bank to
compete with financial services companies that are not regulated or are less regulated. In addition, bank regulators impose
material compliance costs on banks. If AltaPacific Bank fails to comply, bank regulators may limit its activities or growth,
impose fines or ultimately put AltaPacific Bank out of business.
Current and future monetary policies may have an adverse effect on the operations and financial condition of
AltaPacific Bank.
Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by
AltaPacific Bank on deposits and other borrowings and the interest rate earned by AltaPacific Bank on loans, securities and
other interest-earning assets comprises the major source of the bank’s earnings. These rates are highly sensitive to many
factors which are beyond the control of AltaPacific Bank and, accordingly, its earnings and growth are subject to the
influence of economic conditions generally, both domestic and foreign, including inflation, recession, and unemployment;
and also to the influence of monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve
Board (the “FRB”). The FRB implements national monetary policy, such as seeking to curb inflation and combat recession,
by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements, by placing limitations upon savings and time deposit interest rates, and through
adjustments to the discount rate applicable to borrowings by banks which are members of the Federal Reserve System. The
actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates.
The nature and timing of any future changes in such policies and their impact on AltaPacific Bank cannot be predicted;
however, the impact on the net interest margin of AltaPacific Bank, whether positive or negative, depends on the degree to
which its interest-earning assets and interest-bearing liabilities are rate sensitive. In addition, adverse economic conditions
could make a higher provision for loan losses a prudent course and could cause higher loan charge-offs, thus adversely
affecting the earnings and financial condition of AltaPacific Bank.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in
fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial
institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions
are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.
These rules require financial institutions to establish procedures for identifying and verifying the identity of customers
seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the
last year, several banking institutions have received large fines for non-compliance with these laws and regulations. Although
AltaPacific Bank has developed policies and procedures designed to assist in compliance with these laws and regulations, no
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assurance can be given that these policies and procedures will be effective in preventing violations of these laws and
regulations.
The deposit insurance premium of AltaPacific Bank could be higher in the future, which could have a material
adverse effect on its future results of operations.
The FDIC insures deposits at FDIC-insured financial institutions, including AltaPacific Bank. The FDIC charges
the insured financial institutions assessments to maintain the Deposit Insurance Fund at a certain level; if an FDIC-insured
financial institution fails, payments of deposits up to insured limits are made from the Deposit Insurance Fund. An increase
in the risk category of AltaPacific Bank, adjustments to assessment rates and/or a special assessment could have an adverse
effect on its results of operations.
AltaPacific Bank may be subject to more stringent capital and liquidity requirements which would adversely
affect its net income and future growth.
On July 2, 2013, the FRB adopted a final rule that implements the Basel III changes to the international regulatory
capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to
strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act. The final
rule became effective on January 1, 2015 and is applicable to AltaPacific Bank. Because AltaPacific Bancorp is currently a
“small bank holding company” under the FRB’s guidelines, it qualifies for an exemption from the consolidated risk-based
and leverage capital adequacy guidelines applicable to bank holding companies with assets of $1 billion or more.
The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more
and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand
periods of financial stress. The final rule increases capital ratios for all banking organizations and introduces a “capital
conservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservation
buffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The
final rule assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status
and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The
final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for
purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The final rule also
includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These
changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to
the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in
unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital,
subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which
includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition
period. AltaPacific Bank had the one-time option in the first quarter of 2015 to permanently opt out of the inclusion of
accumulated other comprehensive income in its capital calculation and AltaPacific Bank decided to opt out in order to reduce
the impact of market volatility on its regulatory capital levels.
Although AltaPacific Bank cannot currently predict the specific impact and long-term effects that Basel III will have
on it and the banking industry more generally, AltaPacific Bank may be required to maintain higher regulatory capital levels
which could impact its operations, net income and ability to grow. Furthermore, the failure by AltaPacific Bank to comply
with the minimum capital requirements could result in the regulators taking formal or informal actions against AltaPacific
Bank which could restrict its future growth or operations.
AltaPacific Bank’s operational needs or future losses may require it or AltaPacific Bancorp to raise additional
capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
Banks are required by federal and state regulatory authorities to maintain adequate levels of capital to support their
operations. AltaPacific Bank or AltaPacific Bancorp may at some point need to raise additional capital to support the
operations of AltaPacific Bank or because AltaPacific Bank needs additional capital due to future losses. Any capital that is
obtained may result in the dilution of the interests of existing holders of common stock of AltaPacific Bancorp, or otherwise
have a negative effect on an investment in AltaPacific Bancorp.
The ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which
are outside AltaPacific Bancorp’s control. Accordingly, AltaPacific Bancorp may not be able to raise additional capital if
needed, or on terms that will be acceptable. If AltaPacific Bancorp cannot raise additional capital when needed, its ability to
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fund its operations and the operations of AltaPacific Bank could be materially impaired and the financial condition and
liquidity of AltaPacific Bancorp and AltaPacific Bank could be materially and adversely affected.
AltaPacific Bancorp plans to continue to grow and there are risks associated with growth.
AltaPacific Bancorp intends to continue to expand its businesses and operations to increase deposits and loans.
Continued growth may present operating and other problems that could adversely affect its business, financial condition and
results of operations. AltaPacific Bancorp’s growth may place a strain on its administrative, operational, personnel and
financial resources and increase demands on its systems and controls. AltaPacific Bancorp’s ability to manage growth
successfully will depend on its ability to attract qualified personnel and maintain cost controls and asset quality while
attracting additional loans and deposits on favorable terms, as well as on factors beyond its control, such as economic
conditions and interest rate trends. If AltaPacific Bancorp grows too quickly and is not able to attract qualified personnel,
control costs and maintain asset quality, this continued rapid growth could materially adversely affect its financial
performance.
AltaPacific Bank relies heavily on technology and computer systems, and computer failure could result in loss of
business and adversely affect the financial condition and results of operations of AltaPacific Bank.
Advances and changes in technology could significantly affect the business, financial condition, results of
operations and future prospects of AltaPacific Bank. AltaPacific Bank faces many challenges, including the increased
demand for providing customers access to their accounts and the systems to perform banking transactions electronically. The
ability of AltaPacific Bank to compete depends on its ability to continue to adapt technology on a timely and cost-effective
basis to meet these demands. In addition, its business and operations are susceptible to negative effects from computer system
failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or
failures of its data processing systems.
Risks associated with Internet-based systems and online commerce security, including “hacking” and “identity
theft,” could adversely affect the business of AltaPacific Bank.
AltaPacific Bank relies heavily upon data processing, including loan servicing and deposit processing software,
communications systems and information systems from a number of third parties to conduct its business. Third party, or
external systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional
events. AltaPacific Bank’s operations are also vulnerable to disruptions from human error, natural disasters, power loss,
computer viruses, spam attacks, denial of service attacks, unauthorized access and other unforeseen events. Undiscovered
data corruption could render its customer information inaccurate. These events may obstruct its ability to provide services
and process transactions. While AltaPacific Bank believes it is in compliance with all applicable privacy and data security
laws, an incident could put its customers’ confidential information at risk.
Although AltaPacific Bank has not experienced a cyber-incident that has been successful in compromising its data
or systems, it can never be certain that all of its systems are entirely free from vulnerability to breaches of security or other
technological difficulties or failures. AltaPacific Bank continues to monitor and modify, as necessary, its protective
measures in response to the perpetual evolution of cyber threats.
A breach in the security of any of AltaPacific Bank’s information systems, or other cyber incident, could have an
adverse impact on, among other things, its revenues, its ability to attract and maintain customers and its business reputation.
In addition, as a result of any breach, it could incur higher costs to conduct its business, to increase protection, or related to
remediation.
AltaPacific Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title.
Approximately 91.0% of the loan portfolio of AltaPacific Bank at September 30, 2016 consisted of real estate loans.
In the course of its business, AltaPacific Bank may foreclose and take title to real estate, and could be subject to
environmental liabilities with respect to these properties. AltaPacific Bank may be held liable to a governmental entity or to
third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection
with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical
releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if
AltaPacific Bank is the owner or former owner of a contaminated site, it may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination emanating from the property. If AltaPacific
39
Bank becomes subject to significant environmental liabilities, its business, financial condition, results of operations and cash
flows may be materially and adversely affected.
Explanatory Note Concerning Risk Factors Applicable to Commerce Bank.
Many of the risk factors discussed above concerning AltaPacific Bancorp, AltaPacific Bank and the banking
industry generally, currently apply to Commerce Bank, although in some cases to a different extent due to differences in the
specific operations of each entity. Due to the relatively small size of Commerce Bank and the fact that AltaPacific Bank
already operates one branch office in the same market area as Commerce Bank, the effect of this acquisition on these general
risk factors going forward is not considered to be material to the operations of AltaPacific Bank or AltaPacific Bancorp.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus or in documents incorporated by reference,
including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” and words of
similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. These forward-looking statements, including among others those found in “QUESTIONS AND
ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER,” “SUMMARY,” and “PROPOSAL NO. 1 - THE
MERGER AGREEMENT AND THE MERGER” involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the combined companies to be materially different from any future
results, performance or achievements expressed or implied by such forward-looking statements.
In addition to the risks discussed in “RISK FACTORS beginning on page 26,” the following factors, among others,
could cause actual results to differ materially from forward-looking statements or historical performance:
•
the ability of AltaPacific Bank to successfully integrate Commerce Bank, or achieve expected beneficial
synergies and/or operating efficiencies;
•
customer acceptance of AltaPacific Bank's and Commerce Bank's products and services and efforts by
competitor institutions to lure away such customers;
•
increased competitive pressures generally;
•
possible business disruption following the merger or difficulty retaining key managers and employees;
•
changes in customer borrowing, repayment, investment and deposit practices;
•
changes in market factors that may affect the value of traded instruments in "mark-to-market" portfolios;
•
potential volatility and deterioration in the credit and financial markets or adverse changes in general
economic conditions leading to increased loan losses;
•
the potential impact on our net interest margin and funding sources from interest rate fluctuations;
•
greater than expected noninterest expenses including potential increases in deposit insurance premiums;
•
fluctuations in the demand for loans, the number of unsold homes, land and other properties and
fluctuations in real estate values in our market areas;
•
secondary market conditions for loans and our ability to sell loans in the secondary market;
•
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation;
•
possible acquisitions of other financial institutions and/or expansion into new market areas;
•
the availability of capital;
•
the failure or security breach of computer systems on which we depend;
•
unanticipated regulatory or legal proceedings; and
•
our ability to manage the risks involved in the foregoing.
Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.
AltaPacific Bancorp and Commerce Bank disclaim any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained in this proxy statement/prospectus to reflect future
events or developments, except as required by law.
THE SPECIAL MEETING
General
This proxy statement/prospectus is being provided to Commerce Bank shareholders as part of a solicitation of
proxies by Commerce Bank’s board of directors for use at its special meeting of shareholders and at any adjournments or
postponements of such meeting. This proxy statement/prospectus provides Commerce Bank shareholders with important
information about the special meeting and should be read carefully in its entirety.
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Date, Time and Place of the Special Meeting
The special meeting will be held at the headquarters office of Commerce Bank located at 25220 Hancock Avenue,
Suite 140, Murrieta, California 92562, on April 14, 2017, at 5:30 p.m. (local time).
Record Date for the Special Meeting; Stock Entitled to Vote
Only holders of record of Commerce Bank common stock at the close of business on February 16, 2017, which is
the record date for the special meeting, are entitled to receive notice of and to vote at the meeting. On the record date,
Commerce Bank had 1,616,041 shares of its no par value common stock issued, outstanding and eligible to vote at the special
meeting.
Quorum
A majority of the shares of Commerce Bank common stock issued and outstanding and entitled to vote on the record
date must be represented in person or by proxy at the special meeting in order for a quorum to be present for purposes of
transacting business. Proxies marked as abstaining (including proxies containing broker non-votes) on any matter to be acted
upon by shareholders will be treated as present at the meeting for purposes of determining quorum but will not be counted as
votes cast on such matters. If there is no quorum at the special meeting, the affirmative vote of at least a majority of the votes
present in person or represented by proxy and entitled to vote at the meeting may adjourn the special meeting to another date.
Purposes of the Special Meeting
The special meeting is being held to consider and vote on the following proposals:
•
Approval of the Merger Agreement and the Merger. To approve the Agreement and Plan of
Reorganization and Merger, dated September 1, 2016, by which Commerce Bank will be merged with and
into AltaPacific Bank, as more fully described in this proxy statement/prospectus.
•
Adjournment. To approve any adjournment or postponement of the special meeting, if necessary, to
solicit additional proxies if there are not sufficient votes in favor of the merger agreement or for any other
legally permissible purpose.
Recommendation of the Commerce Bank Board of Directors
A majority of the directors of Commerce Bank has determined that the merger and the merger agreement are
advisable and in the best interests of Commerce Bank and its shareholders, has approved the merger, and recommends that
Commerce Bank’s shareholders vote:
•
“FOR” the approval of the principal terms of the merger agreement and the merger; and
•
“FOR” the approval of any adjournment or postponement of the special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes in favor of the merger agreement or for any other legally
permissible purpose.
Four of Commerce Bank’s 11 directors disagreed with the majority’s determination and voted against the merger
agreement and the merger. The conclusions of Commerce Bank’s board of directors regarding the merger agreement are
based upon a number of factors which are discussed under the section entitled “PROPOSAL NO. 1 – THE MERGER
AGREEMENT AND THE MERGER – Commerce Bank’s Reasons for the Merger; Recommendation of Commerce Bank’s
Board of Directors” beginning on page 53. In considering the recommendation of Commerce Bank’s board of directors with
respect to the merger, Commerce Bank shareholders should be aware that some of Commerce Bank’s directors and executive
officers may have interests that are different from, or in addition to, the interests of Commerce Bank shareholders generally.
See “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Interests of Directors and Officers in the
Merger” beginning on page 60.
Number of Votes
Each Commerce Bank shareholder is entitled to cast one vote, in person or by proxy, for each share held in that
shareholder’s name on the books of Commerce Bank as of the record date on the matter to be submitted to the vote of the
shareholders.
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Votes Required; Voting Agreements
The votes required for each proposal are as follows:
•
Approval of the merger agreement and the merger. The affirmative vote of at least a majority of the
outstanding shares of Commerce Bank common stock is required to approve this proposal.
•
Adjournment. The affirmative vote of at least a majority of the shares of Commerce Bank common stock
represented and voting at the special meeting is required to approve this proposal.
As of the record date, Commerce Bank’s directors and executive officers owned a total of approximately 895,423
voting shares (not including vested option shares), representing approximately 55.4% of Commerce Bank’s issued and
outstanding shares of common stock. Pursuant to voting agreements described in this proxy statement/prospectus, seven of
Commerce Bank’s directors and all of its executive officers have agreed to vote their shares “FOR” approval of the merger
agreement and the merger. See “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Director and
Executive Officer Voting, Non-Solicitation and Non-Competition Agreements” beginning on page 58. These nine
individuals owned a total of approximately 285,862 voting shares (not including vested option shares), or approximately
17.7% of Commerce Bank’s outstanding shares as of the record date. As of that same date, four of Commerce Bank’s
directors, owning a total of approximately 609,561 voting shares (not including vested option shares), or approximately
37.7% of Commerce Bank’s outstanding shares, have indicated that they intend to vote their shares “AGAINST” the
approval of the merger agreement and merger. The forms of voting agreements are attached as Exhibits A and B to the
merger agreement which is attached to this proxy statement/prospectus as Appendix A and incorporated herein by reference.
Voting of Proxies
Submitting Proxies
Whether or not you plan to attend the special meeting, we urge you to complete, sign and date the enclosed proxy
card and to return it promptly in the envelope provided. Returning the proxy card will not affect your right to attend the
special meeting and vote. You may also vote over the Internet or by telephone. Instructions for all voting can be found on the
proxy card included with this proxy statement/prospectus.
If you properly fill in your proxy card and send it to us in time to vote, or vote by Internet or telephone, your
“proxy” (the individual(s) named on your proxy card) will vote your shares as you have directed. If you sign the proxy card
but do not make specific choices, your proxy will vote your shares as recommended by the Commerce Bank board of
directors as follows:
•
“FOR” the approval of the merger agreement and merger; and
•
“FOR” the approval of any adjournment or postponement of the special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes in favor of the merger agreement or for any other legally
permissible purpose.
If any other matter is presented, your proxy will vote in accordance with the recommendation of the Commerce
Bank board of directors. At the time this proxy statement/prospectus went to press, we knew of no matters which needed to
be acted on at the special meeting other than those discussed in this proxy statement/prospectus.
Voting by Telephone or Over the Internet
In addition to voting in person or by proxy at the special meeting, Commerce Bank shareholders also have the
option to vote by telephone or over the Internet. Instructions to vote by telephone or over the Internet can be found on the
proxy card included with this proxy statement/prospectus. The Internet and telephone voting procedures are designed to
authenticate a shareholder’s identity and to allow shareholders to vote their shares and confirm that their voting instructions
have been properly recorded.
Revoking Proxies
Commerce Bank shareholders who hold their shares in certificate form may revoke their proxies at any time before
the time their proxies are voted at the special meeting by: (i) filing with the Corporate Secretary of Commerce Bank an
instrument revoking it or a duly executed proxy bearing a later date; (ii) appearing and voting in person at the special
43
meeting; or (iii) if a Commerce Bank shareholder has voted such Commerce Bank shareholder’s shares by Internet or
telephone, by recording a different vote, or by signing and returning a proxy card dated as of a date that is later than such
shareholder’s last Internet or telephone vote. Subject to such revocation, shares represented by a properly executed proxy
received in time for the special meeting will be voted by the proxy holder thereof in accordance with the instructions on the
proxy. If no instruction is specified with respect to a matter to be acted upon, the shares represented by the proxy will
be voted in favor of the proposals listed on the proxy. If any other business is properly presented at the meeting, the
proxy will be voted in accordance with the recommendations of Commerce Bank’s board of directors.
Written notices of proxy revocations must be sent so that they will be received before the taking of the vote at the
special meeting as follows:
Commerce Bank of Temecula Valley
25220 Hancock Avenue, Suite 140
Murrieta, California 92562
Attention: Corporate Secretary
If you have instructed a broker or other nominee to vote your shares, you must follow directions received from your
broker or other nominee in order to change those instructions.
Abstentions and Broker Non-Votes
If you hold your shares of Commerce Bank common stock in “street name” (that is, through a broker or other
nominee), you must vote your shares through your broker. You should receive a form from your broker asking how you
want to vote your shares. Follow the instructions on that form to give voting instructions to your broker. Under the rules that
govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such shares on
routine, but not on non-routine matters. At the special meeting, none of the matters is a routine matter. Therefore, if you
fail to instruct your broker or nominee as to how to vote your shares of Commerce Bank common stock, your broker
or nominee cannot vote your shares “for” any of the proposals set forth in this proxy statement-prospectus, including
the approval of the merger agreement and the merger, without your specific direction. A “broker non-vote” occurs
when your broker does not vote on a particular proposal because the broker does not receive instructions from the beneficial
owner and does not have discretionary authority. It is VERY IMPORTANT that you return the instructions to your broker
or nominee. Therefore if you wish to be represented you must vote by completing the information which is sent to you
by your broker or nominee.
Dissenters’ Rights
Holders of Commerce Bank common stock will have dissenters’ rights with respect to the proposal to approve the
merger agreement and the merger. In order to perfect dissenters’ rights, a shareholder of Commerce Bank stock must do the
following:
•
not vote “FOR” the merger agreement and the merger;
•
make a timely written demand upon Commerce Bank for purchase in cash of his or her shares at their fair
market value as of September 1, 2016, the day of and immediately prior to the first public announcement of
the merger, excluding any change in such value as a consequence of the proposed merger, which demand
includes:
•
the number and class of the shares held of record by him or her that he or she demands upon
Commerce Bank; and
•
what he or she claims to be the fair market value of his or her shares as of September 1, 2016,
excluding any change in such value as a consequence of the proposed merger;
•
have his or her demand received by Commerce Bank within 30 days after the date on which the notice of
the approval by the outstanding shares is mailed to the shareholder;
•
submit certificates representing his or her shares for endorsement in accordance with Section 1302 of the
Corporations Code; and
•
comply with such other procedures as are required by the Corporations Code.
If dissenters’ rights are properly perfected, such dissenter has the right to receive cash in the amount equal to the fair
market value, as determined by Commerce Bank, or, if required, by a court of law, of their shares of Commerce Bank
44
common stock as of the day immediately prior to the first public announcement of the merger, excluding any change in such
value as a consequence of the proposed merger. The Commerce Bank board of directors has determined that the fair market
value of a share of Commerce Bank common stock as of September 1, 2016, the day of and immediately prior to the first
public announcement of the merger was $7.50. See “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE
MERGER — Dissenters’ Rights of Commerce Bank Shareholders” and Appendix B for additional information.
Other Matters
Commerce Bank management is not aware of any other business that will be conducted at the special meeting.
Solicitation of Proxies
Commerce Bank’s board of directors is soliciting the proxies for the special meeting. Commerce Bank will pay for
the cost of such solicitation, including preparation, printing and mailing costs. In addition to solicitation by mail, Commerce
Bank’s directors, officers and employees may also solicit proxies from shareholders by telephone, facsimile, or in person.
Commerce Bank will not pay any additional compensation to these directors, officers or employees for these activities, but
may reimburse them for reasonable out-of-pocket expenses, if any. Arrangements will also be made with brokerage houses
and other custodians, nominees and fiduciaries to send the proxy materials to beneficial owners. Commerce Bank will, upon
request, reimburse those brokerage houses and custodians for their reasonable expenses in so doing. Commerce Bank has
retained Georgeson LLC to assist in soliciting proxies for a fee of $30,000 plus expenses and certain variable per call or per
proxy fees. The total amount to be paid to Georgeson is estimated to be approximately $35,000.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of February 16, 2017 pertaining to the beneficial ownership of
Commerce Bank's outstanding common stock by (i) persons known to Commerce Bank to own more than five percent (5%)
of such stock, (ii) each current director and executive officer, and (iii) all directors and executive officers of Commerce Bank
as a group. The only beneficial owner of more than five percent (5%) of Commerce Bank’s outstanding common stock at
February 16, 2017 who was not also a director or executive officer of Commerce Bank was KEDAP S.A. de C.V.
(“KEDAP”), Calle 3 #331, Mexico City, Mexico (see footnote 4 to the table below). All of KEDAP’s shares are reported in
the table below as part of director Enrique Schon’s beneficial stock ownership, as Enrique Schon owns in excess of 99% of
that company. The information contained herein has been obtained from Commerce Bank's records and from information
furnished directly by the individual or entity to Commerce Bank.
45
Name and Position Held
LouEllen Ficke
Executive Vice President
and Chief Financial Officer
Nancy K. Hughes
Director
Donald W. Murray
Chairman, President
and Chief Executive Officer
Philip D. Oberhansley
Director
Thomas T. Pangelinan
Director
Carl P. Patsko
Executive Vice President
and Chief Credit Officer
Enrique Schon
Director
Jaquelyn Schon
Director
Paul Schon
Director
Richard K. Shuman, M.D.
Director
Thomas G. Williams, M.D.
Director
Gerald R. Wilson
Director
Kumar S. Yamani
Director
Directors and Executive Officers as a Group
(13 persons)
Number of Shares
of Common Stock
Beneficially Owned1
30,000
Number of Shares
Subject to Vested
Stock Options2
30,047
Percent of Class
Beneficially Owned3
3.65%
7,100
0
0.44%
133,762
0
8.28%
0
0
12,000
6,260
1.13%
0
6,668
0.41%
0
32.68%
0
0
n/a
0
0
n/a
51,500
6,864
3.60%
41,500
0
2.57%
10,000
6,260
1.00%
81,500
0
5.04%
895,423
56,099
56.90%
528,0614
n/a
1
Except as otherwise noted, may include shares held by or with such person’s spouse (except where legally separated) and minor children, and by any other
relative of such person who has the same home; shares held in “street name” for the benefit of such person; shares held by a family trust as to which such
person is a trustee and primary beneficiary with sole voting and investment power (or shared power with a spouse); or shares held in an Individual
Retirement Account or pension plan as to which such person is the sole beneficiary and has pass-through voting rights and investment power.
2
Represents option shares which are vested or will vest within 60 days of February 16, 2017 pursuant to Commerce Bank’s 2007 Stock Option Plan.
3
This percentage is based on the total number of shares of Commerce Bank’s common stock outstanding, plus the numbers of option shares for the
applicable individual, or for the directors and executive officers collectively, which are vested or will vest within 60 days of February 16, 2017 pursuant to
Commerce Bank’s 2007 Stock Option Plan.
4
Consists of 513,359 shares held by KEDAP; 11,502 shares held by Enrique Schon’s wife in a trust of which she is the sole trustee; and 3,200 shares held by
his wife in an IRA account. On December 15, 2015, following all necessary regulatory approvals, KEDAP acquired the 513,359 shares referenced in the
preceding sentence, which constituted approximately 34% of Commerce Bank’s issued and outstanding shares at that time. Enrique Schon owns in excess of
99% of KEDAP. The shares were acquired by KEDAP pursuant to a sale of the shares conducted by the Korea Deposit Insurance Corporation. On
January 27, 2016, the board of directors appointed Enrique Schon; Jaquelyn Schon, Enrique Schon’s daughter; and Paul Schon, Enrique Schon’s son; to
Commerce Bank’s board of directors. Enrique Schon has sole voting and investment power over the shares held by KEDAP, and shared investment power
with his wife but no voting power over the shares beneficially held by his wife discussed above.
46
PROPOSAL NO. 1
THE MERGER AGREEMENT AND THE MERGER
This section describes certain aspects of the merger agreement and the merger of Commerce Bank with and into
AltaPacific Bank. Because this is a summary, it does not contain all the information that may be important to you. You
should read this entire proxy statement/prospectus, including the appendices. A copy of the Agreement and Plan of
Reorganization and Merger, dated September 1, 2016, referred to herein as the merger agreement, is attached as Appendix
A to this proxy statement/prospectus and is incorporated by reference herein. The following discussion describes important
aspects and the material terms of the merger agreement and the merger. These descriptions are qualified in their entirety by
reference to Appendix A.
Structure of the Merger
The merger agreement provides for the merger of Commerce Bank with and into AltaPacific Bank, with AltaPacific
Bank as the surviving entity after the merger. As a result of the merger, Commerce Bank will cease to exist as a separate
entity.
The merger agreement is attached as Appendix A to this document. We encourage you to read the merger
agreement in its entirety.
Merger Consideration
The merger agreement provides that shareholders of Commerce Bank will be entitled to receive either 1.1377 shares
of AltaPacific Bancorp common stock or $10.00 in cash for each share they own, or a combination of both, subject to
proration and allocation to ensure that 50% of outstanding Commerce Bank shares are exchanged for shares of AltaPacific
Bancorp common stock and 50% are exchanged for cash. For purposes of this 50-50 split, the shares of AltaPacific Bancorp
common stock have been valued at $8.79 per share by the parties, which was the tangible book value of such stock as of
March 31, 2016. As the trading price of AltaPacific Bancorp common shares fluctuates from time to time, the actual value of
the per share stock consideration will likely be different at the effective time of the merger than when valued for purposes of
the merger agreement. The value of the per share stock consideration based on an assumed value of AltaPacific Bancorp
common stock of $8.79 per share is the same $10.00 per share of Commerce Bank common stock as the cash consideration.
Based on the trading price of AltaPacific Bancorp common stock on March 8, 2017, the value of the per share stock
consideration would be $12.17 per share. It is impossible to predict this value at the time of the close of the merger or
whether this value will be more or less than that of the cash consideration. Based on that same trading price at March 8,
2017, the value of the per share merger consideration for a shareholder receiving 50% cash and 50% stock would be $11.09.
The aggregate cash consideration to be paid in the merger is $7,935,205, and based on the assumed value of $8.79
per share of AltaPacific Bancorp common stock used for purposes of fixing the consideration in the merger agreement, the
value of the 902,789 shares of stock to be issued in the merger would be substantially equivalent to the aggregate cash
consideration. The actual value of the aggregate stock consideration at the close of the merger is subject to the same
fluctuation in the market price of AltaPacific common stock as the per share stock consideration discussed in the previous
paragraph. Based on the trading price of AltaPacific Bancorp common stock on March 8, 2017, the market value of the
aggregate stock consideration would be $10,986,942.
The aggregate cash and stock consideration will both increase in the event outstanding in-the-money options to
purchase Commerce Bank common stock are exercised in lieu of the optionees entering into cancellation agreements. Such
increase would simply reflect the same per share merger consideration as for each outstanding share of Commerce Bank
stock, so that the aggregate cash consideration would increase by $5.00 for each additional share outstanding, and the
aggregate stock consideration would increase by 1.1377 times half the number of additional shares issued upon the exercise
of stock options. The exercise of any such options will not affect the per share merger consideration.
Holders of outstanding Commerce Bank stock options shall be entitled to exercise such options in connection with
the merger. Any option holder electing to exercise outstanding stock options prior to the merger will receive the same
merger consideration as any other Commerce Bank shareholder. Holders of in-the-money options who choose to execute
cancellation agreements instead of exercising their stock options will be entitled to receive $10.00 per share minus the
exercise price. As of February 16, 2017, Commerce Bank had options outstanding to purchase 193,641 shares of its common
stock, at an average per share exercise price of $9.65 per share.
47
Election Procedure
Election Right
Subject to the allocation mechanism described in the next section, each Commerce Bank shareholder will have the
right to elect to receive one of the following with respect to such shareholder’s shares of Commerce Bank common stock:
•
AltaPacific Bancorp common stock for all of such shareholder’s shares;
•
cash for all of such shareholder’s shares; or
•
AltaPacific Bancorp common stock for a portion of such shareholder’s shares and cash for the remaining
portion, which we refer to as a mixed election.
Shares of Commerce Bank common stock with respect to which the shareholder fails to make an effective election
prior to the election deadline, or with respect to which the exchange agent does not receive an effective election prior to the
election deadline, will be deemed to be “no election shares,” as explained below. Any dissenting shares as to which
dissenters’ rights are not properly exercised will be treated as no election shares.
As described above under “– Merger Consideration,” because the merger consideration is set by a predetermined
formula and it is impossible to predict what elections different shareholders will make, there is no assurance that any given
shareholder will receive the form of consideration he or she elects.
Election Form
An election form and instructions for use in making an election as to the form of merger consideration that a
shareholder prefers will be mailed to Commerce Bank shareholders no less than 35 days prior to the anticipated effective time
of the merger, or on such other date as the Commerce Bank and AltaPacific Bancorp mutually agree, which we refer to as the
mailing date, to shareholders of record as of five business days prior to the mailing date. The election form allows a
Commerce Bank shareholder to indicate whether the shareholder elects to make a stock election, a cash election, a mixed
election or no election. Commerce Bank will also make election forms available to persons who become holders of
Commerce Bank common stock between the record date for mailing election forms and the business day prior to the election
deadline (as defined below).
Shareholders of Commerce Bank common stock who wish to elect the type of merger consideration they will
receive in the merger should carefully review and follow the instructions set forth in the election form. Shares as to which
the shareholder has not made or as to which the exchange agent has not received a valid election prior to 5:00 p.m., Pacific
time, on the date that is the 30th day following the mailing date of the election forms, or such later time as the parties may
mutually agree, which we refer to as the “election deadline,” will be deemed to be no election shares.
To make a valid election, a Commerce Bank shareholder must submit a properly completed and signed election
form so that it is actually received by Computershare, AltaPacific Bancorp’s exchange agent, on or prior to the election
deadline in accordance with the instructions on the election form. An election form will be deemed properly completed only
if an election is indicated for each share of Commerce Bank common stock covered by such election form. Any shareholder
who fails to deliver a properly completed election form to the exchange agent on or before the election deadline, or who fails
to redeliver a properly completed election form after an election has been revoked on or before the election deadline, will not
have made a valid election, and the shares of Commerce Bank common stock owned by such shareholder will be deemed to
be no election shares.
An election may be revoked or changed by the shareholder submitting the election form at or prior to the election
deadline. The exchange agent will have reasonable discretion to determine whether any election, revocation, withdrawal or
change has been properly or timely made and to disregard immaterial defects in the election forms, and any decisions of
AltaPacific Bancorp required by the exchange agent and made in good faith in determining such matters will be binding and
conclusive. Neither AltaPacific Bancorp nor the exchange agent will be under any obligation to notify any
shareholder of any defect in any election form. If an election is revoked and any certificates have been transmitted to the
exchange agent, AltaPacific Bancorp will cause such certificates to be promptly returned without charge to the person
submitting the revoked election form upon written request to that effect from the shareholder who submitted such election
form.
48
Allocation Calculation
In the following discussion, “stock election shares” means shares of Commerce Bank common stock with respect to
which the shareholder has elected to receive shares of AltaPacific Bancorp common stock; “cash election shares” means
shares of Commerce Bank common stock with respect to which the shareholder has elected to receive cash; and “mixed
election shares” means shares of Commerce Bank common stock with respect to which the shareholder has elected to receive
the prescribed mix of cash and stock. “Mixed stock shares” and “mixed cash shares” refer to the numbers of shares
designated by shareholders submitting mixed elections for stock and cash, respectively.
If a shareholder makes no election with respect to his or her shares of Commerce Bank common stock, or if there are
any shares of Commerce Bank common stock with respect to which the exchange agent has not otherwise received an
effective, properly completed election form on or before the election deadline, such shares will be deemed to be no election
shares.
A shareholder who perfects his or her dissenters' rights under the Corporations Code will receive the fair market
value for his or her shares in cash, as determined pursuant to the procedures under the Corporations Code, and will not
receive any merger consideration. See “– Dissenters' Rights of Commerce Bank Shareholders" below. Any dissenting shares
as to which dissenters’ rights are not properly exercised will be treated as no election shares solely for purposes of the
allocation calculation.
If the aggregate cash amount that would be paid upon conversion in the merger of the cash election shares,
dissenting shares and the mixed cash shares is equal or nearly equal (as determined by the exchange agent) to the aggregate
cash consideration to be issued in the merger, then all cash election shares and mixed cash shares will be converted into the
right to receive the per share cash consideration, and all stock election shares, mixed stock shares and no election shares will
be converted into the right to receive the per share stock consideration.
Oversubscription of Cash Consideration.
If the aggregate cash amount that would be paid upon the conversion in the merger of the cash election shares,
dissenting shares and the mixed cash shares is more than the aggregate cash consideration, then:
•
all mixed stock shares, stock election shares and no election shares will be converted into the right to
receive the per share stock consideration;
•
all dissenting shares will be deemed, solely for purposes of the allocation procedures, to be converted into
the right to receive the per share cash consideration; and
•
the exchange agent shall then select from among the cash election shares, by a pro rata selection process, a
sufficient number of shares, which we refer to as stock designated shares, such that the aggregate cash
amount that will be paid in the merger equals as closely as practicable the aggregate cash consideration, all
stock designated shares will be converted into the right to receive the per share stock consideration, and the
remaining cash election shares and all mixed cash shares will be converted into the right to receive the per
share cash consideration.
Undersubscription of Cash Consideration
If the aggregate cash amount that would be paid upon conversion in the merger of the cash election shares,
dissenting shares and the mixed cash shares is less than the aggregate cash consideration, then:
•
all cash election shares and mixed cash shares will be converted into the right to receive the per share cash
consideration;
•
all dissenting shares will be deemed, solely for purposes of the allocation procedures, to be converted into
the right to receive the per share cash consideration; and
•
the exchange agent shall then select first from among the no election shares and then (if necessary) from
among the stock election shares, by a pro rata selection process, a sufficient number of shares, which we
refer to as cash designated shares, such that the aggregate cash amount that will be paid in the merger
equals as closely as practicable the aggregate cash consideration, all cash designated shares will be
converted into the right to receive the per share cash consideration, and the remaining stock election shares
49
and the no election shares and all mixed stock shares will be converted into the right to receive the per
share stock consideration.
The allocation calculations described above will be prepared by the exchange agent within 10 business days after the
election deadline, unless the effective time has not yet occurred, in which case this will be done as soon thereafter as
practicable. Any calculation resulting in a holder receiving a portion of a share of AltaPacific Bancorp common stock shall
be rounded to the nearest whole share, and any cash payment shall be rounded to the nearest cent.
Background of the Merger
Commerce Bank, based in Murrieta, California, has conducted general banking operations to serve individuals and
small-to medium-sized businesses since 2007. In serving individuals, small businesses and mid-market corporations,
Commerce Bank has historically focused on a community-based approach to banking.
Following the completion of its initial offering in 2007 and the “Great Recession” that commenced in 2008, the
board of directors continually evaluated the banking marketplace, the economic cycle and the historical acquisition prices
being paid for financial institutions of Commerce Bank's size. The board of directors was concerned about the rapid changes
occurring in the banking industry in Southern California and Riverside County in particular. To effectively compete with
other more efficient financial institutions, Commerce Bank’s board of directors and management knew that they had to
continue to increase Commerce Bank’s core deposit base as well as its loan portfolio, and needed to continue to improve its
efficiency. Although the board of directors believed Commerce Bank was in a position to accomplish this, the board of
directors also decided that Commerce Bank should be receptive to offers that could maximize shareholder value. Although a
small number of very preliminary discussions were held with other financial institutions, entities and individuals to either
acquire Commerce Bank or effect a change of control in order to raise additional capital for Commerce Bank, the board did
not pursue any of the preliminary discussions as the board perceived execution and regulatory approval risk on some
proposals, the entity would need to raise capital to accomplish an acquisition, the board wanted additional time in order to
increase size and profitability, and/or the board believed the individual or entities did not have sufficient financial
wherewithal to complete the transaction.
In 2013 through 2015, Commerce Bank was approached by several financial institutions for a possible strategic
transaction in addition to AltaPacific Bancorp but Commerce Bank decided to remain independent and continue operating
under its existing charter. Although discussions were held with other financial institutions, entities and individuals to either
acquire Commerce Bank or effect a change of control in order to raise additional capital for Commerce Bank, the board
rejected such offers as the board believed the consideration offered was not adequate, the proposed acquiring entity did not
have the necessary capital, and/or the acquiring entity did not fit Commerce Bank’s strategic plans and objectives.
Tomato Savings Bank of South Korea originally purchased approximately 9% of Commerce Bank’s stock in its
initial offering completed in 2007. In addition, approximately 25% of Commerce Bank’s shares that were purchased in the
initial offering by certain shareholders were also pledged to Tomato Saving Bank in connection with loans that certain
shareholders had received from Tomato Savings Bank. When Tomato Savings Bank became insolvent and the Korean
Deposit Insurance Corporation (the “KDIC”) in South Korea was appointed as conservator, the shareholders that had pledged
their Commerce Bank shares defaulted on their loans, and the KDIC eventually took control of 513,359 shares or 34% of
Commerce Bank common stock. In 2015, the KDIC conducted an auction to sell the Commerce Bank shares, and after
receiving regulatory approvals and subject to shareholder approval, Commerce Bank made a bid to acquire the shares.
However, on December 15, 2015, following receipt of all necessary regulatory approvals, KEDAP, S.A. de C.V.
(“KEDAP”), Calle 3 #331, Mexico City, Mexico, acquired the 513,359 shares or approximately 34% of the Bank’s common
stock. Enrique Schon owns in excess of 99% of KEDAP. On January 20, 2016, the board of directors appointed as directors
Enrique Schon; Jaquelyn Schon, Enrique Schon’s daughter; and Paul Schon, Enrique Schon’s son.
AltaPacific Bancorp first presented to Commerce Bank an unsolicited indication of interest to acquire Commerce
Bank on August 7, 2013, proposing a merger of Commerce Bank into AltaPacific Bancorp's banking subsidiary, AltaPacific
Bank, with 50% of the consideration consisting of AltaPacific Bancorp common shares and 50% consisting of cash.
AltaPacific Bancorp shares would be valued at their volume weighted average 90-day trading price on August 7, 2013.
AltaPacific Bancorp placed a value of $9.91 million on the transaction, or $6.50 per Commerce Bank share. All in-themoney options would be cashed out for $6.50 less the applicable option exercise price. The offer also anticipated that Donald
Murray, President and Chief Executive Officer of Commerce Bank, would remain employed under a mutually acceptable
employment agreement for some period following the closing. Commerce Bank did not pursue this offer, as the board
believed that the price and other terms offered were inadequate.
50
AltaPacific Bancorp then presented a second unsolicited indication of interest to acquire Commerce Bank on
October 13, 2015, proposing a merger of Commerce Bank into AltaPacific Bank for an aggregate merger consideration of
$11.909 million for all shares of Commerce Bank common stock and options for a purchase price of $7.92 per share, with
50% of the consideration consisting of AltaPacific Bancorp common shares and 50% of cash. Based upon in-the-money
options, the price per share would decrease to $7.74 per share. AltaPacific Bancorp shares would be valued at a value per
share assigned to Commerce Bank stock divided by the weighted average last sale price of AltaPacific Bancorp common
stock during the 20 trading days ending five days prior to closing; provided, however, that the AltaPacific Bancorp weighted
average price would not be greater than 115%, nor less than 85%, of the weighted average last sale price of AltaPacific
Bancorp common stock for the 20 trading days ending three days prior to the execution of a definitive agreement. A breakup fee of $750,000 would be payable to AltaPacific Bancorp if Commerce Bank elected to accept a superior offer or failed to
recommend approval of the merger to its shareholders. The offer also anticipated that Mr. Murray would remain employed
for a two-year period following the closing. Commerce Bank did not pursue this second offer, as the board believed that the
price and other terms offered were inadequate.
On February 2, 2016, Charles Hall and Frank Basirico, then President and Chief Executive Officer and Senior
Executive Vice President and Chief Operating Officer, respectively, of AltaPacific Bank, had a lunch meeting with Enrique
Schon, and Paul Schon, directors of Commerce Bank. The meeting was also attended by Keith Holmes, of King Holmes,
Paterno & Soriano, LLP (“King Holmes”) counsel to AltaPacific Bancorp. At that meeting Mr. Hall asked Enrique Schon, as
the largest shareholder of Commerce Bank through his ownership of KEDAP, if he would be interested in exploring a
possible acquisition of Commerce Bank by AltaPacific Bancorp through a merger with AltaPacific Bank.
Enrique Schon indicated that he had recently acquired his position in the shares of Commerce Bank and that he and
his son and daughter had just been appointed as directors of Commerce Bank on January 20, 2016 and had not yet attended
any board meetings. He expressed his view that he would need some time to assess Commerce Bank's position and that
discussions at that time would be premature. No pricing or other material terms of a possible combination were disclosed or
discussed at the meeting. The Commerce Bank directors, management and its counsel not attending the February 2, 2016
meeting were not informed of the meeting until AltaPacific Bancorp informed Commerce Bank approximately one month
after the merger agreement was executed.
On March 14, 2016, AltaPacific Bancorp sent a third letter of interest to Commerce Bank. This offer was valued by
AltaPacific Bancorp at between $9.25 and $10.00 per Commerce Bank share, less the cost to retire any in-the-money
Commerce Bank stock options. The consideration would be paid 50% in AltaPacific Bancorp common shares and 50% in
cash. Unlike the 2013 proposal, the cost of cashing out option holders would reduce the price paid to Commerce Bank
shareholders. Also, the number of shares of AltaPacific Bancorp would not be fixed at the signing of the merger agreement
but would be determined at closing, with the AltaPacific Bancorp share value for determining the number of AltaPacific
Bancorp shares issued not to exceed 115% of the AltaPacific Bancorp volume weighted average stock price for the 20 trading
days ending three days before signing of the merger agreement, and not to be less than 85% of the same price for the presigning period. A break-up fee of $750,000 would be payable to AltaPacific Bancorp if Commerce Bank elected to accept a
superior offer or failed to recommend approval of the merger to its shareholders. The offer also anticipated that Donald
Murray would provide at least two years of services to AltaPacific Bancorp to assist in the transition of ownership of the
Commerce Bank business into AltaPacific Bank.
On April, 25, 2016 Commerce Bank responded to the March 14 letter of interest requesting certain modifications to
the offer of AltaPacific Bancorp, including a request of a fixed price of $10.00 per share valuing the AltaPacific Bancorp
shares at their tangible book value as of March 31,2016, the ability to pay reasonable transaction costs, two board seats for
Commerce Bank board members on the AltaPacific Bancorp board, and a reduction in the break-up fee from $750,000 to
$250,000. On May 10, 2016 AltaPacific Bancorp responded agreeing to the $10.00 price based on the tangible book value at
March 31, 2016 of AltaPacific Bancorp shares, and no price reduction for reasonable Commerce Bank transaction costs.
AltaPacific Bancorp also proposed a cap on the stock issued to Commerce Bank shareholders at a value of $11.00 per share if
the AltaPacific Bancorp shares traded above $9.67 for the 20 trading days prior to closing. A compromise break-up fee of
$500,000 was also proposed.
After several informal discussions, a majority of the board of directors of Commerce Bank recognized the
advantages of a potential business combination with AltaPacific Bancorp. At the same time, a majority of the board of
directors of Commerce Bank recognized the opportunity to participate with a larger independent financial institution in its
local markets. At the direction of a majority of the board of directors, Mr. Murray, with the assistance of Commerce Bank
counsel, then conducted several discussions with AltaPacific Bancorp in April through May 2016. During that period the
parties negotiated terms for a revised letter of intent.
51
Commerce Bank sent a letter to AltaPacific Bancorp dated May 19, 2016 describing certain issues, including that the
transaction should be based upon the tangible book values of AltaPacific Bancorp and Commerce Bank, a limit on the
number of AltaPacific Bancorp shares should be removed, and a description of Commerce Bank’s estimated transaction
expenses. AltaPacific Bancorp prepared a revised counter offer on May 19, 2016 with improved terms for Commerce Bank.
The revised offer proposed total consideration valued by AltaPacific Bancorp at $10.00 per share, utilizing as the value of
AltaPacific Bancorp's common stock, its tangible book value per share of $8.79 at March 31, 2016. The AltaPacific Bancorp
shares, which are thinly traded, had most recently traded at $9.50 per share, giving Commerce Bank the advantage of the
premium to June 30, 2016 book value at which the AltaPacific Bancorp shares were trading and increasing the number of
AltaPacific Bancorp shares to be paid in the stock component of the transaction. The revised offer also proposed a fixed
exchange ratio at the time of execution of the definitive agreement of 1.1377 shares of AltaPacific Bancorp common stock
for each Commerce Bank share. The exchange ratio would not be changed based on the value of AltaPacific Bancorp shares
at the time of closing. If the AltaPacific Bancorp shares were valued at their market price on August 31, 2016, the value of
the AltaPacific Bancorp shares received for each Commerce Bank share exchanged for AltaPacific Bancorp shares would be
approximately $10.92, and when considering the 50% cash price of $10.00, the overall deal value would be approximately
$10.46 per share. Any unexercised stock options would be cashed out but now would not reduce the aggregate consideration
payable to the shareholders of Commerce Bank. AltaPacific Bancorp would also be able to terminate the transaction if
Commerce Bank’s reasonable estimated transaction expenses exceeded $2.4 million. AltaPacific Bancorp also indicated that
it wanted to secure the ongoing assistance of Mr. Don Murray of Commerce Bank for the transition for a period of at least
two years. The $750,000 break-up fee payable to AltaPacific Bancorp should it take a superior offer or fail to recommend the
merger to shareholders was reduced to $500,000. The offer also proposed that one member of the Commerce Bank would be
added to the AltaPacific Bancorp board following the closing.
On May 16, 2016, another bank sent a preliminary indication of interest to acquire Commerce Bank for $14.6
million, or $9.50 per share, consisting of 60% common stock and the reminder in cash. On May 20, 2016, the other bank
increased its offer to $15.9 million or $10.25 per share, consisting of 65% common stock and the remainder in cash. There
was also a subsequent discussion between the presidents of both banks that the other bank could make an all cash offer of
$15.9 million or $10.25 per share, but it would need to raise capital. The other bank followed up the all-cash offer discussion
in writing in early June 2016. Because the transaction with the other bank did not provide as much value to Commerce
Bank’s shareholders as the proposed transaction with AltaPacific Bancorp, that the other bank’s stock was considered to have
less liquidity, the other bank may have needed to raise capital, and for other reasons, at a May 26, 2016 special board
meeting, the Commerce Bank board of directors voted to proceed with the AltaPacific Bancorp offer exclusively for a limited
period based on its preliminary proposal, subject to due diligence and other conditions. All matters respecting the offer were
thoroughly reviewed and discussed with an investment banking firm and Loren P. Hansen, Esq. of Loren P. Hansen, a
Professional Corporation. On May 27, 2016 a confidentiality agreement was executed with AltaPacific Bancorp and due
diligence commenced shortly thereafter.
After Commerce Bank was unable to reach an engagement agreement with the investment banking firm mentioned
in the preceding paragraph, Commerce Bank discussed an engagement with alternative firms, and the Findley Group was
retained on July 9, 2016 after execution of a confidentiality agreement, to render a fairness opinion respecting the
consideration to be paid to Commerce Bank shareholders. At the August 8, 2016 board meeting, the Findley Group
presented its analysis of the merger and its opinion that the consideration to be received in the merger was fair to Commerce
Bank’s shareholders from a financial point of view, and that the Findley Group would issue the fairness opinion if the board
decided to proceed with the AltaPacific Bancorp proposal. Findley reaffirmed its conclusion after reviewing certain
additional due diligence material concerning AltaPacific Bancorp.
On July 20, 2016, and on August 30, 2016, counsel for AltaPacific Bancorp sent to counsel for Commerce Bank and
to Mr. Murray a proposed employment agreement between Mr. Murray and AltaPacific Bancorp. However, Mr. Murray
declined to consider employment with AltaPacific Bancorp since the offer of employment did not conform to the preliminary
indication of interest, and the merger agreement had not been fully negotiated nor executed.
On August 8, 17 and 26, 2016, Commerce Bank’s board deliberated at length concerning the new terms and
conditions of a transaction with AltaPacific Bancorp. There were substantial changes in the terms of the merger throughout
the discussions between the parties and their representatives concerning the merger agreement that were mostly favorable to
Commerce Bank that required substantial discussions between the Commerce Bank’s board of directors, committees, its
financial advisor and counsel, and discussions between Commerce Bank’s committee with certain AltaPacific Bancorp
executives.
During the period of the negotiations concerning the definitive agreement from May through August 2016, both
Commerce Bank and AltaPacific Bancorp conducted due diligence and negotiated and exchanged drafts of the proposed
52
merger agreement and ancillary documents. The changes to the merger agreement and related documents, the strategic
alternatives for Commerce Bank, the competitive banking environment in California, the prospects for Commerce Bank if it
remained independent, and many other items as discussed in detail in Commerce Bank’s Reasons for the Merger contained
elsewhere in this proxy statement/prospectus were all thoroughly reviewed with the board of directors.
The terms which changed from AltaPacific Bancorp's initial draft of the merger agreement prior to August 8, 2016
included but were not limited to the addition of indemnity agreements by AltaPacific Bancorp for the benefit of the
Commerce Bank directors, the limit of Commerce Bank's transaction expenses at $2.4 million, contraction of certain
Commerce Bank representations and warranties, expansion of the forbearances of AltaPacific Bancorp pending the merger
and of its representatives and warranties, and the reduction of the proposed break-up fee due AltaPacific Bancorp from
$500,000 to $200,000 if the Commerce Bank shareholders failed to approve the transaction.
In order to determine if any modifications could be made to the terms of the transaction that would result in a
unanimous vote of the board of directors of Commerce Bank in favor of the transaction and the merger agreement,
AltaPacific Bancorp and its representatives continued to discuss the merger terms with Commerce Bank and its
representatives. The members of the board of directors opposed to the proposed transactions were directors Enrique Schon,
Jaqueline Schon, Paul Schon, Kumar Yamani and related parties, who are believed to hold collectively approximately 38.4%
of the outstanding shares of Commerce Bank common stock as of February 16, 2017.
During the course of the negotiations, AltaPacific Bancorp had been advised that some of the directors were more
interested in receiving AltaPacific Bancorp stock and some desired cash. AltaPacific Bancorp communicated an offer to
allow the Commerce Bank board the choice to select on behalf of Commerce Bank and its shareholders between (i) a 100%
cash transaction at $10.00 per Commerce Bank share, (ii) a 50% cash and 50% stock transaction, or (iii) a 40% stock and
60% cash transaction per Commerce Bank share. A $200,000 break-up fee for Commerce Bank was also added, to be paid to
Commerce Bank in the event AltaPacific Bancorp could not close the transaction. This fee had previously been requested by
a merger committee of the Commerce Bank board. AltaPacific Bancorp also withdrew its offer of a board seat to a
Commerce Bank director chosen by the Commerce Bank board due to the opposition of some Commerce Bank board
members to the transaction.
On August 3, 2016, the AltaPacific Bancorp board unanimously approved the merger agreement and transaction as
constituted at that time, and authorized management to negotiate any final changes to the terms of the merger agreement
without further board approval. Charles Hall, Frank Basirico and AltaPacific Bancorp legal counsel reviewed the final terms
of the merger agreement with the AltaPacific Bancorp board merger committee prior to the execution of the merger
agreement. The AltaPacific Bancorp board later ratified all changes that had been made to the merger agreement.
On August 26, 2016, after discussing the merger agreement and many other items, the Commerce Bank board
approved the final version of the merger agreement by a 7-4 vote, with Enrique Schon, Jaqueline Schon, Paul Schon and
Kumar Yamani voting against the transaction for several reasons, with the material objections described in the section
entitled “Commerce Bank’s Reasons for the Merger; Recommendation of Commerce Bank’s Board of Directors”
immediately following this section. The merger agreement was signed and the transaction was announced in a joint press
release after the stock market closed on September 1, 2016. Following the execution of the merger agreement on
September 1, 2016, Mr. Murray then reviewed and negotiated his employment agreement with AltaPacific Bank, which he
executed on September 6, 2016.
Commerce Bank’s Reasons for the Merger; Recommendation of Commerce Bank’s Board of Directors
General
A majority of the Commerce Bank board of directors believes that the terms of the merger agreement are advisable
and fair to, and in the best interests of, Commerce Bank and its shareholders. Accordingly, by a vote of seven to four, the
Commerce Bank board of directors has approved the merger agreement and recommends that Commerce Bank shareholders
vote “FOR” approval of the merger agreement and the merger.
In the course of reaching its determination, the Commerce Bank board of directors consulted with legal counsel with
respect to their legal duties and the terms of the merger agreement. The board also consulted with their financial advisor with
respect to the financial aspects of the transaction and the fairness of the merger consideration from a financial point of view.
The following discussion of the information and factors considered by the Commerce Bank board is not intended to
be exhaustive, but does include the material factors considered in reaching its determination that the merger is advisable and
53
fair to, and in the best interests of, Commerce Bank and its shareholders. The Commerce Bank board considered the
following:
•
information concerning the financial performance, financial condition, branch network, and business
operations of AltaPacific Bank/Bancorp;
•
the Commerce Bank board of directors’ knowledge and review, based in part on presentations by its
financial advisor and Commerce Bank’s management, of: (i) the business, operations, financial condition
and earnings of AltaPacific Bancorp on a historical and prospective basis and of the combined company on
a pro forma basis; and (ii) the potential for increased earnings for Commerce Bank shareholders as
shareholders of the combined company;
•
the anticipated positive effect of the merger on Commerce Bank’s existing shareholders, personnel,
customers and communities;
•
the anticipated premium to current market price for Commerce Bank’s common stock based on the
exchange ratio and the recent closing prices for AltaPacific Bancorp’s common stock;
•
the anticipated positive effect on earnings for both Commerce Bank’s shareholders and AltaPacific
Bancorp’s shareholders as a result of the merger;
•
the strategic options available to Commerce Bank and the board’s assessment that none of these options,
including remaining independent, is likely to present an opportunity to create value for Commerce Bank
shareholders that is greater than that created by the proposed merger with AltaPacific Bancorp;
•
the Commerce Bank board of directors’ review of the historical market prices of Commerce Bank’s
common stock compared to the exchange ratio of AltaPacific Bancorp common stock to be received by
Commerce Bank shareholders for each share of Commerce Bank common stock owned by them;
•
the terms of the merger agreement, which provide the board with an ability to respond to, and to accept, an
unsolicited offer that is determined by the board to be superior to the merger, if necessary, to comply with
the board’s fiduciary duties to Commerce Bank’s shareholders under applicable law;
•
the board’s knowledge and belief that Commerce Bank provides AltaPacific Bancorp with expanded
geographic markets, which strategically fit into AltaPacific Bancorp’s growth and expansion plans;
•
the financial presentation of Findley, Commerce Bank’s independent financial advisor, and the opinion of
Findley that as of the date of such opinion, the exchange ratio was fair from a financial point of view to the
holders of Commerce Bank common stock (see “—Opinion of Financial Advisors – Fairness Opinion for
Commerce Bank’s Board of Directors”);
•
the closing conditions in the merger agreement and the likelihood that the merger would be approved by the
requisite regulatory authorities;
•
the fact that the exchange of Commerce Bank common stock for AltaPacific Bancorp common stock in the
merger will be a tax deferred transaction to Commerce Bank’s shareholders; and
•
The financial presentation of Findley that the current operating environment favors larger banks and banks
with a clear growth strategy.
In addition to taking into account the foregoing factors, Commerce Bank’s board also considered the following
potentially negative factors in reaching its decision to approve the merger agreement:
•
the possibility that Commerce Bank would be substantially more profitable than expected or that another
acquiror would be willing to pay a higher price sometime in the future;
•
the limited liquidity in AltaPacific Bancorp common stock;
•
the significant break-up fee of $500,000, and in certain circumstances, $200,000, in relation to the size of
the transaction;
•
the possible effect of the public announcement of the transaction on the continuing commitment of
Commerce Bank’s management, employees and customers pending the consummation of the merger;
•
the possibility that AltaPacific Bancorp would be unable to effectively integrate the two companies or that
AltaPacific Bancorp would not be able to realize the cost savings that it has projected;
•
the interests of directors and executive officers of Commerce Bank that are different from, or in addition to,
the interests of Commerce Bank’s shareholders generally;
54
•
the 7-4 split on the board of directors of Commerce Bank on approval of the merger agreement, including
the opposition of director Enrique Schon, the indirect owner of 32.7% of the outstanding Commerce Bank
shares, and its potential impact on Commerce Bank’s ability to obtain shareholder approval of the merger
agreement; and
•
the reasons of the four directors (Enrique Schon, Jaquelyn Schon, Paul Schon and Kumar Yamani) for
opposing the merger transaction included, but are not limited to, the following: the belief that the
Commerce Bank stock will be worth substantially more in the future, the value of remaining independent
due to the diminished number of banks that could be available for sale, the interests of the President and
Chief Executive Officer who conducted many of the negotiations with AltaPacific Bancorp and the
severance to be received, whether the fairness opinion considered all aspects of the proposed combination
with AltaPacific Bancorp, whether the board of directors considered all strategic alternatives, whether all
aspects of the Commerce Bank’s due diligence of AltaPacific Bancorp were considered, the costs of the
transaction including the cost of terminating certain vendor contracts, and the substantial number of shares
represented by certain members of the board who are in opposition to the transaction.
The foregoing discussion of the information and factors considered by the Commerce Bank board includes the
primary material factors that the board considered. In view of the variety of factors considered in connection with its
evaluation of the merger, the board did not find it practicable to, and did not, quantify or otherwise assign relative or specific
weight or values to any of these factors, although individual directors may have given different weights to different factors.
The board considered all of the factors as a whole and considered the factors in their totality to be favorable to, and to support
the decision to approve, the merger agreement and the merger and to recommend their approval to the Commerce Bank
shareholders.
Board Approval
At various meetings in July and August 2016, including meetings on August 8, August 17, and August 26, 2016,
Commerce Bank’s board deliberated at length concerning the terms and conditions of a transaction with AltaPacific Bancorp.
There were substantial changes in the terms of the merger as compared to the terms originally proposed that required
substantial discussions between Commerce Bank’s board of directors, its financial advisor and counsel. The amendments to
the merger agreement and related documents, the strategic alternatives for Commerce Bank, the competitive banking
environment in California, and the prospects for Commerce Bank if it remained independent, were all thoroughly reviewed
with the board of directors. At the August 8, 2016 meeting, Findley also presented its analysis of the merger and its opinion
that the consideration to be received in the merger was fair to Commerce Bank’s shareholders from a financial point of view.
Thereafter, Commerce Bank’s board by a vote of seven to four approved and authorized the execution of the merger
agreement.
For reasons set forth above, the Commerce Bank board of directors, by a vote of seven to four, approved the
merger agreement as being in the best interest of Commerce Bank and its shareholders, and recommends that the
Commerce Bank shareholders vote “FOR” the merger agreement and the merger.
Opinion of Commerce Bank’s Financial Advisor
The board of directors of Commerce Bank has retained The Findley Group (“Findley”) to render financial advisory
and investment banking services. Findley is a regionally recognized investment banking firm with substantial expertise in
transactions similar to the proposed transaction and is familiar with Commerce Bank and its business. As part of its
investment banking business, Findley is regularly engaged in the valuation of financial services companies and their
securities in connection with mergers and acquisitions, private placements and valuations for estate, corporate and other
purposes.
On August 8, 2016, Findley met with the board of Commerce Bank to discuss whether the merger consideration to
be received by Commerce Bank common shareholders in the proposed transaction is fair, from a financial point of view, to
Commerce Bank’s common shareholders. Since that date Findley updated its evaluation of the transaction and issued an
opinion dated September 1, 2016 which is summarized in this proxy statement/prospectus.
For purposes of Findley’s review of the proposed transaction, Findley has, among other things:
•
reviewed the Execution Copy of the Agreement and Plan of Reorganization and Merger;
55
•
reviewed certain publicly available financial statements and related financial information of Commerce
Bank and AltaPacific Bancorp/AltaPacific Bank, including those included in their respective annual reports
for the past two years and their quarterly reports for the past two years;
•
held discussions with members of executive and senior management of Commerce Bank and AltaPacific
Bancorp/AltaPacific Bank concerning the past and current results of operations of Commerce Bank and
AltaPacific Bancorp/AltaPacific Bank, their current financial condition and managements’ opinion of their
respective future prospects;
•
reviewed the financial terms of merger and acquisition transactions, to the extent publicly available,
involving financial institutions and financial institution holding companies that Findley deemed to be
relevant; and
•
reviewed such other information, financial studies, analyses and investigations, as Findley considered
appropriate under the circumstances.
Findley’s opinion is necessarily based on economic, market, and other conditions as in effect on, and the
information made available to it as of, the date of the opinion. Events occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the securities markets, the results of operations or material changes in the
assets or liabilities of AltaPacific Bancorp/AltaPacific Bank or Commerce Bank could materially affect the assumptions used
in preparing the opinion. Findley assumed that all of the representations and warranties contained in the merger agreement
and all related agreements are true and correct, that each party to such agreements will perform all of the covenants required
to be performed by such party under such agreements and that the conditions precedent in the merger agreement are not
waived.
No limitations were imposed by Commerce Bank’s board of directors upon Findley with respect to the
investigations made or procedures followed in rendering its opinion. Findley’s opinion as expressed herein is limited to the
fairness, from a financial point of view, of the consideration to be received by Commerce Bank common shareholders in the
proposed transaction and does not address Commerce Bank’s underlying business decision to proceed with the proposed
transaction. Findley has been retained on behalf of the board of directors of Commerce Bank, and its opinion does not
constitute a recommendation to any shareholder of Commerce Bank as to how such shareholder should vote with respect to
the merger agreement.
In delivering its opinion to the board of directors of Commerce Bank, Findley prepared and delivered to Commerce
Bank’s board of directors written materials containing various analyses and other information. The following is a summary
of the material financial analyses performed by Findley in connection with the preparation of its opinion and does not purport
to be a complete description of all the analyses performed by Findley. The summary includes information presented in
tabular format, which should be read together with the text that accompanies those tables. The preparation of a fairness
opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances. Therefore, an opinion is not necessarily
susceptible to partial analysis or summary description. Findley believes that its analyses must be considered as a whole and
that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could
create an incomplete view of the analyses and the processes underlying its opinion. In its analyses, Findley made numerous
assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are
beyond the control of Commerce Bank and Findley. Any estimates contained in Findley’s analyses are not necessarily
indicative of future results or values, which may be significantly more or less favorable than such estimates. Estimates of
values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities
may actually be sold.
Summary of Proposal. Findley reviewed the financial terms of the proposed transaction. Pursuant to the terms of
the merger agreement, each share of Commerce Bank common stock issued and outstanding immediately prior to the
effective time (other than dissenting shares) shall be converted into the right to receive the following consideration:
•
the product of (a) $7,935,205, plus (b) the product of number of shares of Commerce Bank common stock
issued between the date of the merger agreement and the effective time pursuant to the exercise of
Commerce Bank stock options prior to the closing date, and $5.00, divided by the number of shares of
Commerce Bank common stock outstanding immediately prior to the effective time rounded up or down to
the nearest cent (the “per share cash consideration”); and
•
the product of (a) 902,789 shares of AltaPacific Bancorp common stock, plus (b) the product of 50% of the
number of shares of Commerce Bank common stock issued between the date of the merger agreement and
56
the effective time pursuant to the exercise of Commerce Bank stock options prior to the closing date, and
1.1377, subject to adjustment as provided in Section 2.5(j) of the merger agreement, divided by the number
of shares of Commerce Bank common stock outstanding immediately prior to the effective time (the “per
share stock consideration”).
Based on the aggregate cash consideration of $7,935,205 (before adjustments for stock options) and the aggregate
stock consideration of $8,666,774 (before adjustments for stock options) and based on a stock price of $9.60 per share for
AltaPacific Bancorp (the closing price on August 31, 2016), the per share merger consideration would equal $10.46. The per
share merger consideration of $10.46 represents a price to June 30, 2016 equity (after adjustment for the exercise of stock
83,000 stock options for aggregate consideration of $576,350 in August 2016) of 1.29x, a price to tangible equity of 1.29x, a
price to 2015 earnings of 29.8x, a price to estimated 2016 earnings of 6.27x, a price to June 30, 2016 assets of 21.7% and a
tangible premium on deposits at June 30, 2016 of 5.85%. It must be noted that Commerce Bank had a nonrecurring deferred
tax asset reversal during the first quarter which resulted in one time net income of about $2.318 million which, while
reflected in the book value per share multiple for June 30, 2016, does impact a multiple of estimated 2016 earnings which
without the one-time deferred tax reversal would be closer to 2015 earnings.
Stock Trading History. Findley reviewed the closing per share market prices and volumes for AltaPacific Bancorp
common stock and Commerce Bank common stock on a daily basis from April 1, 2016 to August 31, 2016. AltaPacific
Bancorp is trading on the OTC-Pink under the ticker symbol “ABNK”. For the period between April 1, 2016 and July 15,
2016, the closing price of AltaPacific Bancorp common stock ranged from a low of $9.10 to a high of $9.60. The closing
price on August 31, 2016 was $9.60 per share and the average daily trading volume for AltaPacific Bancorp was about 3,500
shares. AltaPacific Bancorp common stock is a thinly traded stock with limited volume.
Commerce Bank common stock trades on the OTC-Pink under the ticker symbol “CKTM”. For the period between
April 1, 2016 and August 31, 2016, the closing price of Commerce Bank common stock ranged from a low of $6.00 to a high
of $7.50. The closing price on August 31, 2016 was $7.50 per share and the average daily trading volume for Commerce
Bank was 82 shares. The transaction price of $10.46 represented a 39.5% premium over Commerce Bank’s closing price on
August 31, 2016. Commerce Bank common stock is a thinly traded stock with limited volume.
AltaPacific Bancorp Selected Company Analysis. Findley used publicly available information to compare selected
financial information for AltaPacific Bancorp and a selected group of financial institutions. The AltaPacific Bancorp peer
group consisted of publicly traded California banks with total assets between $250 million and $500 million, excluding
merger targets. While Findley believes that the banks listed below are similar to AltaPacific Bancorp, none of these banks
have the same composition, operations, size or financial profile as AltaPacific Bancorp.
Company
Ticker
Redwood Capital Bancorp
Community 1st Bancorp
Community Business Bank
Liberty Bancorp
New Resource Bank
Pinnacle Bank
United American Bank
American Riviera Bank
Suncrest Bank
Valley Commerce Bancorp
Communities First Financial Corp.
Bank of Santa Clarita
Mission Valley Bancorp
NCAL Bancorp
Pacific Commerce Bancorp
Broadway Financial Corp.
PBB Bancorp
Bank of So. California, N.A.
Private Bancorp of America, Inc.
Capital Bank
CommerceWestBank
RWCB
CFBN
CBBC
LIBC
NWBN
PBNK
UABK
ARBV
SBKK
VCBP
CFST
BSCA
MVLY
NCAL
PCBC
BYFC
PBCA
BCAL
PBAM
CBJC
CWBK
57
To perform this analysis, Findley used financial information as of March 31, 2016, a price of $9.60 for AltaPacific
Bancorp (the closing price on August 31, 2016) and pricing data for the peer group as of June 30, 2016 obtained from SNL
Financial LC. The following table sets forth the comparative financial and market data:
AltaPacific
Bancorp
Total assets (in millions)
Return on average assets
Return on average equity
Equity/assets
Loan loss reserve/gross loans
Nonperforming assets/assets
Efficiency ratio
Price/book value per share
Price/tangible book value per share
Price/last 12 months’ earnings per share
Per Group
Median
$366.40
1.07
7.22
14.62
1.35
n/a
65.22
101.05
108.35
11.35
$307.10
0.63
5.60
10.36
1.37
0.08
71.68
100.33
104.27
11.57
Analysis of Selected Financial Institution Transactions. Findley performed an analysis of the amount of
consideration paid in selected recently announced acquisitions of banking organizations with comparable characteristics to
the merger.
The set of comparable transactions consisted of a group of selected transactions for profitable banks in the western
United States, which included applicable California transactions, with total assets between $50 million and $200 million for
which pricing data were available. These comparable transactions consisted of 13 mergers and acquisitions of banks with
assets between $50 million and $200 million that were completed or have been announced and are yet to be completed
between January 1, 2014 and August 31, 2016. There were a few additional transactions announced but those announced
transactions were not consummated for a variety of reasons.
The analysis yielded multiples of the purchase prices in these transactions as shown below:
Maximum
Minimum
Median
Commerce Bank Offer1
Price/
Book (x)
Price/
Tg Book (x)
Price/LTM
Earnings (x)
Premium
Deposits (%)
1.77
0.68
1.18
1.29
1.77
0.68
1.18
1.29
65.00
NM
NM
29.80
13.71
(9.23)
2.40
5.85
The transaction value of $10.46 per share is within the range of implied values of comparable transactions, which
supports the fairness of the transaction.
No company or transaction used as a comparison in the above analysis is identical to Commerce Bank or the
proposed transaction. Accordingly, an analysis of these results is not strictly mathematical. An analysis of the results of the
foregoing involves complex considerations and judgments concerning differences in financial and operating characteristics of
Commerce Bank and the companies included in the comparable transactions.
Present Value Analysis. Findley calculated the present value of theoretical future earnings of Commerce Bank and
compared the transaction value to the calculated present value of Commerce Bank’s common stock on a stand-alone basis.
Based on projected earnings for Commerce Bank for 2016 through 2019, a discount rate of 14%, and including a residual
value, the stand-alone present value of Commerce Bank equaled $8.10 per share. The transaction value of $10.46 per share is
above this value, which supports the fairness of the transaction.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Findley estimated the net present value of
the future streams of after-tax cash flow that Commerce Bank could produce to benefit a potential acquirer, referred to as
1
Based on Commerce Bank’s June 30, 2016 financials and assumes merger consideration of $16,601,979.40 or $10.46 per share. Also based upon
Commerce Bank’s 2015 earnings per share. As of June 30, 2016, Commerce Bank had shareholder equity of $12,282,000 however in August 2016 83,000
stock options of Commerce Bank were exercised at an average price of $6.94 per share for an increase in shareholder equity of $576,350.
58
dividendable net income, and added a terminal value. Based on projected earnings for Commerce Bank for 2016 through
2019, Findley assumed after-tax distributions to a potential acquirer such that its tier 1 leverage ratio would be maintained at
8.00%. The terminal values for Commerce Bank were calculated based on Commerce Bank’s projected 2019 earnings times
18 and a price to tangible book multiple of 1.25 and utilized a discount rate of 14%. This discounted cash flow analysis
indicated implied values of $7.55 per share and $7.33 per share. The transaction value of $10.46 per share is above these
values, which supports the fairness of the transaction.
Pro Forma Merger Analysis. Findley performed pro forma merger analyses to calculate the financial implications
of the merger to Commerce Bank shareholders. This analysis assumes, among other things, the terms of the transaction as
indicated above, that the merger closes at December 31, 2016 and cost savings and revenue enhancement opportunities of
about $1,000,000 annually in the years 2017 through 2019, which approximates 35% of Commerce Bank’s 2016 overhead
expenses. This analysis utilized stand-alone earnings estimates of $.70 per share in 2016 and $0.77 per share in 2017 for
AltaPacific Bancorp and stand-alone earnings estimates of $0.37 per share for Commerce Bank in 2016 (adjusting for the
one-time deferred tax assets recovery) and $0.41 per share in 2017 for Commerce Bank. This analysis indicated that the
merger would be accretive to Commerce Bank’s projected earnings per share in 2017.
Pursuant to the terms of an engagement letter with Commerce Bank, Findley will receive a fee of $19,000 upon
delivery of its opinion. Findley’s fee is not contingent upon consummation of the proposed transaction.
No principal of Findley or its affiliated entities has any ownership in Commerce Bank or AltaPacific Bancorp
common stock.
The fairness opinion is directed only to the question of whether the merger consideration is fair from a financial
perspective and does not constitute a recommendation to any of Commerce Bank’s shareholders to vote in favor of the
merger.
Based on the results of the various analyses described above, Findley has concluded that the merger consideration to
be received by Commerce Bank shareholders pursuant to the merger is fair from a financial point of view.
Board of Directors, Management and Operations After the Merger
At the effective time of the merger, Commerce Bank will merge with and into AltaPacific Bank. As a result,
Commerce Bank will cease to exist as a separate bank, and all of its assets, liabilities and operations will be held and
managed by AltaPacific Bank as the surviving bank. Pursuant to Section 4888 of the California Financial Code, at the close
of the merger, Commerce Bank’s headquarters office will become a branch banking office of AltaPacific Bank, and all safe
deposit, deposit and loan customers of Commerce Bank will, by operation of law, become customers of AltaPacific Bank.
Commerce Bank’s directors will cease to hold board positions at the effective time of the bank merger. AltaPacific Bank’s
board of directors and principal executive officers will not change as result of the bank merger.
Director and Executive Officer Voting, Non-Solicitation and Non-Competition Agreements
In connection with entering into the merger agreement, AltaPacific Bancorp entered into voting, non-competition
and non-solicitation agreements with six of the current non-employee directors of Commerce Bank, which agreements we
refer to collectively as the director voting agreements. Also in connection with the merger agreement, AltaPacific Bancorp
entered into voting and non-solicitation agreements with Commerce Bank’s three executive officers (one of whom is also a
director), which agreements we refer to collectively as the officer voting agreements and, collectively with the director voting
agreements, the voting agreements. The following summary of the director and officer voting agreements is subject to, and
qualified in its entirety by reference to, the form of director and officer agreements attached as Exhibits A and B,
respectively, to the merger agreement which is appended to this proxy statement/prospectus as Appendix A.
Pursuant to the voting agreements, each shareholder party to a voting agreement agreed to vote his or her shares of
Commerce Bank common stock:
•
in favor of approval of the merger agreement and the merger and any other transactions contemplated by
the merger agreement; and
•
against any action, agreement or transaction that is intended, or could reasonably be expected, to materially
impede, interfere or be inconsistent with, delay, postpone, discourage or materially and adversely affect the
59
consummation of the merger or the performance by the director of his or her obligations under the merger
agreement.
The voting agreements also provide that each shareholder party to a voting agreement will not, other than pursuant
to the merger, directly or indirectly:
•
sell (including short sell), transfer, pledge, assign, tender, encumber, grant a participation interest in,
hypothecate or otherwise dispose of (including by gift) any of such shareholder’s shares of Commerce
Bank common stock;
•
enter into any contract or understanding providing for any action described in the preceding bullet; or
•
take any other action that could reasonably be expected to impair or otherwise adversely affect, in any
material respect, the director’s power, authority and ability to comply with and perform his or her
covenants and obligations under the merger agreement.
In addition, the director voting agreements provide that the director shall not, for a period of two years after the
effective time of the merger:
•
solicit the banking business of any customer of AltaPacific Bank, AltaPacific Bancorp or Commerce Bank;
•
acquire, charter, operate, enter into any management agreement with, or serve as an officer, director,
employee, agent, promoter, or consultant to, any financial institution located in Riverside, San Bernardino
and San Diego counties in California; or
•
hire, recruit or discuss employment, or assist others in so doing, with any person who was a Commerce
Bank employee in the 12 months prior to the date of the merger agreement.
The director voting agreements do not require any director to divest any passive interest in a covered financial
institution, refrain from becoming a shareholder of no more than 4.9% of any “covered financial institution” as defined in the
agreements, resign from any board position at a covered financial institution held as of the date of merger agreement.
The non-competition provisions of the director voting agreements do not apply to executive officers. Instead, the
officer voting agreements provide that for a period of one year after the executive ceases to be employed by Commerce Bank,
AltaPacific Bank or AltaPacific Bancorp, the executive will not hire, recruit or discuss employment with any person who was
an employee of any of these entities in the 45 days prior to such executive’s termination date; and further that such officer
shall not use or disclose trade secrets with limited exceptions as provided in the officer voting agreements.
Interests of Directors and Officers in the Merger
In considering the recommendation of a majority of Commerce Bank’s board of directors that you vote to approve
the merger agreement, you should be aware that some of Commerce Bank’s executive officers and directors have financial
interests in the merger that are different from, or in addition to, those of Commerce Bank shareholders generally. The
members of Commerce Bank’s board of directors were aware of and considered these interests, among other matters, in
evaluating and negotiating the merger agreement and the merger, and in recommending to the shareholders that the merger
agreement be approved. These interests are detailed below.
Share Ownership
Seven of Commerce Bank’s directors and all of its executive officers, who collectively owned approximately 17.7%
of Commerce Bank’s outstanding shares as of the record date, have entered into voting agreements pursuant to which, among
other things, they have agreed to vote their shares in favor of the merger. Four of Commerce Bank’s directors, owning
approximately 37.7% of Commerce Bank’s outstanding shares of common stock as of the record date, have indicated that
they intend to vote their shares against the merger. All directors and executive officers of Commerce Bank, whether or not
they vote their shares in favor of the merger, will receive the same merger consideration as all other Commerce Bank
shareholders. No directors of Commerce Bank own shares of AltaPacific Bancorp stock.
For information on stock options held by Commerce Bank’s executive officers and directors, see “— Stock Options”
below in this section.
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Retention Incentives
AltaPacific Bank has entered into an employment agreement with Donald Murray, Chairman of the Board, President
and Chief Executive Officer (CEO) of Commerce Bank, for a period of two (2) years commencing on the effective date of
the merger. Mr. Murray will serve as Executive Vice President, report to AltaPacific Bank’s President/Chief Operating
Officer (President/COO), and provide leadership in planning and implementing the conduct of AltaPacific Bank’s business
and affairs in Riverside and North San Diego Counties and other regions within Southern California, subject to the direction
of AltaPacific Bank’s President/COO. Mr. Murray will receive a base salary of $190,000 per year; eligibility for a bonus in
the discretion of AltaPacific Bank’s CEO; reimbursement of business expenses; eligibility to participate in all employee
benefit plans maintained by AltaPacific Bank, a car allowance of $750 per month, cell phone reimbursement of $100 per
month; and stock options to purchase 10,000 shares of AltaPacific Bancorp common stock. The agreement also provides that
Mr. Murray shall receive the balance of his salary (plus any accrued but unused vacation) through the end of the agreement
term if he is terminated without cause during the first 23 months of the term; and for a period of 30 days after the date of
termination if so terminated during the final month of the term.
AltaPacific Bank has also entered into an employment agreement with LouEllen Ficke, Executive Vice President
and Chief Financial Officer (CFO) of Commerce Bank, for a period of one (1) year commencing on the effective date of the
merger. Ms. Ficke will serve as Senior Vice President, report to Mr. Murray, and provide leadership in the retention of
customers, planning and implementing the conduct of AltaPacific Bank’s business and affairs in Riverside and North San
Diego Counties, subject to the direction of Mr. Murray. Ms. Ficke will receive a base salary of $80,000 per year; eligibility
for a bonus in the discretion of AltaPacific Bank’s CEO; reimbursement of business expenses; eligibility to participate in all
employee benefit plans maintained by AltaPacific Bank, cell phone reimbursement of $100 per month; and stock options to
purchase 2,000 shares of AltaPacific Bancorp common stock. The agreement also provides that Ms. Ficke shall receive the
balance of her salary (plus any accrued but unused vacation) through the end of the agreement term if she is terminated
without cause during the first 11 months of the term; and for a period of 30 days after the date of termination if so terminated
during the final month of the term.
Commerce Bank anticipates that some of its officers and employees at the effective time will be retained as officers
and employees of AltaPacific Bank, and as such will be entitled to participate in all employee benefits and benefit programs
of AltaPacific Bank on the same basis as similarly situated employees of AltaPacific Bank. The merger agreement provides
that full-time employees of Commerce Bank who are not retained by AltaPacific Bank following the close of the merger will
be entitled to certain severance benefits to be paid by AltaPacific Bank, unless such employee has an employment agreement
or other agreement or arrangement otherwise providing for severance payments.
Change in Control Payments
Because the merger will constitute a “change in control” of Commerce Bank, certain executive officers of
Commerce Bank will be entitled to change in control payments under the terms of their employment agreements upon
termination at the close of the merger. Specifically, Donald Murray, Chairman of the Board, President and CEO; LouEllen
Ficke, Executive Vice President and CFO; and Carl Patsko, Executive Vice President and CCO; have each executed
employment agreements with Commerce Bank pursuant to which upon consummation of the merger, they will be entitled to
receive payments upon termination equal to two years of annual salary plus medical benefits in effect at termination. The
amount of severance was increased from one year to two years on October 20, 2015. The salary payments would be
$380,000, $310,000 and $280,000 for Mr. Murray, Ms. Ficke and Mr. Patsko, respectively. Reimbursements for medical
insurance premiums for 24 months (or until other employment is found, which includes employment with AltaPacific Bank)
would be $13,631, $11,819 and $12,195 for Mr. Murray, Ms. Ficke and Mr. Patsko, respectively. At the close of the merger
Mr. Murray’s and Ms. Ficke’s employment agreements with Commerce Bank will be terminated upon payment of their
$380,000 and $310,000 severance amounts, respectively, and will be superseded by their employment agreements with
AltaPacific Bank.
Protection of Directors, Officers and Employees Against Claims
Pursuant to the terms of the merger agreement, AltaPacific Bancorp has agreed to maintain and preserve the
indemnification rights of Commerce Bank directors and officers after the completion of the merger as provided in Commerce
Bank’s articles of incorporation and bylaws as in effect as of the date of the merger agreement. AltaPacific Bancorp has also
agreed to enter into new indemnification agreements with the Commerce Bank directors and officers after the completion of
the merger in the form attached as an exhibit to the merger agreement. AltaPacific Bancorp has also agreed to allow
Commerce Bank to purchase “tail coverage” for a period of three years in order to continue providing liability insurance,
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including directors’ and officers’ liability insurance, to the officers and directors of Commerce Bank equivalent to the
coverage in effect just before the close of the merger.
Stock Options
Commerce Bank has previously granted stock options to certain executive officers and directors under its 2007
Stock Option Plan. Under the terms of the merger agreement and the option plan, all such options will become 100% vested
and fully exercisable for a designated period of time prior to the effective time of the merger and contingent upon the
consummation of the merger. Any option holder electing to exercise outstanding stock options prior to the merger will
receive the same merger consideration as any other Commerce Bank shareholder. Holders of in-the-money stock options
who choose to execute cancellation agreements instead of exercising their stock options will be entitled to receive $10.00 per
share minus the exercise price of the corresponding Commerce Bank stock option.
The following table sets forth information concerning outstanding stock options held by each Commerce Bank
director and executive officer holding Commerce Bank stock options, including the amount of cash that such individual
would receive in the merger for his or her options, if not exercised:
Cash
Consideration for
Stock Options
Name
Position
LouEllen Ficke
Executive Vice President
and Chief Financial Officer
Director
30,047
−
n/a
n/a
−
n/a
n/a
Philip D. Oberhansley
Chairman, President
and Chief Executive Officer
Director
−
n/a
n/a
Thomas T. Pangelinan
Director
Carl P. Patsko
Enrique Schon
Executive Vice President
and Chief Credit Officer
Director
Jaquelyn Schon
Nancy K. Hughes
Donald W. Murray
Stock Options
Average
Exercise
Price
$10.00
$
0
6,260
10.00
0
10,000
4.00
60,000
−
n/a
n/a
Director
−
n/a
n/a
Paul Schon
Director
−
n/a
n/a
Richard K. Shuman, M.D.
Director
6,864
Thomas G. Williams, M.D.
Director
−
Gerald R. Wilson
Director
6,260
Kumar S. Yamani
Director
−
10.00
n/a
10.00
n/a
0
n/a
0
n/a
Accounting Treatment of the Merger
AltaPacific Bancorp will account for the merger using the acquisition method of accounting for financial reporting
purposes, which follows accounting principles generally accepted in the United States of America. Under this method,
AltaPacific Bancorp will recognize Commerce Bank’s assets acquired and liabilities assumed based upon their estimated fair
values as of the date AltaPacific Bancorp obtains control of Commerce Bank, which is expected to be upon completion of the
merger. Deferred tax assets and liabilities will be established for the difference between the tax basis of the assets and
liabilities and their basis under the acquisition method. The excess, if any, of the total purchase consideration over the net
assets acquired will be recognized as goodwill and periodically evaluated for impairment. AltaPacific Bancorp’s financial
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statements issued after completion of the merger will reflect these values, but historical data are not restated retroactively to
reflect the combined historical financial position or results of operations of AltaPacific Bancorp and Commerce Bank.
Shareholder Approval
The affirmative vote of at least a majority of the shares of Commerce Bank common stock outstanding as of the
record date for the special meeting is required to approve the merger agreement and the merger. Each holder of shares of
Commerce Bank stock outstanding on the record date for the special meeting will be entitled to one vote for each share held.
As of February 16, 2017, the record date for the special meeting, there were 1,616,041 shares of Commerce Bank common
stock outstanding. Therefore, at least 808,021 shares of Commerce Bank common stock must be affirmatively voted in favor
of the merger agreement to constitute the required approval of Commerce Bank shareholders. Abstentions, failures to vote
and broker non-votes will have the same effect as votes against approval of the merger agreement.
Dissenters’ Rights of Commerce Bank Shareholders
The holders of Commerce Bank common stock will be given the opportunity to exercise dissenters’ rights in
accordance with certain procedures specified in Chapter 13 of the Corporations Code. Please note that the description below
does not purport to be a complete statement of the law relating to dissenters’ rights and is qualified in its entirety by reference
to Sections 1300, 1301, 1302, 1303 and 1304 of the Corporations Code, which sections are attached hereto as Appendix B
and incorporated herein by reference.
Holders of Commerce Bank stock who do not vote in favor of the merger may demand, in accordance with Chapter
13 of the Corporations Code, that Commerce Bank acquire their shares for cash at their fair market value as of the day of and
immediately prior to the first public announcement of the merger, excluding any change in such value as a consequence of
the proposed merger.
Submit a Written Demand
In order to exercise dissenters’ rights, a Commerce Bank shareholder must not vote in favor of the merger agreement
and must make a written demand that Commerce Bank purchase his or her shares in cash for the fair market value and have
the demand received by Commerce Bank within 30 days after the date on which the notice of the approval of the merger
agreement and the merger is mailed to the shareholder. The written demand must state the number of shares held of record
by such Commerce Bank shareholder for which demand for purchase for cash is being made and must contain a statement of
the amount which such Commerce Bank shareholder claims to be the fair market value of the shares as of the day of and
immediately prior to the first public announcement of the merger, excluding any change in such value as a consequence of
the proposed merger. That statement will constitute an offer by the Commerce Bank shareholder to sell his or her shares to
Commerce Bank at that price. Once submitted, a Commerce Bank shareholder may not withdraw such demand unless
Commerce Bank consents thereto.
Surrender Stock Certificates
Thereafter, in order to perfect dissenters’ rights, a Commerce Bank shareholder must also deliver his or her share
certificate(s) for receipt by Commerce Bank or its successor or representative within 30 days after the date on which notice of
the closing of the merger was mailed. Commerce Bank will stamp or endorse the certificate(s) with a statement that the
shares are dissenting shares and return the certificate(s) to such Commerce Bank shareholder.
Any demands, notices, certificates or other documents delivered to Commerce Bank in connection with the exercise
of dissenters’ rights should be sent to AltaPacific Bancorp, as successor or representative for Commerce Bank, Attention:
Allen R. Christenson, 4845 Old Redwood Highway, Santa Rosa, California 95403, telephone: (707) 543-2704.
Determination of Value of Commerce Bank Common Stock
The purchase price for the shares of Commerce Bank common stock that dissent to the merger agreement will be the
fair market value for such shares as of the day of and immediately prior to the first public announcement of the merger,
excluding any change in such value as a consequence of the proposed merger. The board of directors of Commerce Bank has
determined that the fair market value of a share of Commerce Bank common stock as of September 1, 2016, the day of and
immediately prior to the first public announcement of the merger was $7.50. If there is a disagreement between the
shareholder and Commerce Bank regarding the proposed purchase price or if Commerce Bank denies that such shares
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constitute dissenting shares, the shareholder and Commerce Bank each have the right, for six (6) months following the date
on which notice of the closing of the merger was mailed, to file a lawsuit in the Superior Court of the County of Riverside to
have the fair market value determined by a court or to determine whether such shares are dissenting shares or both, as the
case may be.
Regulatory Approvals Required for the Merger
Consummation of the merger requires, among other things, the approvals of the Federal Reserve and the DFI, as the
primary banking regulators for AltaPacific Bank, as well as the approval of the Federal Reserve as the primary federal
regulator for AltaPacific Bancorp. Applications for the necessary approvals were filed in late October 2016.
In reviewing the applications, those regulatory agencies take into consideration, among other things, competition,
the financial and managerial resources and future prospects of the companies, and the convenience and needs of the
communities to be served. Federal law prohibits these federal regulatory agencies from approving a merger if the merger
would result in undue concentration of resources or decreased or unfair competition, unless the anti-competitive effects of the
merger are clearly outweighed by the benefits to the public. The approval of the merger and the merger agreement by the
applicable regulatory agencies will reflect only their respective view that the transactions do not contravene applicable
competitive standards imposed by law and is consistent with regulatory policies relating to safety and soundness. These
regulatory agencies express no opinion as to the financial consideration paid to the Commerce Bank shareholders, nor do
these regulatory agencies express any opinion as to the adequacy of the terms of the merger agreement and the merger.
The federal banking agencies have the authority to deny the application for approval of the merger if they conclude
that the combined organization would have an inadequate capital structure, taking into account, among other factors, the level
of problem assets, the nature of the business and operations and plans for expansion. Furthermore, these agencies must also
evaluate the records of AltaPacific Bank and Commerce Bank in meeting the credit needs of their respective communities,
including low- and moderate-income neighborhoods, consistent with safe and sound operation under the federal Community
Reinvestment Act of 1977 (“CRA”). AltaPacific Bank and Commerce Bank both received a “satisfactory” performance
rating in their most recent CRA evaluations.
Similarly, the DFI has the authority to deny the application for approval of a merger if it finds any of the following:
(i) the merger will result in a monopoly or is in furtherance of a conspiracy to monopolize the banking business in California;
(ii) the merger will substantially lessen competition or otherwise restrain trade or the anticompetitive effects of the merger
outweigh the benefits of the merger in meeting the convenience and needs of the communities to be served by the surviving
bank; (iii) the shareholders’ equity of the surviving bank will not be adequate or the financial condition of the surviving bank
will be unsatisfactory; (iv) the directors and management of the surviving bank will be unsatisfactory; (v) the surviving bank
cannot provide the DFI with a reasonable promise of successful operation or that the surviving bank will be operated in a safe
and sound manner in compliance with all applicable laws; or (vi) the merger is not fair, just or equitable to the respective
parties.
As of the date of this proxy statement/prospectus, the required regulatory approvals of the merger from the Federal
Reserve and the DFI have all been received. AltaPacific Bancorp has also applied for and received a permit under the
California Corporate Securities Law to issue the shares of common stock to be issued as merger consideration in the merger
and a determination, after a noticed hearing, of the fairness of the terms and conditions of the issuance of those shares. This
fairness determination provides AltaPacific Bancorp with the basis for an exemption from the registration requirements of the
Securities Act for the issuance of its shares in the merger.
The approvals by our regulators do not constitute endorsements of the merger. Neither AltaPacific Bancorp nor
Commerce Bank is aware of any other regulatory approvals that would be required for completion of the merger except as
described above. Should any other approvals be required, it is presently contemplated that such approvals would be sought.
There can be no assurance, however, that any other approvals, if required, will be obtained.
Any transaction approved by the Federal Reserve under the Bank Merger Act may not be completed until 30 days
after the Federal Reserve’s approval, during which time the U.S. Department of Justice may challenge such transaction on
antitrust grounds. With the approval of the Federal Reserve and the U.S. Department of Justice, the waiting period may be
reduced to 15 days. As of the date of this proxy statement/prospectus, the applicable waiting period has expired.
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Resale of AltaPacific Bancorp Common Stock
Fairness Hearing. The shares of AltaPacific Bancorp common stock will be issued in reliance on an exemption
from registration provided by Section 3(a)(10) of the Securities Act. The availability of the Section 3(a)(10) exemption is
contingent upon the determination by an appropriate governmental authority, after a public hearing at which all interested
parties are invited to attend, that the terms and conditions of the issuance of the AltaPacific Bancorp common stock in
connection with the merger are fair. On February 9, 2017, the DOC conducted a public hearing pursuant to Section 25142 of
the Corporate Securities Law of 1968 concerning AltaPacific Bancorp’s proposed issuance of common stock in the merger
and determined that the terms and conditions of the proposed issuance are fair, thereby satisfying the Section 3(a)(10)
condition.
Transferability of Shares. The shares of AltaPacific Bancorp common stock issued in reliance on the exemption
from registration provided by Section 3(a)(10) of the Securities Act will be freely tradable for purposes of the Securities Act,
except for shares of AltaPacific Bancorp received by any such holder who is or becomes an “affiliate” of AltaPacific Bancorp
after completion of the merger.
Exchange of Certificates
Surrender of Shares
No later than five business days after the effective time, Computershare will mail each shareholder of record at the
effective time, a customary transmittal letter and instructions with respect to the delivery by Commerce Bank shareholders to
the exchange agent of their Commerce Bank share certificates in exchange for the merger consideration. As of the effective
time, there will be no further transfers on the stock transfer books of Commerce Bank of any shares of Commerce Bank
common stock. If certificates representing shares of Commerce Bank common stock are presented to AltaPacific Bancorp
for any reason after the completion of the merger, they will be cancelled and exchanged for the merger consideration into
which the shares of Commerce Bank common stock represented by those certificates shall have been converted.
All shares of AltaPacific Bancorp common stock issued to shareholders of Commerce Bank in the merger will be
deemed issued as of the effective time of the merger, but until Commerce Bank stock certificates are surrendered for
exchange, a shareholder will not receive any dividends or other distributions that may be declared after the effective time
with respect to the shares of AltaPacific Bancorp common stock into which the Commerce Bank shares may have been
converted. Such dividends or other distributions will accrue, however, and when the Commerce Bank certificates are
surrendered, AltaPacific Bancorp will pay any such unpaid dividends or other distributions, as well as any cash into which
any of the shares may have been converted, without interest.
The Exchange Agent
The parties have agreed that AltaPacific Bancorp shall designate Computershare, or another person reasonably
acceptable to Commerce Bank, to act as exchange agent in the merger with respect to the payment of the merger
consideration to Commerce Bank shareholders.
At any time following the six-month anniversary of the effective time, AltaPacific Bancorp will be entitled to
require the exchange agent to deliver to it any portion of the merger consideration not disbursed to shareholders of
Commerce Bank common stock, and thereafter such holders shall be entitled to look only to AltaPacific Bancorp (subject to
abandoned property, escheat or other similar laws) as general creditors with respect to the merger consideration payable upon
due surrender of their Commerce Bank common stock, without interest. Notwithstanding the foregoing, neither AltaPacific
Bancorp nor the exchange agent will be liable to any Commerce Bank shareholder for merger consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or similar law.
Lost, Stolen or Destroyed Certificates
If your certificate for shares of Commerce Bank common stock has been lost, stolen or destroyed, please contact
Commerce Bank’s transfer agent, Computershare, at (800) 522-6645 for a replacement certificate.
After the merger, if any certificate for Commerce Bank common stock has been lost, stolen or destroyed, the
exchange agent or AltaPacific Bancorp, as applicable, will issue the merger consideration to the holder of such certificate
upon the making of an affidavit of such fact by such holder, provided that the exchange agent, in its reasonable discretion and
65
as a condition to such payment, may require the owner of such lost, stolen or destroyed certificate to deliver a customary
indemnity agreement or provide a bond in a customary amount.
Rights of Holders of Commerce Bank Stock Certificates Until Surrender
If a dividend or other distribution on AltaPacific Bancorp common stock is declared by AltaPacific Bancorp with a
record date after the effective time of the merger, you will not receive that dividend or distribution until you surrender your
Commerce Bank stock certificate(s). If your stock certificates are lost or destroyed, you must submit documentation to the
exchange agent that is acceptable to AltaPacific Bancorp and to the exchange agent of your ownership of Commerce Bank
stock. Any dividends or distributions withheld from you ultimately will be remitted to you when you deliver your Commerce
Bank stock certificate(s) (or substitute documentation if your certificates are lost or destroyed), but they will be remitted to
you without interest and less any taxes that may have been imposed.
Otherwise, notwithstanding the time of surrender of their certificates representing Commerce Bank stock,
Commerce Bank shareholders who receive stock consideration in the merger will be deemed shareholders of AltaPacific
Bancorp for all purposes from the effective time of the merger, except that they will not be able to vote as shareholders of
AltaPacific Bancorp until their shares have been exchanged so that they can be counted as shareholders of record as to any
matter to be voted on.
THE MERGER AGREEMENT
Explanatory Note Regarding the Merger Agreement
The merger agreement and the related agreements attached as exhibits thereto govern the structure of the merger
pursuant to which Commerce Bank will merge with and into AltaPacific Bank, which will survive the bank merger and
continue commercial bank operations under its California state charter and as the wholly-owned subsidiary of AltaPacific
Bancorp.
Representations and Warranties of the Parties
The merger agreement contains customary representations and warranties of the parties that are typical in a merger
of financial institutions.
Commerce Bank’s representations and warranties relate to, among other things:
•
organization, standing, corporate power and authority to engage in the transaction;
•
capital structure;
•
financial statements, regulatory reports, undisclosed liabilities and absence of changes;
•
compliance with applicable legal and reporting requirements;
•
accounting and internal controls;
•
legal proceedings;
•
taxes;
•
material contracts;
•
benefit plans;
•
agreements with regulatory agencies;
•
anti-takeover statutes;
•
the necessary vote to approve the merger agreement and the merger;
•
ownership of properties;
•
condition of assets;
•
intellectual property;
•
derivatives;
•
the loan portfolio;
•
insurance;
•
transactions with affiliates;
66
•
absence of certain business practices;
•
environmental compliance;
•
Community Reinvestment Act compliance;
•
Fair Housing Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act and Equal
Credit Opportunity Act compliance;
•
usury and other consumer compliance laws;
•
unfair, deceptive or abusive acts or practices;
•
consumer complaints;
•
the Bank Secrecy Act, Foreign Corrupt Practices Act and U.S.A. Patriot Act;
•
books and records;
•
employee relationships;
•
brokers or finders;
•
transaction expenses;
•
receipt of a fairness opinion; and
•
the absence of any fact or circumstance that would impair Commerce Bank’s ability to fulfill its material
obligations under the agreement or to close the transaction.
AltaPacific Bancorp’s representations and warranties relate to, among other things:
•
organization, standing, corporate power and authority to engage in the transaction;
•
capital structure;
•
financial statements, regulatory reports and undisclosed liabilities;
•
compliance with applicable legal and reporting requirements;
•
accounting and internal controls;
•
taxes;
•
loan portfolio;
•
absence of certain business practices;
•
environmental compliance;
•
brokers or finders;
•
legal proceedings;
•
agreements with regulatory agencies;
•
financing;
•
Community Reinvestment Act compliance;
•
Fair Housing Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act and Equal
Credit Opportunity Act compliance;
•
unfair, deceptive or abusive acts or practices;
•
the Bank Secrecy Act, Foreign Corrupt Practices Act and U.S.A. Patriot Act;
•
the absence of any fact or circumstance that would impair AltaPacific Bancorp’s ability to fulfill its
material obligations under the agreement or to close the transaction;
•
regulatory capital;
•
transactions with affiliates and insider loans;
•
insurance;
•
usury laws and other consumer compliance laws;
•
books and records; and
•
certain agreements.
The foregoing is an outline of the representations and warranties made respectively by AltaPacific Bancorp to
Commerce Bank, and Commerce Bank to AltaPacific Bancorp contained in the merger agreement attached as Appendix A to
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this proxy statement/prospectus and incorporated by reference herein. You should carefully review the entire merger
agreement, and in particular Articles 4 and 5, containing the detailed representations and warranties of the parties.
Conduct of the Parties Prior to Completion of the Merger
Commerce Bank, AltaPacific Bank and/or AltaPacific Bancorp
Until the effective time of the merger, except as expressly permitted by the merger agreement or consented to in
writing by the other party, Commerce Bank and AltaPacific Bank and/or AltaPacific Bancorp, as appropriate, have mutually
agreed, among other things, to:
•
carry on their businesses in the usual, regular and ordinary course consistent with past practice; use all
commercially reasonable efforts to preserve intact their present business organizations; maintain their
rights, franchises, licenses and other authorizations issued by governmental entities; preserve their
relationships with directors, officers, employees, customers, suppliers and others having business dealings
with them; and maintain their respective properties and assets; to the end that their goodwill and ongoing
businesses shall not be impaired in any material respect as of the effective time;
•
in the case of AltaPacific Bancorp and Commerce Bank, not (i) declare or pay any dividends on or make
other distributions in respect of any of their capital stock, (ii) split, combine, exchange, adjust or reclassify
any of their capital stock or issue or authorize or propose the issuance or authorization of any other
securities in respect of, in lieu of or in substitution for, shares of their capital stock, or (iii) purchase,
redeem or otherwise acquire, any shares of their capital stock or securities convertible into or exercisable
for and shares of their capital stock, subject to certain exceptions (including in the case of AltaPacific
Bancorp, pursuant to its existing stock repurchase program; and in the case of Commerce Bank, pursuant to
outstanding Commerce Bank stock option agreements);
•
in the case of AltaPacific Bancorp and Commerce Bank, not issue, deliver or sell, or authorize or propose
the issuance, delivery or sale of, any shares of their capital stock of any class, any voting debt, any stock
appreciation rights or any securities convertible into or exercisable or exchangeable for, or any rights,
warrants or options to acquire, any such shares or voting debt, or enter into any agreement with respect to
any of the foregoing except, in the case of AltaPacific Bancorp, for options or other stock awards made to
eligible recipients pursuant to its 2016 Equity Incentive Plan and any shares issued with respect thereto;
•
not intentionally take any action that would, or reasonably might be expected to, result in any of its
representations and warranties being or becoming untrue, or in any of the conditions to the merger not
being satisfied or in a violation of any provision of the merger agreement, or (unless such action is required
by applicable legal requirements) which would adversely affect the ability of the parties to obtain any of the
requisite regulatory approvals without imposition of a condition or restriction that constitutes a materially
burdensome regulatory condition to approval of the merger;
•
in the case of AltaPacific Bancorp and Commerce Bank, not make any material change to its methods of
accounting in effect at June 30, 2016, except as required by changes in GAAP as concurred in by
Commerce Bank’s independent auditors or required by any governmental entity or at the specific written
request of AltaPacific Bancorp;
•
in the case of AltaPacific Bancorp and Commerce Bank, not make or rescind any tax election, make any
amendments to tax returns previously filed, or settle or compromise any tax liability or refund, without the
prior written consent of AltaPacific Bancorp, which consent shall not unreasonably be withheld,
conditioned or delayed;
•
not materially restructure or materially change (on a consolidated basis) their investment securities
portfolios, their hedging strategy or their interest rate risk positions, through purchases, sales or otherwise,
or the manner in which their investment securities portfolios are classified or reported or materially
increase the credit or other risk concentrations associated with their investment securities portfolios;
provided, however, that the foregoing shall not restrict the purchase or sale of investment securities in the
ordinary course of business consistent with past practice;
•
in the case of AltaPacific Bancorp and Commerce Bank, not adopt a plan of complete or partial liquidation
or resolutions providing for or authorizing such a liquidation or a dissolution, restructuring, recapitalization
or reorganization;
•
other than sales of other real estate (OREO) and nonperforming assets in the ordinary course of business
consistent with past practice; sales of OREO or non-performing assets at a price that equals or exceeds the
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book value of such assets (net of allocated reserves); sales of performing loans and investment securities in
the ordinary course of business consistent with past practice; or in the case of Commerce Bank, except as
requested in writing by AltaPacific Bancorp; neither party shall sell, lease, assign, encumber or otherwise
dispose of, or agree to sell, lease, assign, encumber or otherwise dispose of, any of its assets (including
indebtedness of others held by the relevant entity) which are material, individually or in the aggregate, to
Commerce Bank or AltaPacific Bancorp;
•
not incur, create or assume any long-term indebtedness for borrowed money (or without the written consent
of the other party, modify any of the material terms of any such outstanding long-term indebtedness),
guarantee any such long-term indebtedness or issue or sell any long-term debt securities or warrants or
rights to acquire any long-term debt securities or guarantee any long-term debt securities, other than (i)
indebtedness in the ordinary course of business consistent with past practice (including advances under
existing lines of credit with the FHLB of San Francisco or the Federal Reserve Bank Discount Window);
(ii) prepayments or voluntarily repayments of subordinated indebtedness or trust preferred securities; or
(iii) in the case of AltaPacific Bank, long-term indebtedness incurred by on commercially reasonable terms
in an aggregate principal amount not exceeding $10.0 million; and
•
not agree to, or make any commitment to, take, or authorize, any of the actions prohibited by the foregoing.
Commerce Bank Only
In addition to the reciprocal agreements discussed in the previous section, Commerce Bank has agreed that until the
close of the merger, it will:
•
not (i) enter into any new material line of business, (ii) change its lending, investment, underwriting, risk
and asset-liability management or other material banking or operating policies in any respect which is
material to Commerce Bank, except as required by applicable legal requirements or by policies imposed by
a governmental entity, (iii) incur or commit to any capital expenditures or any obligations or liabilities in
connection therewith other than capital expenditures and obligations or liabilities incurred or committed to
in the ordinary course of business consistent with past practice, (iv) enter into or terminate any material
lease, contract or agreement, or make any change to any existing material leases, contracts or agreements,
except in the ordinary course of business consistent with past practice or (v) take any action or fail to take
any action, which action or failure causes a material breach of any material lease, contract or agreement;
•
not amend or propose to amend their articles of incorporation, bylaws or similar organizational documents,
as applicable, or, except to the extent permitted by in connection with an acquisition proposal that
constitutes a superior proposal, enter into a plan of consolidation, merger or reorganization with any
person;
•
not acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in any
assets of, by forming a partnership or joint venture with, or in any other manner, any business or any
corporation, partnership, association or other business organization or division thereof or otherwise acquire
or agree to acquire any material assets not in the ordinary course of business; provided, however, that the
foregoing shall not prohibit foreclosures, repossessions or other acquisitions through foreclosure in the
ordinary course of business;
•
submit a complete loan write-up to the chief credit officer of AltaPacific Bank at least two business days
prior to taking action to make, commit to make, renew, extend the maturity of, or alter any of the material
terms of (i) any loan or group of loans to any one borrower or related group of borrowers that, individually
or collectively, would be in excess of $250,000 ($500,000 in the case of renewals), or (ii) a loan in any
amount that is rated below “pass;” and
•
not (i) enter into, adopt, amend (except for such amendments as may be required by applicable legal
requirements) or terminate any of its benefit plans, or any agreement, arrangement, plan or policy between
Commerce Bank and one or more of its directors or officers, (ii) except for normal payments, awards and
increases in the ordinary course of business or as required by any plan or arrangement as in effect as of the
date of the merger agreement, increase in any manner the compensation or benefits of any director, officer
or employee or pay any benefit not required by any plan or arrangement as in effect as of the date of the
merger agreement or enter into any contract, agreement, commitment or arrangement to do any of the
foregoing, provided further that, any retention bonuses payable shall not be paid to the employees until
satisfactory completion of such employees’ duties under the retention bonus arrangements, (iii) enter into
or renew any contract, agreement, commitment or arrangement (other than a renewal occurring in
accordance with the terms thereof) providing for the payment to any director, officer or employee of
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compensation or benefits contingent, or the terms of which are materially altered, upon the occurrence of
any of the transactions contemplated by the merger agreement or (iv) provide that, with respect to the right
to any bonus or incentive compensation and the grant of any stock option, restricted stock, restricted stock
unit or other equity-related award pursuant to Commerce Bank benefit plans or otherwise granted on or
after the date of the merger agreement, the vesting of any such bonus, incentive compensation, or stock
option, restricted stock, restricted stock unit or other equity-related award shall accelerate or otherwise be
affected by the occurrence of any of the transactions contemplated by the merger agreement, either alone or
in combination with some other event.
In addition, Commerce Bank has agreed in the merger agreement that before the merger becomes effective, it will:
•
cooperate with AltaPacific Bancorp in the preparation of this proxy statement/prospectus;
•
establish a record date for, call, give notice of, convene and hold a meeting of its shareholders as promptly
as reasonably practicable for the purpose of submitting the merger to the Commerce Bank shareholders;
•
use its reasonable commercially best efforts to solicit or cause to be solicited from the Commerce Bank
shareholders the required shareholder approval of the merger agreement and the merger, and to recommend
that Commerce Bank’s shareholders vote in favor of the merger;
•
take all other lawful action necessary or advisable (including, subject to the Commerce Bank board’s
exercise of its fiduciary duties, postponing or adjourning the Commerce Bank shareholders meeting to
obtain a quorum or to solicit additional proxies in favor of the adoption of the merger agreement) to obtain
the required approval of the Commerce Bank shareholders;
•
provide AltaPacific Bancorp access to all its properties, books, contracts and records and, during such
period, make available to AltaPacific Bancorp (i) a copy of each report, schedule, registration statement
and other document filed or received by it during such period pursuant to the requirements of federal or
state securities laws, federal or state banking laws or the rules and regulations of self-regulatory
organizations (other than reports or documents which it is not legally permitted to disclose) and (ii) all
other information concerning its business, properties and personnel as AltaPacific Bancorp may reasonably
request;
•
use all commercially reasonable best efforts to take, or cause to be taken, all actions necessary or advisable
to consummate the merger and the bank merger and make effective the other transactions contemplated
herein as promptly as reasonably practicable;
•
terminate if requested to do so by AltaPacific Bancorp, no later than immediately before the closing date,
any Commerce Bank benefit plans and to accrue any and all obligations with respect to the termination of
such plans before the closing date;
•
pay or accrue for all transaction expenses in full prior to the closing date and update its disclosure schedule
at least three business days prior to the closing to reflect the final transaction expenses; and
•
at least 10 days prior to the projected closing, provide AltaPacific Bancorp with supplemental disclosure
schedules reflecting any material changes since the date of the merger agreement.
AltaPacific Bancorp and AltaPacific Bank Only
In addition to the reciprocal agreements discussed above under “ – Conduct of the Parties Prior to Completion of the
Merger − Commerce Bank, AltaPacific Bank and/or AltaPacific Bancorp” beginning on page 68, AltaPacific Bank and
AltaPacific Bancorp, as appropriate, have agreed to:
•
not amend or propose to amend their articles of incorporation, bylaws or similar organizational documents,
as applicable, except as may be required to effectuate the merger;
•
not acquire or agree to acquire, by merging or consolidating with, or by purchasing an equity interest in any
assets of, any bank or other depository institution or division thereof or otherwise acquire or agree to
acquire any material assets of any business not in the ordinary course of business; provided, however, that
the foregoing shall not prohibit foreclosures, repossessions or other acquisitions through foreclosure in the
ordinary course of business;
•
timely make all regulatory filings and any other filings required to be filed with any applicable bank
regulator or governmental entity;
70
•
comply in all material respects with all of the applicable rules enforced or promulgated by any bank
regulator or governmental entity with which it makes any regulatory filing;
•
indemnify the officers, directors and employees of Commerce Bank against losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the
fact that such person is or was a director, officer or employee of Commerce Bank, and maintain effective
directors’ and officers’ liability insurance for former Commerce Bank directors and officers for a period of
three years following the close of the merger equivalent to the coverage in effect just prior to the close of
the merger; and
•
not enter into any agreement with any person that (i) would restrict AltaPacific Bank and/or AltaPacific
Bancorp’s ability to comply with any of the terms of the merger agreement, (ii) relates to any acquisition
proposal that would materially impair AltaPacific Bank’s and/or AltaPacific Bancorp’s ability to
consummate the merger and the transactions contemplated by the merger agreement, or (iii) relates to any
acquisition proposal, unless such acquisition proposal requires the completion of the merger and payment
of the merger consideration to the Commerce Bank shareholders as provided in the merger agreement prior
to completion of any other acquisition proposal respecting AltaPacific Bancorp.
Agreements of Commerce Bank Relating to Alternative Acquisition Proposals
Commerce Bank has agreed not to (i) solicit, initiate, endorse, or knowingly encourage the making of any inquiry,
proposal or offer with respect to, or the making or completion of, any “acquisition proposal,” or any inquiry, proposal or offer
that is reasonably likely to lead to any acquisition proposal; (ii) engage in any discussions or negotiations with or provide any
nonpublic information to any person concerning an acquisition proposal, or knowingly facilitate any effort or attempt to make
or implement an acquisition proposal, or (iii) approve, endorse or recommend (including by resolution or otherwise of the
Commerce Bank board), or propose to approve, endorse or recommend, or execute or enter into, any letter of intent,
agreement in principle, memorandum of understanding, term sheet, merger agreement, asset purchase, share exchange
agreement, option agreement or other similar agreement (whether binding or not) related to any acquisition proposal (other
than an acceptable confidentiality agreement) or (iv) propose or agree to do any of the foregoing.
Under the terms of the merger agreement, an “acquisition proposal” means any inquiry, proposal or offer with
respect to any transaction contemplating a merger, reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving Commerce Bank or any purchase or sale of 10% or
more of its consolidated assets taken as a whole, or any purchase or sale of, or tender or exchange offer for, its voting
securities that, if consummated, would result in any person (or the shareholders of such person) beneficially owning
securities representing 10% or more of its total voting power (or of the surviving parent entity in such transaction).
Commerce Bank may, prior to obtaining shareholder approval of the merger agreement and the merger, engage in
discussions or negotiations with, and provide confidential information to, a person who has submitted an acquisition proposal
only if the Commerce Bank board determines, after consultation with outside counsel and its financial advisors that the
acquisition proposal is likely to lead to a “superior proposal.” In such case, Commerce Bank must enter into a confidentiality
agreement that is at least as restrictive as the one entered into with AltaPacific Bancorp in connection with the merger and
provide AltaPacific Bancorp with prior notice before engaging in such discussions or negotiations, or providing such
confidential information, and thereafter must keep AltaPacific Bancorp informed on a current basis of the status of such
discussions and negotiations. Commerce Bank must notify AltaPacific Bancorp promptly upon receiving any acquisition
proposal, inquiry or request for information, including the identity of the third party and the material terms and conditions of
any expressions of interest, offers, proposals, request or inquiries.
Commerce Bank’s board is not permitted to withdraw, modify, amend or qualify its recommendation in a manner
adverse to AltaPacific Bancorp; adopt a resolution to that effect; publicly announce its intention to do so; approve, endorse or
recommend any acquisition proposal with respect to Commerce Bank, or cause, authorize or permit Commerce Bank to enter
into any letter of intent, memorandum of understanding, agreement-in-principle, merger agreement, asset purchase or share
exchange agreement, acquisition agreement or other similar agreement relating to any acquisition proposal except a
confidentiality agreement that is at least as restrictive as that entered into with AltaPacific Bancorp or a definitive agreement
providing for a superior proposal; or publicly propose or announce an intention to do so.
Notwithstanding the agreements set forth in the preceding paragraph, the Commerce Bank board may, prior to
receiving shareholder approval of the merger agreement and the merger proposal, change its recommendation that the
shareholders approve the merger agreement and merger proposal if it determines in good faith and after consulting with its
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outside attorneys and financial advisor, that it would be a breach of its fiduciary duties if it were not to do so, which we refer
to as a “change in recommendation.”
Notwithstanding the preceding paragraph, the Commerce Bank board may not make a change in recommendation
(and may not terminate the merger agreement in the case of a “superior proposal”), unless: (A) an unsolicited, bona fide
written offer to effect an acquisition proposal is made to Commerce Bank; (B) the unsolicited, bona fide, written offer was
not obtained or made in violation of Commerce Bank’s non-solicitation obligations; (C) Commerce Bank has complied in all
material respects with its obligations to notify AltaPacific Bancorp regarding any acquisition proposal; (D) Commerce Bank
notifies AltaPacific Bancorp at least three business days in advance of any intended board meeting at which the board of
directors intends to consider and determine whether to make a change in recommendation, including the date and time,
reasons and material terms and conditions of the acquisition proposal being considered, and the identity of the person making
the competing offer; (E) Commerce Bank permits AltaPacific Bancorp the opportunity engage in good faith negotiations to
amend the merger agreement in order to match the competing proposal; (F) after such negotiations, the Commerce Bank
board nevertheless concludes that the alternative proposal is a superior proposal and that the failure to make a change in
recommendation would constitute a breach of its fiduciary duties to its shareholders under applicable law, and Commerce
Bank thereafter enters into a definitive agreement for the superior proposal and concurrently terminates the merger agreement
and pays AltaPacific Bancorp a termination fee of $500,000.
A “superior proposal” is defined in the merger agreement to mean an unsolicited, bona fide written acquisition
proposal for 100% of the Commerce Bank common stock, which the Commerce Bank board concludes in good faith, after
consultation with outside counsel or its financial advisor, taking into account all legal, financial, regulatory and other aspects
of such acquisition proposal and the person making such acquisition proposal (including any break-up fees, expense
reimbursement provisions and conditions to consummation), (i) is more favorable to the shareholders of Commerce Bank,
from a financial point of view, than the transactions contemplated by the merger agreement, and (ii) in the case of any
acquisition proposal contemplating cash consideration, is not subject to any financing contingencies, and (iii) is reasonably
likely to receive all required governmental approvals on a timely basis and otherwise reasonably capable of being completed
on the terms proposed without unreasonable delay in relation to what is customary for a transaction of the nature so proposed.
Conditions to Both Parties’ Obligations Under the Merger Agreement
The respective obligations of each party under the merger agreement are subject to the fulfillment at or prior to the
closing date of the following conditions:
•
all regulatory approvals and other necessary approvals, authorizations and consents of any governmental
entities required to consummate the merger and the bank merger will have been obtained and are in full
force and effect, and all waiting periods relating to such approvals, authorizations or consents shall have
expired;
•
no injunction or other legal prohibition will have been issued against the merger;
•
the DOC will have issued a permit qualifying the maximum number of shares of AltaPacific Bancorp
common stock that may be issued in the merger following a public hearing on the fairness of the terms and
conditions of the merger agreement;
•
Commerce Bank shall have received a written opinion from its financial advisor, The Findley Group,
stating that the per share merger consideration is fair to shareholders of Commerce Bank from a financial
point of view; and
•
the merger agreement and merger will have been approved by the requisite vote of the shareholders of
Commerce Bank.
Conditions to AltaPacific Bancorp’s Obligations Under the Merger Agreement
The obligations of AltaPacific Bancorp under the merger agreement are also subject to the satisfaction of the
following conditions at or prior to the closing date:
•
the representations and warranties of Commerce Bank set forth in the merger agreement shall be true and
correct as of the date of the merger agreement and as of the closing date of the merger as though made on
and as of the closing date, except as otherwise permitted under the terms of the merger agreement and
AltaPacific Bancorp shall have received a certificate, dated as of the closing date of the merger, signed on
behalf of Commerce Bank by the Chief Executive Officer and the Chief Financial Officer to such effect;
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•
Commerce Bank shall have performed in all material respects all obligations required to be performed by it
under the merger agreement at or prior to the closing date of the merger, and AltaPacific Bancorp shall
have received a certificate, dated as of the closing date of the merger, signed on behalf of Commerce Bank
by the Chief Executive Officer and the Chief Financial Officer to such effect;
•
Commerce Bank shall have obtained all material permits, authorizations, consents, waivers, clearances or
approvals required for the lawful consummation of the merger;
•
no regulatory approvals and other necessary approvals, authorization or consent shall include any condition
or requirement (i) requires any of the parties, including the surviving bank, to pay any amounts (other than
customary filing fees), or divest any banking office, line of business or operations, or (ii) imposes any
condition, requirement or restriction upon AltaPacific Bancorp or AltaPacific Bank that would, individually
or in the aggregate, reasonably be expected to impose a materially burdensome condition on AltaPacific
Bancorp or AltaPacific Bank, as applicable, or otherwise would materially alter the economics of the
merger for AltaPacific Bancorp;
•
there shall not have occurred any event, circumstance, change, occurrence or state of facts that, individually
or in the aggregate with all such other events, circumstances, changes occurrences or states of facts, has
resulted in or would reasonably be expected to result in, a materially adverse effect on Commerce Bank;
•
as of the closing, Commerce Bank's allowance for loan losses, determined in accordance with GAAP, shall
be no less than 1.43% of gross loans;
•
as of the closing, Commerce Bank's total shareholders' equity, determined in accordance with GAAP, but
excluding any transaction expenses that are within a defined expense cap in the merger agreement, shall be
not less than $12.2 million;
•
as of the closing, Commerce Bank’s total transaction expenses as defined in the merger agreement shall not
exceed $2.4 million minus the amount, if any, by which total data processing contract and other
information technology termination costs are less than $1.0 million;
•
accuracy of each party's representations and warranties, a material adverse effect has not occurred, and
compliance in all material respects by each party with its covenants under the merger agreement;
•
AltaPacific Bancorp must have received an opinion dated as of the date of the closing of the merger, from
Vavrinek, Trine, Day & Co., LLP, to the effect that the merger will qualify as a “reorganization” within the
meaning of Section 368(a) of the Internal Revenue Code; and
•
Commerce Bank shall have delivered executed option cancellation agreements from each holder of a
Commerce Bank in-the-money stock option.
Conditions to Commerce Bank’s Obligations Under the Merger Agreement
The obligations of Commerce Bank under the merger agreement are subject to the satisfaction of the following
conditions at or prior to the closing date:
•
the representations and warranties of AltaPacific Bancorp set forth in the merger agreement shall be true
and correct as of the date of the merger agreement and as of the closing date of the merger as though made
on and as of the closing date, except as otherwise permitted under the terms of the merger agreement and
Commerce Bank shall have received a certificate, dated as of the closing date of the merger, signed on
behalf of AltaPacific Bancorp by the Chief Executive Officer and the Chief Financial Officer to such
effect;
•
AltaPacific Bancorp shall have performed in all material respects all obligations required to be performed
by it under the merger agreement at or prior to the closing date of the merger, and Commerce Bank shall
have received a certificate, dated as of the closing date of the merger, signed on behalf of AltaPacific
Bancorp by the Chief Executive Officer and the Chief Financial Officer to such effect;
•
no event, circumstance, change, occurrence or state of facts shall have occurred that, individually or in the
aggregate with all such other events, circumstances, changes occurrences or states of facts, has resulted in
or could reasonably be expected to result in, a material adverse effect as to AltaPacific Bancorp; and
•
AltaPacific Bancorp shall have delivered to the exchange agent for delivery to the holders of Commerce
Bank common stock, the merger consideration on or prior to the closing date.
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Termination; Effect of Termination
The obligations of the parties to consummate the merger are subject to certain closing conditions, some of which
may not be waived by a party, including but not limited to the receipt of all required shareholder and regulatory approvals
and other governmental consents, and some conditions which may be waived by a party in its discretion. The failure of a
condition to the closing of the merger, to the extent not waived, may result in a termination of the merger agreement and the
merger. For a more detailed discussion of the conditions to the closing of the merger, please see “ – Conditions to Both
Parties’ Obligations Under the Merger Agreement,” “ − Conditions to AltaPacific Bancorp’s Obligations Under the Merger
Agreement,” and “– Conditions to Commerce Bank’s Obligations Under the Merger Agreement” above.
Further, the merger agreement permits the parties to terminate the merger agreement and abandon the merger: (i) by
mutual agreement in writing; (ii) if a governmental entity has denied approval of the merger or the bank merger and such
denial has become final and nonappealable, or takes final and nonappealable action to enjoin, restrain or prohibit the merger
or the bank merger (provided that the party seeking to terminate has not caused or materially contributed to such denial);
(iii) if any application shall have been denied or withdrawn at the request of the regulators; or (iv) if the merger is not
consummated by March 31, 2017, which date may be extended one or more times, but not to a date any later than June 30,
2017, by notice from either party to the other on or before March 31, 2017 (or the date to which the agreement has been then
been most recently extended), if the only condition to the closing that has not been satisfied or is not capable of being
satisfied as of the date such notice is delivered is receipt of any required regulatory approval or shareholder approval and the
satisfaction of such condition remains reasonably possible, as determined by AltaPacific Bancorp in good faith.
Either party may terminate the merger agreement if (i) the other party breaches any of the covenants or agreements
or any of the representations or warranties set forth in the merger agreement that individually or in the aggregate would result
in a material adverse effect on that party, or if such breach continued through the closing date and would cause the failure of
a fundamental closing condition that has not been (or cannot by its nature be) cured within 30 days following written notice
thereof to the breaching party; or (ii) a vote shall have been taken at the special meeting of the Commerce Bank shareholders
(including any adjournments thereof) and the required vote of Commerce Bank shareholders shall not have been obtained; or
(iii) a material adverse effect shall have occurred with respect to the other party.
AltaPacific Bancorp may terminate the merger agreement and merger if (i) Commerce Bank fails to hold its
shareholder meeting before February 15, 2017 (which date AltaPacific Bancorp has agreed to extend to April 30, 2017),
unless the delay is due to regulatory action or inaction; or (ii) any regulatory application is approved with commitments,
understandings or conditions which impose a materially burdensome condition on AltaPacific Bancorp or AltaPacific Bank,
as applicable, or otherwise would materially alter the economics of the merger for AltaPacific Bancorp.
AltaPacific Bancorp, upon written notice to Commerce Bank, may also terminate the merger agreement if (i) the
Commerce Bank board effects a change in recommendation or fails to recommend approval of the merger agreement and the
merger; (ii) Commerce Bank enters into a definitive agreement providing for a superior proposal, (iii) the Commerce Bank
board of directors fails to reaffirm its recommendation that shareholders approve the merger agreement and merger within
two business days (or such longer period of time that the Commerce Bank board determines in good faith is reasonably
necessary to comply with its fiduciary duties) of a written request by AltaPacific Bancorp to do so following the date any
acquisition proposal or any material change thereto is first publicly announced, published or sent to Commerce Bank’s
shareholders; (iv) a tender offer or exchange offer (whether or not conditional) relating to shares of Commerce Bank’s capital
stock shall have been commenced and the Commerce Bank board (or any committee thereof) fails to affirmatively
recommend against such tender offer or exchange offer within 10 business days after the commencement of such tender offer
or exchange offer, or (v) Commerce Bank intentionally breaches its non-solicitation obligations, or its obligations with
respect to the call and notice of a meeting of its shareholders to approve the merger agreement and the merger.
Commerce Bank may terminate the merger agreement if it enters into a definitive agreement providing for a superior
acquisition proposal prior to the receipt shareholder approval of the merger agreement and merger; provided, it not in breach
of the merger agreement. Commerce Bank may also terminate the agreement if AltaPacific Bancorp enters into an agreement
that (i) would restrict AltaPacific Bank and/or AltaPacific Bancorp’s ability to comply with any of the terms of the merger
agreement, (ii) relates to any acquisition proposal that would materially impair AltaPacific Bank’s and/or AltaPacific
Bancorp’s ability to consummate the merger and the transactions contemplated by the merger agreement, or (iii) relates to
any acquisition proposal, unless such acquisition proposal requires the completion of the merger and payment of the merger
consideration to the Commerce Bank shareholders as provided in the merger agreement prior to completion of any other
acquisition proposal respecting AltaPacific Bancorp.
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Commerce Bank has agreed to pay a termination fee of $500,000 to AltaPacific Bancorp if: (i) the merger agreement
is terminated by Commerce Bank in order to enter into a definitive agreement providing for a superior acquisition proposal;
(ii) AltaPacific Bancorp terminates the merger agreement due to no Commerce Bank recommendation; or (iii) any person has
made an acquisition proposal, which proposal has been publicly announced, disclosed or proposed and not withdrawn, and
(a) thereafter the merger agreement is terminated (I) by either party because the Commerce Bank shareholders have not
approved the merger agreement and merger; or (II) by AltaPacific Bancorp pursuant to the termination provision for breach
provision and (b) within 12 months after such termination of the merger agreement, Commerce Bank consummates an
acquisition proposal or any definitive agreement with respect to an acquisition proposal is entered into (provided that an
“acquisition proposal” for this purpose is the acquisition of 50%, rather than 10%, of the total voting power of the surviving
entity).
In the event the merger agreement is terminated due to a failure to obtain the approval of Commerce Bank’s
shareholders, then Commerce Bank will be obligated to pay AltaPacific Bancorp a termination fee of $200,000. If the
merger agreement is terminated due to a breach by either party of its representations and warranties or obligations under the
merger agreement, then the breaching party will be obligated to pay $200,000 to the non-breaching party.
Amendment, Extension and Waiver
At any time prior to the effective time of the merger (whether before or after approval thereof by the shareholders of
Commerce Bank), the board of directors of the parties may: (i) amend the merger agreement, (ii) extend the time for the
performance of any of the obligations or other acts of any other party thereto, (iii) waive any inaccuracies in the
representations and warranties contained in the merger agreement or in any document delivered pursuant thereto, or
(iv) waive compliance with any of the agreements or conditions contained in the merger agreement; provided, however, that
no amendment shall be made without the approval of the shareholders of the parties, if such approval is required by law.
Employee Benefits
The merger agreement provides that full-time employees of Commerce Bank who are not retained by AltaPacific
Bank following the close of the merger will be entitled to severance payments equal two weeks of such terminated
employee’s salary or wages for each full or partial year of service to Commerce Bank completed prior to the closing, subject
to a minimum of two weeks and a maximum of 12 weeks’ severance payment, calculated at the rate paid to such former
Commerce Bank employee immediately prior to the closing; provided that no such benefits shall be paid if such employee
has an employment agreement or other agreement or arrangement otherwise providing for severance payments. See
“PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE MERGER – Interests of Directors and Officers in the
Merger – Retention Incentives” at page 61 for a description of benefits under the new retention plan for certain executive
officers.
In addition, prior to the effective time of the merger, Commerce Bank will take all action necessary to terminate all
other compensation or benefit plan identified by AltaPacific Bancorp. Termination of any such plans is subject to compliance
with applicable law, and will not reduce any benefits already accrued thereunder. Commerce Bank will accrue any and all
obligations with respect to the termination of such plans before the effective time of the merger. The employees of
Commerce Bank who are employed by AltaPacific Bank after the effective time or who are offered and who accept
employment with AltaPacific Bank shall be eligible to participate in AltaPacific Bank’s employee benefit plans in which, and
to the same extent as, similarly situated employees of AltaPacific Bank participate. Former Commerce Bank employees’
service with Commerce Bank shall be treated as service with AltaPacific Bank for purposes of determining eligibility to
participate, vesting and benefits.
Expenses
Except as specifically set forth in the merger agreement, all expenses incurred by AltaPacific Bancorp and
Commerce Bank in connection with or related to the authorization, preparation and execution of the merger agreement, the
solicitation of shareholder approvals and all other matters related to the closing of the merger, will be borne solely and
entirely by the party which incurred such expense.
Closing; Effective Time of the Merger
The closing of the merger will occur not later than the 10th calendar day following the latest to occur of: (i) the
receipt of all regulatory approvals required to complete the merger; (ii) the receipt of shareholder approval, (iii) the
satisfaction or waiver of all closing conditions, or (iv) the passing of any applicable waiting periods; or at such other date or
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time upon which the parties hereto will mutually agree. The merger will be effected by the filing of an Agreement of Merger
in the form attached as Exhibit C to the merger agreement with the California Secretary of State on the day of the closing in
accordance with Section 1200 of the Corporations Code. The “effective time” of the merger will be the date and time upon
which the Agreement of Merger is filed with the California Secretary of State.
The parties are working to complete the merger in the second quarter of 2017. However, no assurances can be
provided as to whether or when the merger will actually close.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
This section describes the material United States federal income tax consequences of the merger to U.S. holders of
Commerce Bank common stock who exchange shares of Commerce Bank common stock for shares of AltaPacific Bancorp
common stock, cash, or a combination of shares of AltaPacific Bancorp common stock and cash pursuant to the merger. For
purposes of this discussion, a “U.S. holder” is a beneficial owner of Commerce Bank common stock that for U.S. federal
income tax purposes is:
•
a citizen or individual resident of the United States;
•
a corporation, or an entity treated as a corporation for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or any state or political subdivision thereof;
•
a trust that (1) is subject to (A) the primary supervision of a court within the United States and (B) the
authority of one or more United States persons to control all substantial decisions of the trust or (2) has a
valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person;
or
•
an estate that is subject to U.S. federal income tax on its income regardless of its source.
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes)
holds Commerce Bank common stock, the tax treatment of a partner generally will depend on the status of the partner and the
activities of the partnership. A Commerce Bank shareholder which is a partnership should consult its tax advisor concerning
the tax consequences of the merger.
Commerce Bank shareholders that are not U.S. holders may have different tax consequences than those described
below, and are urged to consult their tax advisors about the tax treatment of the merger to them under U.S. and non-U.S.
laws.
This discussion addresses only those Commerce Bank shareholders that hold their Commerce Bank common stock
as a capital asset within the meaning of Section 1221 of the Internal Revenue Code, and does not address all the U.S. federal
income tax consequences that may be relevant to particular Commerce Bank shareholders in light of their individual
circumstances or to Commerce Bank shareholders that are subject to special rules, such as:
•
financial institutions;
•
pass-through entities or investors in pass-through entities;
•
insurance companies;
•
tax-exempt organizations;
•
dealers in securities;
•
traders in securities that elect to use a mark-to- market method of accounting;
•
persons owning 5% or more of Commerce Bank common stock or that are affiliates of Commerce Bank;
•
persons that hold Commerce Bank common stock as part of a straddle, hedge, constructive sale or
conversion transaction;
•
certain expatriates or persons that have a functional currency other than the U.S. dollar;
•
persons who are not U.S. holders; and
•
shareholders who acquired their shares of Commerce Bank common stock through the exercise of an
employee stock option or otherwise as compensation or through a tax-qualified retirement plan.
In addition, the discussion does not address any alternative minimum tax or any state, local or foreign tax
consequences of the merger, nor does it address any tax consequences arising under the unearned income Medicare
contribution tax.
The following discussion is based on the Internal Revenue Code, its legislative history, existing and proposed
regulations, thereunder, and published rulings and decisions, all as currently in effect as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. Any such change could affect the continuing validity of this
discussion.
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The obligation of AltaPacific Bancorp to complete the merger is conditioned upon the receipt of an opinion from its
independent auditors, Vavrinek, Trine, Day & Co., LLP, to the effect that, for U.S. federal income tax purposes, the merger
will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. Such opinion will be
based on certain assumptions and representations as to factual matters by AltaPacific Bancorp and Commerce Bank.
AltaPacific Bancorp does not currently intend to waive this opinion condition to its obligation to complete the merger. If
AltaPacific Bancorp does waive this condition, Commerce Bank shareholders will be informed of this decision prior to being
asked to vote on the merger.
The following discussion, subject to the limitations and qualifications described herein, summarizes the material
U.S. federal income tax consequences of the merger applicable to a U.S. holder of Commerce Bank common stock that
exchanges Commerce Bank common stock in the merger, to the extent such discussion sets forth statements of U.S. federal
income tax law or legal conclusions with respect thereto. This discussion does not address any state, local or foreign tax
consequences of the merger. It is based on certain assumptions and representations as to factual matters by AltaPacific
Bancorp and Commerce Bank, and cannot be relied upon if any of the assumptions or representations are inaccurate as of the
date hereof or the effective time of the merger. In addition, the discussion is based on current law and cannot be relied upon
if current law changes with retroactive effect. The discussion also relies on the opinion of Vavrinek that the merger will
qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code, which opinion is not
binding upon the Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service or a
court will not take a contrary position. AltaPacific Bancorp has not requested and does not intend to request any ruling from
the Internal Revenue Service as to the U.S. federal income tax consequences of the merger.
A Commerce Bank shareholder may not necessarily receive cash and/or shares of AltaPacific Bancorp common
stock in the proportion(s) that such shareholder has elected. Accordingly, it will not be possible for holders of Commerce
Bank common stock to determine the specific tax consequences of the merger to them at the time they submit their election
form.
Commerce Bank shareholders are urged to consult their tax advisors as to the particular U.S. federal income
tax consequences of the merger to them, as well as any tax consequences arising under any state, local and non-U.S.
tax laws or any other U.S. federal tax laws.
Based on and subject to the foregoing, the following material U.S. federal income tax consequences will result to a
U.S. holder of Commerce Bank common stock that elects to exchange its Commerce Bank common stock in the merger:
•
a U.S. holder receiving only cash in the merger will recognize gain or loss, determined separately for each
identifiable block of shares of Commerce Bank common stock (generally, Commerce Bank common stock
acquired at the same cost in a single transaction) exchanged by the U.S. holder in the merger, equal to the
difference between the amount of cash received in the merger with respect to such block and the U.S.
holder’s tax basis in the shares of Commerce Bank common stock in such block. Such gain or loss
generally will be capital gain, and will be long-term capital gain if, as of the effective date of the merger,
the applicable shares of Commerce Bank common stock were held for more than one year (unless the
receipt of cash has the effect of a distribution of a dividend under the provisions of the Internal Revenue
Code, discussed below, as to which U.S. holders should consult their tax advisors);
•
ignoring any cash received in lieu of a fractional share of AltaPacific Bancorp common stock (which is
discussed below), a U.S. holder receiving only shares of AltaPacific Bancorp common stock in the merger
will not recognize gain or loss in the merger;
•
a U.S. holder receiving cash and shares of AltaPacific Bancorp common stock in exchange for each
identifiable block of Commerce Bank common stock exchanged by the U.S. holder in the merger generally
will recognize gain (but not loss), in an amount equal to the lesser of (i) the amount of cash received with
respect to such block, excluding any cash received in lieu of a fractional share of AltaPacific Bancorp
common stock (which is discussed below), and (ii) the excess, if any, of (a) the sum of the amount of such
cash and the fair market value of the AltaPacific Bancorp common stock received with respect to such
block over (b) the U.S. holder’s tax basis in the shares of Commerce Bank common stock in such block.
Any gain recognized generally will be capital gain, and will be long-term capital gain if, as of the effective
date of the merger, the shares of Commerce Bank common stock in such block were held for more than one
year, unless the receipt of cash has the effect of a distribution of a dividend under the provisions of the
Internal Revenue Code, in which case such gain will be treated as dividend income rather than capital gain.
The Internal Revenue Service has indicated in rulings that any reduction in the interest of a shareholder that
owns a small number of shares in a publicly and widely held corporation and that exercises no control over
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corporate affairs would result in capital gains as opposed to dividend treatment. Because the possibility of
dividend treatment depends primarily upon a U.S. holder’s particular circumstances, including the
application of constructive ownership rules, U.S. holders should consult their tax advisors regarding the
applicability to them of this possibility;
•
a U.S. holder generally will have an aggregate tax basis in the shares of AltaPacific Bancorp common stock
(if any) received by the U.S. holder with respect to each identifiable block of shares of Commerce Bank
common stock exchanged by the U.S. holder in the merger (including any fractional share of AltaPacific
Bancorp common stock deemed received and redeemed for cash, as discussed below) equal to the U.S.
holder’s aggregate tax basis in the shares of Commerce Bank common stock in such block, reduced by the
amount of cash (if any) received with respect to such block (other than cash received in lieu of a fractional
share of AltaPacific Bancorp common stock) and increased by the amount of any gain recognized by the
U.S. holder (including, but not limited to, any portion of such gain that is treated as a dividend, but
excluding any gain recognized with respect to cash received in lieu of a fractional share of AltaPacific
Bancorp common stock) with respect to such block;
•
the holding period of the shares of AltaPacific Bancorp common stock (if any) received by a U.S. holder
with respect to each identifiable block of shares of Commerce Bank common stock exchanged in the
merger (including any fractional share of AltaPacific Bancorp common stock deemed received and
redeemed for cash, as discussed below) will include the holding period of the shares of Commerce Bank
common stock in such block; and
•
cash received by a U.S. holder in lieu of a fractional share of AltaPacific Bancorp common stock in the
merger will be treated as if such fractional share had been issued and then redeemed by AltaPacific
Bancorp. Subject to the discussion above regarding possible dividend treatment, a U.S. holder generally
will recognize capital gain or loss with respect to cash received in lieu of a fractional share, measured by
the difference, if any, between the amount of cash received and the tax basis in such fractional share
(determined as described above). Any gain or loss recognized generally will be long-term capital gain or
loss if, as of the effective date of the merger, the shares of Commerce Bank common stock in the block of
shares of Commerce Bank common stock exchanged in the merger were held for more than one year. The
deductibility of capital losses is subject to limitations.
Backup Withholding and Information Reporting. U.S. holders may be subject to information reporting and backup
withholding on any cash payments they receive in the merger, including cash in lieu of fractional shares of AltaPacific
Bancorp common stock. Payments will not be subject to backup withholding if the U.S. holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this fact or (ii) provides AltaPacific Bancorp or the
exchange agent, as appropriate, with a properly completed Internal Revenue Service Form W-9 (or its successor form)
certifying that the U.S. holder is a U.S. person, the taxpayer identification number provided is correct and the U.S. holder is
not subject to backup withholding. The taxpayer identification number of an individual is his or her Social Security number.
Any amounts withheld from payments to a U.S. holder under the backup withholding rules are not additional tax and will be
allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability, provided the required information is
timely furnished by the U.S. holder to the Internal Revenue Service.
The discussion of the material U.S. federal income tax consequences set forth above is intended to provide
only a general summary, and is not intended to be a complete analysis or description of all potential U.S. federal
income tax consequences of the merger. Moreover, the discussion set forth above does not address tax consequences
that may vary with, or are dependent on, individual circumstances. In addition, the discussion set forth above does
not address any non-income tax or any foreign, state or local tax consequences of the merger and does not address the
tax consequences of any transaction other than the merger.
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INFORMATION ABOUT ALTAPACIFIC BANCORP
AND ALTAPACIFIC BANK
In this section references to “we,” “our,” and “AltaPacific” refer to AltaPacific Bancorp and its consolidated
subsidiary, AltaPacific Bank, unless the context requires otherwise.
AltaPacific Bancorp and AltaPacific Bank
General
AltaPacific Bancorp was incorporated under the laws of the State of California in 2010 to serve as the holding
company of AltaPacific Bank. The primary business of AltaPacific Bancorp is to own all of the capital stock of AltaPacific
Bank.
AltaPacific Bank is a full service California state-chartered commercial bank headquartered in Santa Rosa,
California, offering a full range of credit and depository services primarily to small and medium sized businesses. We
opened for business on July 10, 2006 and currently operate from five full service banking offices. We are a member of the
Federal Reserve System and the FDIC insures our deposits up to applicable limits. The following is a list of our offices:
Headquarters Office – Santa Rosa
4845 Old Redwood Highway
Santa Rosa, CA 95403
Inland Empire Office
3500 Porsche Way, #325
Ontario, CA 91764
Covina Office
100 North Azusa Avenue
Covina, CA 91722
Temecula Office
41530 Enterprise Circle South
Temecula, CA 92590
Riverside Office
3400 Central Avenue, Suite 300
Riverside, CA 92506
Our branch offices generally operate five days per week from 9:00 a.m. until 5:00 p.m. on weekdays.
We engage in a general commercial banking business, making various types of loans and accepting deposits. Our
principal source of revenue is interest income and fees generated by lending and investing funds on deposit. We typically
balance the loan and investment portfolio towards loans. Generally speaking, loans earn more attractive returns than
investments and are a key source of product cross sales and customer referrals. Our loan and investment strategies balance
the need to maintain adequate liquidity via excess cash or federal funds sold with opportunities to leverage our capital
appropriately.
While our strategic plan focuses on organic growth, we are also focused on growing the organization through
mergers and acquisitions. In seeking out appropriate merger and acquisition candidates, we look for financial institutions that
share a common business philosophy and operating culture. Our management team has extensive experience in successfully
completing mergers and acquisitions as they have collectively completed 12 bank acquisitions ranging in size from $17
million to $325 million, including 2 FDIC Purchase and Assumption transactions.
Lending Activities
General. Our primary market focus is on making loans to small and medium size businesses, entrepreneurs,
professionals, consumers and high net worth clients in our primary market area. Our lending activities consist generally of
short to medium term commercial business loans, commercial real estate loans, real estate construction loans, home equity
loans.
Credit Policies and Administration. We have adopted a comprehensive lending policy, which includes stringent
underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our
management team. In an effort to manage risk, prior to funding, the loan committee consisting of the President and six other
members of the board of directors must approve by a majority vote all credit decisions in excess of the Management Loan
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Committee’s lending authority. Management believes that it employs experienced lending officers, secures appropriate
collateral and carefully monitors the financial condition of its borrowers and the concentrations of loans in the portfolio.
In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the
related effects on the borrower and/or the real estate market. Management monitors the loan portfolio closely to ensure that
we minimize past due loans and that we swiftly deal with potential problem loans.
In addition to the internal business processes employed in the credit administration area, we retain an outside,
independent credit review firm to review the loan portfolio. This firm performs a detailed annual review and an interim
update at least once a year. We use the results of the firm’s report to validate our internal loan ratings and we review their
commentary on specific loans and on our loan administration activities in order to improve our operations.
Commercial Business Lending. Our commercial business lending consists of lines of credit, revolving credit
facilities, accounts receivable financing, term loans, equipment loans, SBA loans and unsecured loans. We originate
commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying
of accounts receivable, general working capital contract administration and acquisition activities. We have a diverse client
base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure
commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable
securities, cash value of life insurance, and time deposits at AltaPacific Bank.
Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of
funds for repayment generally depends on the success of the business. They may also involve higher average balances,
increased difficulty monitoring and a higher risk of default since their repayment generally depends on the successful
operation of the borrower’s business. To help manage this risk, we typically limit these loans to proven businesses and we
generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the
financial condition of the business. For loans in excess of $250,000, monitoring usually includes a review of the borrower’s
annual tax returns and updated financial statements.
Commercial Real Estate Lending. We finance commercial real estate for our clients, usually for owner-occupied
properties. We generally will finance owner-occupied commercial real estate at a maximum loan-to-value of 70%. Our
underwriting policies and processes focus on the clients’ ability to repay the loan as well as an assessment of the underlying
real estate.
Commercial real estate lending entails significant additional risks as compared with residential mortgage lending.
Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as
changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these
risks by carefully underwriting these loans. Our underwriting generally includes an analysis of the borrower’s capacity to
repay, the current collateral value, a cash flow analysis and review of the character of the borrower and current and
prospective conditions in the market. We generally limit loans in this category to 70% of the value of the property and
require personal and/or corporate guarantees. In addition, we will meet with the borrowers and/or perform site visits as
required.
Real Estate Construction Lending. This segment of our loan portfolio consists of funds advanced for construction
of single family residences, residential condominiums, multi-family housing and commercial buildings. These loans have
short durations, meaning maturities typically of 18 months or less. Residential houses, multi-family dwellings, residential
condominiums and commercial buildings under construction and the underlying land for which the loan was obtained secure
the construction loans. All of these loans are concentrated in our primary market area.
Construction lending entails significant risks compared with residential mortgage lending. These risks involve
larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project
under construction. The value of the project is estimated prior to the start of construction. Thus, it is more difficult to
evaluate accurately the total loan funds required to complete a project and related loan to value ratios. To mitigate these
risks, we generally limit loan amounts to 70% of appraised values and obtain first lien positions on the property. We
generally only offer real estate construction financing to experienced builders and commercial entities or individuals who
have demonstrated the ability to successfully market, in the case of speculative residential properties, or secure permanent
financing on properties to be retained. We also perform a complete analysis of the borrower and the project under
construction. This analysis includes a review of the cost to construct, the borrower’s verified liquidity and cash flow
available to support the debt payment project and trade references, construction costs in excess of loan proceeds and the
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marketability of the collateral. During construction, we advance funds on these loans on a percentage of completion basis.
We inspect each project as needed prior to advancing funds during the term of the construction loan.
Consumer Installment Lending, Personal and Household Loans. We also make consumer loans for personal,
family or household purposes as a convenience to our customer base. However, these loans are not a focus of our lending
activities. As a general guideline, a consumer’s total debt service should not exceed 35% of their gross income. The
underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an
assessment of his or her ability to meet existing obligations and payments on the proposed loan.
Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are
unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or
depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers
personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount we can recover on such loans.
Lending Limit. As of September 30, 2016, our secured legal lending limit for loans to one borrower was
approximately $15.6 million. As part of our risk management strategy, we may attempt to participate a portion of larger
loans to other financial institutions. This strategy allows us to maintain customer relationships yet reduce credit exposure.
However, this strategy may not always be available.
Investments and Funding
We balance our liquidity needs based on loan and deposit growth via the investment portfolio, purchased funds, and
short term borrowings. It is our goal to provide adequate liquidity to support our loan growth. In the event we have excess
liquidity, we use investments to generate positive earnings. In the event deposit growth does not fully support our loan
growth, we can use a combination of investment sales, federal funds, other purchased funds and short term borrowings to
augment our funding position.
We actively monitor our investment portfolio and classify all of the portfolio as “available for sale.” In general,
under such a classification, we may sell investment instruments as management deems appropriate. On a monthly basis, we
“mark to market” the investment portfolio through an adjustment to shareholders’ equity net of taxes. Additionally, we use
the investment portfolio to balance our asset and liability position. We invest in fixed rate or floating rate instruments as
necessary to reduce our interest rate risk exposure.
Other Banking Products
We offer our customers safe deposit boxes, wire transfer services, debit cards and credit cards through a third party
processor. Additionally, we provide Internet banking capabilities to our customers. With our Internet banking service, our
customers may view their accounts on-line and electronically remit bill payments. Our commercial account services include
direct deposit of payroll for our commercial clients’ employees, an overnight sweep service and remote deposit capture
service.
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of deposit products that include demand,
NOW, money market and savings accounts as well as certificates of deposit. We believe that we pay competitive rates on our
interest bearing deposits. As a relationship-oriented organization, we generally seek to obtain deposit relationships with our
loan clients. In order to mitigate potential liquidity risk we have established borrowing arrangements with various financial
institutions and other wholesale funding sources.
Competition
The banking business is highly competitive. We compete with other commercial banks, savings associations, credit
unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money
market mutual funds and other financial institutions operating in our primary market area and elsewhere.
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We believe we have effectively leveraged our talents, contacts and location to achieve a strong financial position.
However, our primary market areas are highly competitive and heavily branched. Competition in our market for loans to
small and medium sized businesses, entrepreneurs, professionals and high net worth clients is intense, and pricing is
important. Most of our competitors have substantially greater resources and lending limits than we do and offer extensive
and established branch networks and other services that we do not offer. Moreover, larger institutions operating in our
primary market area have access to borrowed funds at a lower rate than is available to us. Deposit competition also is strong
among institutions in our primary market area. As a result, it is possible that to remain competitive we may need to pay
above market rates for deposits.
Employees
As of September 30, 2016, AltaPacific Bank had 53 full time employees. No collective bargaining unit represents
any of our employees and we believe that relations with our employees are good. AltaPacific Bancorp has no employees.
Supervision and Regulation
AltaPacific Bancorp and AltaPacific Bank are subject to extensive regulation under state and federal banking laws
and regulations. Most banking regulations are intended primarily for the protection of depositors and the deposit insurance
fund and not for the benefit of shareholders. The following is a summary of certain statutes, regulations and regulatory
guidance affecting AltaPacific Bancorp and AltaPacific Bank. This summary is not intended to be a complete explanation of
such statutes, regulations and guidance, all of which are subject to change in the future, nor does it fully address their effects
and potential effects on AltaPacific Bancorp and AltaPacific Bank.
Regulation of AltaPacific Bancorp Generally
AltaPacific Bancorp is a legal entity separate and distinct from AltaPacific Bank and its other subsidiaries.
AltaPacific Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC
Act”) and is registered as such with the Federal Reserve. AltaPacific Bancorp is subject to supervision, regulation and
inspection by the Federal Reserve and is required to file annual reports and other information with the Federal Reserve
regarding its business operations and those of its subsidiaries. In general, the BHC Act limits the business of bank holding
companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be so
closely related to banking as to be a proper incident thereto, including securities brokerage services, investment advisory
services, fiduciary services, and management advisory and data processing services, among others. A bank holding company
that also qualifies as and elects to become a “financial holding company” may engage in a broader range of activities that are
financial in nature or complementary to a financial activity (as determined by the Federal Reserve or Treasury regulations),
such as securities underwriting and dealing, insurance underwriting and agency, and making merchant banking investments.
AltaPacific Bancorp has not elected to become a financial holding company but may do so at some point in the future if
deemed appropriate in view of opportunities or circumstances at the time.
The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of more than five percent
of the voting shares of a commercial bank or its parent holding company. Acquisitions by AltaPacific Bank are subject
instead to the Bank Merger Act, which requires the prior approval of an acquiring bank’s primary federal regulator for any
merger with or acquisition of another bank.
AltaPacific Bancorp and AltaPacific Bank are deemed to be “affiliates” of each other and thus are subject to
Sections 23A and 23B of the Federal Reserve Act as well as related Federal Reserve Regulation W which impose both
quantitative and qualitative restrictions and limitations on transactions between affiliates. AltaPacific Bank is also subject to
laws and regulations requiring that all loans and extensions of credit to our executive officers, directors, principal
shareholders and related parties must, among other things, be made on substantially the same terms and follow credit
underwriting procedures no less stringent than those prevailing at the time for comparable transactions with persons not
related to AltaPacific Bank.
Under certain conditions, the Federal Reserve has the authority to restrict the payment of cash dividends by a bank
holding company as an unsafe and unsound banking practice, and may require a bank holding company to obtain the prior
approval of the Federal Reserve prior to purchasing or redeeming its own equity securities, unless certain conditions are met.
The Federal Reserve also has the authority to regulate the debt of bank holding companies.
A bank holding company is required to act as a source of financial and managerial strength for its subsidiary banks
and must commit resources as necessary to support such subsidiaries. In this connection, the Federal Reserve may require a
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bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the
payment of dividends to the shareholders if the Federal Reserve Board believes the payment of such dividends would be an
unsafe or unsound practice.
The status of AltaPacific Bancorp as a registered bank holding company under the Bank Holding Company Act does
not exempt it from certain federal and state laws and regulations applicable to California corporations generally, including,
without limitation, certain provisions of the federal securities laws.
Regulation of AltaPacific Bank Generally
AltaPacific Bank is a California chartered bank, and a member of the Federal Reserve System. The Deposit
Insurance Fund of the FDIC (“DIF”) insures its deposit accounts up to the maximum legal limits of the FDIC. It is subject to
regulation, supervision and regular examination by the DFI and the Federal Reserve. The regulations of these various
agencies govern most aspects of AltaPacific Bank’s business, including required reserves against deposits, loans,
investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. The laws and
regulations governing AltaPacific Bank generally have been promulgated to protect depositors and the deposit insurance
funds, and not for the purpose of protecting its shareholders.
Capital Adequacy Guidelines
AltaPacific Bancorp and AltaPacific Bank are subject to the regulations of the Federal Reserve governing capital
adequacy. However, AltaPacific Bancorp is currently a “small bank holding company” under the Federal Reserve’s
guidelines, and thus qualifies for an exemption from the consolidated risk-based and leverage capital adequacy guidelines
applicable to bank holding companies with assets of $1 billion or more and meet certain requirements. The Federal Reserve
has adopted risk-based capital guidelines to provide a systematic analytical framework which makes regulatory capital
requirements sensitive to differences in risk profiles among banking organizations, considers off-balance sheet exposures in
evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels, as measured by
these standards, are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory
provisions.
Prior to January 1, 2015, the guidelines included a minimum required ratio of qualifying Tier 1 plus Tier 2 capital to
total risk weighted assets of 8% (“Total Risk-Based Capital Ratio” or “Total RBC Ratio”), and a minimum required ratio of
Tier 1 capital to total risk weighted assets of 4% (“Tier 1 Risk-Based Capital Ratio” or “Tier 1 RBC Ratio”). The guidelines
also provided for a minimum Leverage Ratio, which is defined as Tier 1 capital to adjusted average assets (quarterly average
assets less the disallowed capital items discussed below). The minimum Leverage Ratio is 3% for institutions having the
highest regulatory rating, and 4% for all other institutions. Tier 1 capital is generally defined as the sum of core capital
elements, less goodwill and other intangible assets, accumulated other comprehensive income, disallowed deferred tax assets,
and certain other deductions. The following items are defined as core capital elements: (i) common shareholders’ equity; (ii)
qualifying non-cumulative perpetual preferred stock and related surplus (and, in the case of holding companies, senior
perpetual preferred stock issued to the U.S. Treasury Department pursuant to the Troubled Asset Relief Program); (iii)
minority interests in the equity accounts of consolidated subsidiaries; and (iv) “restricted” core capital elements (which
include qualifying trust preferred securities) up to 25% of all core capital elements. Tier 2 capital includes the following
supplemental capital elements: (i) allowance for loan and lease losses (but not more than 1.25% of an institution’s riskweighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital
instruments, perpetual debt and mandatory convertible debt instruments; and, (iv) term subordinated debt and intermediateterm preferred stock and related surplus. The maximum amount of Tier 2 capital is capped at 100% of Tier 1 capital.
Effective January 1, 2015, a new capital class known as Common Equity Tier 1 capital was added, and most
financial institutions were given the option of a one-time election to continue to exclude accumulated other comprehensive
income (“AOCI”) from regulatory capital. Since AltaPacific Bank exercised its option to exclude AOCI with its first
regulatory filings for 2015, our Common Equity Tier 1 capital includes common stock, additional paid-in capital, and
retained earnings, less the following: disallowed goodwill and intangibles, disallowed deferred tax assets, and any insufficient
additional capital to cover the deductions. The definitions of Tier 1 and Tier 2 capital are essentially unchanged, although
disallowed amounts increased with the new rules. The final rules include new regulatory minimums of 4.5% for the common
equity Tier 1 capital to total risk weighted assets ratio (“Common Equity Tier 1 RBC Ratio”), 6.0% for the Tier 1 RBC Ratio,
8.0% for the Total RBC Ratio, and 4.0% for the Leverage Ratio. The final rules also require a Common Equity Tier 1 capital
conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in
the rule. The capital buffer requirement will be phased in over three years beginning in 2016, and will effectively raise the
minimum required Common Equity Tier 1 RBC Ratio to 7.0%, the Tier 1 RBC Ratio to 8.5%, and the Total RBC Ratio to
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10.5% on a fully phased-in basis. Institutions that do not maintain the required capital buffer will become subject to
progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock
repurchases, and on the payment of discretionary bonuses to executive management.
The final rules also increase the required capital for certain categories of assets, including higher-risk construction
and real estate loans, certain past-due or nonaccrual loans, and certain exposures related to securitizations. The new
minimum capital ratios became effective for us on January 1, 2015, and the capital buffers will be fully phased in by
January 1, 2019. Based on our capital levels at December 31, 2015 and 2014, AltaPacific Bank would have met all capital
adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.
For more information on AltaPacific Bank’s regulatory capital ratios, see Note 20 to AltaPacific Bancorp’s audited
financial statements which appear elsewhere in this proxy statement/prospectus. Risk-based capital ratio requirements are
discussed further in the following section.
Prompt Corrective Action
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured
financial institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The
federal banking agencies have by regulation defined the following five capital categories: “well capitalized” (Total RBC
Ratio of 10%; Tier 1 RBC Ratio of 8%; Common Equity Tier 1 RBC Ratio of 6.5%; and Leverage Ratio of 5%); “adequately
capitalized” (Total RBC Ratio of 8%; Tier 1 RBC Ratio of 6%; Common Equity Tier 1 RBC Ratio of 4.5%; and Leverage
Ratio of 4%); “undercapitalized” (Total RBC Ratio of less than 8%; Tier 1 RBC Ratio of less than 6%; Common Equity Tier
1 RBC Ratio of less than 4.5%; or Leverage Ratio of less than 4%); “significantly undercapitalized” (Total RBC Ratio of less
than 6%; Tier 1 RBC Ratio of less than 4%; Common Equity Tier 1 RBC Ratio of less than 3%; or Leverage Ratio less than
3%); and “critically undercapitalized” (tangible equity to total assets less than or equal to 2%). A bank may be treated as
though it were in the next lower capital category if, after notice and the opportunity for a hearing, the appropriate federal
agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as “critically
undercapitalized” unless its actual capital ratio warrants such treatment. As of December 31, 2015 and 2014, AltaPacific
Bank was deemed to be well capitalized for regulatory capital purposes.
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations.
For example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital
distributions if to do so would make the bank “undercapitalized.” Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements
(including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks are subject to broad
regulatory authority, including among other things capital directives, forced mergers, restrictions on the rates of interest they
may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing
compensation to senior executive officers without FDIC approval. Even more severe restrictions apply to “critically
undercapitalized” banks. Most importantly, except under limited circumstances, not later than 90 days after an insured bank
becomes critically undercapitalized the appropriate federal banking agency is required to appoint a conservator or receiver for
the bank.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to
potential actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the issuance of cease and desist orders, termination of insurance of deposits (in the case of
a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal
agreements, or removal and prohibition orders against “institution-affiliated” parties.
Safety and Soundness Standards
The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all
insured depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation, and liquidity and interest rate exposure. In general, the standards are
designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions
before capital becomes impaired. If an institution fails to meet the requisite standards, the appropriate federal banking
agency may require the institution to submit a compliance plan and could institute enforcement proceedings if an acceptable
compliance plan is not submitted or adhered to.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
Legislation and regulations enacted and implemented since 2008 in response to the U.S. economic downturn and
financial industry instability continue to impact most institutions in the banking sector. Certain provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was enacted in 2010, are now effective and have
been fully implemented, including revisions in the deposit insurance assessment base for FDIC insurance and a permanent
increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers
to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Additional
actions taken to implement Dodd-Frank provisions include (i) final new capital rules, (ii) a final rule to implement the so
called Volcker rule restrictions on certain proprietary trading and investment activities and (iii) final rules and increased
enforcement action by the Consumer Finance Protection Bureau (discussed further below in connection with consumer
protection).
Some aspects of Dodd-Frank are still subject to rulemaking and will take effect over several years, making it
difficult to anticipate the ultimate financial impact on the Company, its customers or the financial services industry more
generally. However, certain provisions of Dodd-Frank are already affecting our operations and expenses, including but not
limited to changes in FDIC assessments, the permitted payment of interest on demand deposits, and enhanced compliance
requirements. Some of the rules and regulations promulgated or yet to be promulgated under Dodd-Frank will apply directly
only to institutions much larger than ours, but could indirectly impact smaller banks, either due to competitive influences or
because certain required practices for larger institutions may subsequently become expected “best practices” for smaller
institutions. We expect to see continued increases in the attention and resources devoted by the Company to ensure
compliance with the statutory and regulatory requirements engendered by Dodd-Frank.
Deposit Insurance
AltaPacific Bank’s deposits are insured up to maximum applicable limits under the Federal Deposit Insurance Act,
and the Bank is subject to deposit insurance assessments to maintain the FDIC’s Deposit Insurance Fund (the “DIF”). In
October 2010, the FDIC adopted a revised restoration plan to ensure that the DIF’s designated reserve ratio (“DRR”) reaches
1.35% of insured deposits by September 30, 2020, the deadline mandated by the Dodd-Frank Act. However, financial
institutions like AltaPacific Bank with assets of less than $10 billion are exempted from the cost of this increase.
Furthermore, the restoration plan proposed an increase in the DRR to 2% of estimated insured deposits as a long-term goal
for the fund. The FDIC also proposed future assessment rate reductions in lieu of dividends, when the DRR reaches 1.5% or
greater.
As noted above, the Dodd-Frank Act provided for a permanent increase in FDIC deposit insurance per depositor
from $100,000 to $250,000 retroactive to January 1, 2008. Furthermore, the FDIC redefined its deposit insurance premium
assessment base from an institution’s total domestic deposits to its total assets less tangible equity, effective in the second
quarter of 2011. The changes to the assessment base necessitated changes to assessment rates, which became effective
April 1, 2011. The revised assessment rates are lower than prior rates but the assessment base is larger, so approximately the
same amount of assessment revenue is being collected by the FDIC. We are generally unable to control the amount of
premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the
FDIC otherwise determines, we may be required to pay even higher FDIC premiums, which may have a material adverse
effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.
In addition to DIF assessments, banks must pay quarterly assessments that are applied to the retirement of Financing
Corporation bonds issued in the 1980’s to assist in the recovery of the savings and loan industry. The assessment amount
fluctuates, but the annual rate was 0.56 basis points of insured deposits for the third quarter of 2016. Those assessments will
continue until the Financing Corporation bonds mature in 2019.
Community Reinvestment Act
AltaPacific Bank is subject to certain requirements and reporting obligations involving Community Reinvestment
Act (“CRA”) activities. The CRA generally requires federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low and moderate income neighborhoods. The CRA further
requires the agencies to consider a financial institution’s efforts in meeting its community credit needs when evaluating
applications for, among other things, domestic branches, mergers or acquisitions, or the formation of holding companies. In
measuring a bank’s compliance with its CRA obligations, the regulators utilize a performance-based evaluation system under
which CRA ratings are determined by the bank’s actual lending, service, and investment performance, rather than on the
extent to which the institution conducts needs assessments, documents community outreach activities or complies with other
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procedural requirements. In connection with its assessment of CRA performance, the FDIC assigns a rating of “outstanding,”
“satisfactory,” “needs to improve” or “substantial noncompliance.” AltaPacific Bank most recently received a “satisfactory”
CRA assessment rating in July 2012.
Privacy and Data Security
The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999 (the “Financial
Modernization Act”), imposed requirements on financial institutions with respect to consumer privacy. Financial institutions,
however, are required to comply with state law if it is more protective of consumer privacy than the Financial Modernization
Act. The Financial Modernization Act generally prohibits disclosure of consumer information to non-affiliated third parties
unless the consumer has been given the opportunity to object and has not objected to such disclosure. The statute also
directed federal regulators, including the Federal Reserve and the FDIC, to establish standards for the security of consumer
information, and requires financial institutions to disclose their privacy policies to consumers annually.
Overdrafts
The Electronic Funds Transfer Act, as implemented by the Federal Reserve’s Regulation E, governs transfers
initiated through automated teller machines (“ATMs”), point-of-sale terminals, and other electronic banking services.
Regulation E prohibits financial institutions from assessing an overdraft fee for paying ATM and one-time point-of-sale debit
card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in
provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit
card transactions. The rule does not apply to other types of transactions, such as check, automated clearinghouse (“ACH”)
and recurring debit card transactions. Additionally, in November 2010 the FDIC issued its Overdraft Guidance on automated
overdraft service programs, to ensure that a bank mitigates the risks associated with offering automated overdraft payment
programs and complies with all consumer protection laws and regulations. These regulatory changes have not had a material
impact on our business or results of operations.
Consumer Financial Protection and Financial Privacy
Dodd-Frank created the Consumer Finance Protection Bureau (the “CFPB”) as an independent entity with broad
rulemaking, supervisory and enforcement authority over consumer financial products and services including deposit
products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer
complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing
rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions,
including the Bank, although only banks with $10 billion or more in assets are subject to examination by the CFPB. Banks
with less than $10 billion in assets, including the Bank, will continue to be examined for compliance by their primary federal
banking agency.
In January 2013, the CFPB issued final regulations governing primarily consumer mortgage lending. One rule
which became effective in January 2014 imposes additional requirements on lenders, including rules designed to require
lenders to ensure borrowers’ ability to repay their mortgages. The CFPB also finalized a rule on escrow accounts for higher
priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The
CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In November
2013 the CFPB issued a final rule on integrated and simplified mortgage disclosures under the Truth in Lending Act and the
Real Estate Settlement Procedures Act, which became effective in October 2015.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks,
including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or
practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a
consumer financial product or service or take unreasonable advantage of a consumer’s: (i) lack of financial savvy, (ii)
inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a
covered entity to act in the consumer’s interests.
AltaPacific Bank continues to be subject to numerous other federal and state consumer protection laws that
extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds
Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the
Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act, and respective
state-law counterparts to these laws, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
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These and other laws require disclosures including the cost of credit and terms of deposit accounts, provide substantive
consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial
privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise interest rates and subject us to
substantial regulatory oversight.
In addition, AltaPacific Bank, like all other financial institutions, is required to maintain the privacy of its
customers’ non-public, personal information. Such privacy requirements direct financial institutions to: (i) provide notice to
customers regarding privacy policies and practices; (ii) inform customers regarding the conditions under which their nonpublic personal information may be disclosed to non-affiliated third parties; and (iii) give customers an option to prevent
disclosure of such information to non-affiliated third parties.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) together with
Dodd-Frank relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval,
state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such
states to establish branches. The Interstate Act requires regulators to consult with community organizations before permitting
an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from
using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-todeposit ratio screen to ensure compliance with this prohibition. Dodd-Frank effectively eliminated the prohibition under
California law against interstate branching through de novo establishment of California branches. Interstate branches are
subject to certain laws of the states in which they are located. AltaPacific Bank presently does not have any interstate
branches.
USA Patriot Act of 2001
The impact of the USA Patriot Act of 2001 (the “Patriot Act”) on financial institutions of all kinds has been
significant and wide ranging. The Patriot Act substantially enhanced anti-money laundering and financial transparency laws,
and required certain regulatory authorities to adopt rules that promote cooperation among financial institutions, regulators,
and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Under the Patriot
Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as
well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and
foreign customers. The Patriot Act also requires all financial institutions to establish anti-money laundering programs. The
Bank expanded its Bank Secrecy Act compliance staff and intensified due diligence procedures concerning the opening of
new accounts to fulfill the anti-money laundering requirements of the Patriot Act, and also implemented systems and
procedures to identify suspicious banking activity and report any such activity to the Financial Crimes Enforcement Network.
Commercial Real Estate Lending Concentrations
As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management
practices with respect to a financial institution’s concentrations in commercial real estate (“CRE”) lending activities. These
guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to
unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The
guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis
with regard to the institution’s CRE concentration risk. The guidelines are designed to promote appropriate levels of capital
and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the guidelines
establish the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s
total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE
loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE
loan portfolio has increased by 50% or more during the prior 36 month period. AltaPacific Bank believes that the guidelines
are applicable to it, as it has a relatively high concentration in CRE loans. AltaPacific Bank and its board of directors have
discussed the guidelines and believe that AltaPacific Bank’s underwriting policies, management information systems,
independent credit administration process, and monitoring of real estate loan concentrations are sufficient to address the
guidelines.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the AltaPacific Bancorp, AltaPacific Bank and the
banking industry in general are pending, and additional initiatives may be proposed or introduced before the United States
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Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter
the structure, regulation and competitive relationship among financial institutions, and may subject us to increased regulation,
disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such
legislation or regulations may be enacted or the extent to which our business would be affected thereby.
Properties
Our headquarters is located in Santa Rosa, California, and is the only building owned by us. All of the other
locations are leased. We generally lease our facilities under long-term, non-cancelable lease agreements, which are
accounted for as operating leases. In the opinion of management, all our properties are adequately covered by insurance.
Legal Proceedings
From time to time, AltaPacific Bancorp or AltaPacific Bank may be involved in litigation relating to claims arising
out of its normal course of business. As of the date of this proxy statement/prospectus, we did not have any material pending
legal matters or litigation for AltaPacific Bank or AltaPacific Bancorp.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, or GAAP, requires management to make a number of judgments, estimates and assumptions that affect the
reported amount of assets, liabilities, income and expenses in the financial statements of AltaPacific Bancorp (“AltaPacific”)
and accompanying notes. AltaPacific’s management believes that the judgments, estimates and assumptions used in
preparation of AltaPacific’s financial statements are appropriate given the factual circumstances as of September 30, 2016.
Various elements of AltaPacific’s accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the
most complex and subjective decisions and assessments and have the greatest potential impact on AltaPacific’s results of
operation. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of investment securities, and the valuation of deferred tax
assets. AltaPacific’s management has identified the accounting policies related to these three areas as critical to an
understanding of AltaPacific’s financial statements due to judgments, estimates and assumptions inherent in these
policies, and the sensitivity of AltaPacific’s financial statements to those judgments, estimates and assumptions.
Allowance for Loan Losses. The provision for loan losses charged to operations is an amount sufficient to bring the
allowance for loan losses to an estimated balance considered adequate to absorb probable losses inherent in the portfolio
at the date of the financial statements. The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to results of operations. Loan losses are charged against the allowance
when management believes the collection of a loan balance will not occur. Subsequent recoveries, if any, are credited to the
allowance. The allowance for loan losses is evaluated on a regular basis by management and the estimate is based upon
management’s periodic review of the collectability of the loans that considers historical experience, the nature and volume of
the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and qualitative components. The specific component relates to loans that
are considered impaired for which an allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value of that loan. For such loans that are also
classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of that loan. Although Management believes the level of the
allowance at September 30, 2016 is adequate to absorb losses inherent in the loan portfolio, a further decline in the
regional economy may result in increasing losses that cannot reasonably be predicted at this time. For further information
regarding the allowance for loan losses and related methodology see “Financial Condition – Allowance for Loan Losses”
included elsewhere herein.
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Investment Securities. AltaPacific currently classifies its investment securities as available-for-sale. Securities
classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from results of operations
and reported as a separate component of accumulated other comprehensive income included in shareholders’ equity. Under
the available-for-sale classification, securities can be sold due to changing conditions. AltaPacific does not have any
investment securities classified as held-to-maturity or trading securities. Investment transactions are recorded on the
trade date. Gains and losses on investment securities are recognized at the time of sale based upon the specific identification
method. Management performs regular impairment analyses on the securities portfolio. If it is probable that AltaPacific will
be unable to collect all amounts due according to the contractual terms of the debt security, an other-than-temporary
impairment (“OTTI”) is considered to have occurred. When an other-than-temporary impairment occurs, the cost basis of
the security is written down to its fair value (as the new cost basis) and the write-down is accounted for as a realized loss if it
is credit related. In assessing whether impairment represents OTTI, AltaPacific must consider whether it intends to sell a
security or if it is likely that it would be required to sell the security before recovery of the amortized cost basis of the
investment, which may be maturity. If AltaPacific intends to sell the security or it is likely that a sale of the security may be
required before recovering the cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If
AltaPacific does not intend to sell the security and it is not likely the sale of the security is required by AltaPacific, and
AltaPacific does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss
representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference
between the amortized cost basis and the present value of the cash flows to be expected to be collected. Projected cash flows
are discounted by the original or current effective interest rate depending on the nature of the security being measured for
potential OTTI. The remaining impairment related to other factors, the difference between the present value of cash flows
expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment
losses related to all other factors are presented as separate categories within OCI. Purchase premiums and discounts are
recognized in interest income using the interest method over the expected life of the security. For certain securities such
as mortgage-backed securities, the average life can fluctuate based on the amount of prepayments received on the collateral
underlying the securities.
Income Taxes. AltaPacific uses the asset and liability method to account for income taxes. The objective of
the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between
the financial reporting basis and the income tax basis of AltaPacific’s assets and liabilities at enacted tax rates expected to be
in effect when such amounts are realized or settled. AltaPacific’s annual tax rate is based on its income, statutory tax rates
and tax planning opportunities available in which it operates. Tax laws are complex and subject to different interpretations
by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax
expense and in evaluating tax positions, including evaluating uncertainties. Benefits from tax positions are recognized in the
financial statements only when it is more likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant information. AltaPacific reviews its tax positions
periodically and adjusts the balances as new information becomes available. Deferred income tax assets represent amounts
available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary
differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax
credit carry-forwards. AltaPacific evaluates the recoverability of these future tax deductions by assessing the adequacy of
future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating
earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. AltaPacific
uses historical experience and short and long-range business forecasts to provide insight. Although realization is not assured
for the remaining deferred income tax assets, AltaPacific believes it is more likely than not the deferred tax assets will be
fully recoverable within the applicable statutory expiration periods. However, deferred tax assets could be reduced in the
near term if estimates of taxable income are significantly reduced or available tax planning strategies are no longer viable.
Recent Developments
On January 24, 2017 AltaPacific Bancorp reported net income for the quarter totaling $1.0 million, or $0.17 per
diluted share, and year-to-date net income totaling $4.4 million, or $0.74 per diluted share, for the period ended
December 31, 2016, respectively. Assets totaled $351.4 million at December 31, 2016, an increase of $5.6 million (1.6%)
over December 31, 2015. At December 31, 2016, gross loans totaled $233.1 million and deposits totaled $276.7 million for
an increase of $7.6 million (3.4%) and $14.3 million (5.4%), respectively. During the fourth quarter of 2016, the Company
reduced borrowings with the Federal Home Loan Bank of San Francisco by $15.0 million (75%). Shareholders’ equity at
December 31, 2016 totaled $57.2 million.
At December 31, 2016, the allowance for loan losses totaled $3.3 million. During the quarter ended December 31,
2016 there were no additions to the provision for loan losses, no loans were charged off and there were no recoveries of loans
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previously charged off. Nonaccrual loans at the end of the quarter totaled $229 thousand and loans past due 30-89 days
totaled $663 thousand.
Business Overview
AltaPacific Bancorp was incorporated under the laws of the State of California in 2010 to serve as the holding
company of AltaPacific Bank. The primary business of AltaPacific Bancorp is to own all of the capital stock of AltaPacific
Bank.
AltaPacific Bank was organized under the laws of the State of California on February 16, 2006. The bank opened
for business as a state-chartered non-member bank on July 10, 2006. On November 5, 2010, AltaPacific Bank became a
member of the Federal Reserve System.
AltaPacific Bank is subject to regulation by the California Commissioner of Business Oversight and the FRB and its
deposits are insured by the Federal Deposit Insurance Corporation up to applicable legal limits. The bank is headquartered in
Santa Rosa, California and provides products and services to customers who are predominately small to middle-market
business, professionals and not-for-profit organizations. In addition to its office in Santa Rosa in Sonoma County, California,
AltaPacific Bank has branch offices located in Temecula and Riverside in Riverside County, California; in Ontario in San
Bernardino County California; and in Covina in Los Angeles County, California.
On February 17, 2012, AltaPacific completed the acquisition of Stellar Business Bank. At that date, the fair value of
the assets acquired totaled $90.3 million and the fair value of the liabilities totaled $72.7 million. All of the assets and
liabilities of Stellar Business Bank were acquired in exchange for 2,034,434 shares of AltaPacific Bancorp stock and the total
transaction was valued at $17.44 million. Stellar Business Bank operated one branch in Covina, California.
On May 2, 2014, AltaPacific completed the acquisition of Mission Oaks National Bancorp (“Mission Oaks”). At
that date, the fair value of the assets acquired totaled $93.0 million and the fair value of the liabilities totaled $97.4 million.
All of the assets and liabilities of Mission Oaks were acquired in exchange for cash totaling $3.5 million. Mission Oaks
operated two branches, one of which was located at its headquarters in Temecula, California. The other branch was located
in Fallbrook, California. In May 2015, AltaPacific Bank closed the Fallbrook branch.
On February 29, 2016 AltaPacific Bank opened a new branch in Riverside, California.
Earnings Performance
Summary of Performance for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended
September 30, 2015. AltaPacific recognized net income of $3.36 million during the nine month period ended September 30,
2016, compared to net income of $3.93 million during the nine month period ended September 30, 2015. The following is an
overview of key factors affecting AltaPacific’s net income for the nine month period ending September 30, 2016 when
compared to the same period in 2015:
Net interest income decreased $758 thousand.
•
Interest income on loans decreased $696 thousand.
•
Included in interest income on loans is the accretion of purchase discount on acquired loans.
Accretion income is amortized into income using the interest method over the life of individual
loans. In the event a purchased loan pays in full prior to maturity, any unaccreted purchase
discount is recognized immediately in income at the time the loan is paid.
•
During 2016, accretion income relating to purchased loans decreased by $1.1 million.
The decrease is attributable to a reduction in the number and dollar amount of purchased
loans paying prior to maturity in 2016 when compared to 2015.
Provision for loan losses decreased $105 thousand.
•
AltaPacific reduced the provision for loan losses during 2016.
Noninterest income decreased $10 thousand.
•
Included in noninterest income is the recognition of recoveries of loans which had been previously charged
off by Mission Oaks.
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•
During 2016, recoveries of loans previously charged off by Mission Oaks totaled $195 thousand.
In 2015, recoveries of loans previously charged off by Mission Oaks totaled $199 thousand.
Noninterest expense increased $406 thousand.
•
Salary and employee benefits increased $497 thousand.
•
•
The increase is primarily related to the February, 2016 opening of a new branch in Riverside, CA.
Professional fees decreased $130 thousand.
•
During the year, accrued expenses are recorded as a liability based upon projected merger and
acquisition activities. Accruals for projected merger expenses totaled $488 thousand during 2016
compared to $627 thousand during 2015.
• At year end, accrued liabilities and expenses are adjusted to reflect actual expenditures.
Provision for income taxes decreased $499 thousand.
•
The provision for income taxes totaled $2.3 million during 2016 and totaled $2.8 million during 2015.
•
AltaPacific’s effective tax rate was 41% in 2016 and 2015.
Summary of Performance for the Year Ended December 31, 2015 Compared to the Year ended December 31,
2014. AltaPacific recognized net income of $5.27 million in 2015, compared to net income of $3.43 million in 2014. The
following is an overview of key factors affecting AltaPacific’s net income for the year ending December 31, 2015 when
compared to the same period in 2014:
Net interest income increased $3.1 million.
•
Interest income on loans increased $3.1 million.
•
During 2015, accretion income relating to purchased loans exceeded 2014 by $1.6 million.
•
The recognition of net interest income relating to the acquisition of Mission Oaks started
immediately after the May 2, 2014 closing date.
•
Accordingly, in 2014 AltaPacific Bank recognized approximately eight months of net
interest income as compared to 2015 which resulted in the recognition of 12 months of
net interest income.
Provision for loan losses decreased $235 thousand.
•
The provision for loan losses totaled $390 thousand in 2015. In 2014, the provision for loan losses totaled
$625 thousand.
Noninterest income decreased $387 thousand.
•
During 2015, recoveries of loans previously charged off by Mission Oaks totaled $410 thousand. In 2014,
recoveries of loans previously charged off by Mission Oaks totaled $625 thousand.
Noninterest expense decreased $90 thousand.
•
Salary and employee benefits increased $425 thousand.
•
The increase is attributable to factors relating to the acquisition of Mission Oaks combined with
AltaPacific’s investment in professional staff to support the growing customer base.
•
Data processing, and other noninterest expense decreased principally as a result of one-time
expenses incurred during 2014 relating to the acquisition of Mission Oaks.
Provision for income taxes increased $1.2 million.
•
The provision for income taxes totaled $3.5 million during 2015 and totaled $2.3 million during 2014.
•
AltaPacific’s effective tax rate was 40% and 41% in 2015 and 2014, respectively.
Net Interest Income and Net Interest Margin. Net interest income was $19.3 million in 2015, compared to $16.2
million in 2014 and $10.2 million in 2013. AltaPacific’s level of net interest income depends on several factors in
combination, including growth in earning assets, the mix of earning assets by loan type and by security type, the cost of
interest bearing liabilities and the mix of noninterest earning deposits to total deposits. The $3.1 million, or 19.0%, increase
in 2015 and the $6.0 million, or 58.3% increase in 2014 was primarily due to increases in interest income earned on
AltaPacific’s loan portfolio of $3.1 million and $6.0 million, respectively. The increase in interest earned on AltaPacific’s
loan portfolio in 2015 and 2014, was the net result of an approximate $93 million increase in average loans outstanding from
both 2013 to 2014 and from 2014 to 2015. In both years the increase in interest income from loan growth was enhanced by an
92
increase in AltaPacific’s loan yield. In 2015 the loan yield increased by 48 basis points and in 2014 it increased by 67 basis
points. While the low rate environment and competitive market place affected loan yields in both 2015 and 2014, loan yields
were affected positively by the accretion of purchase discount from loans acquired in the acquisition of Stellar Business Bank
and Mission Oaks. Accretion income from purchased loans totaled $3.6 million, $2.0 million and $0.5 million in 2015, 2014
and 2013, respectively.
There was essentially no change in the interest earned on AltaPacific’s security portfolio from 2014 to 2015;
however, interest income increased by $353 thousand from 2013 to 2014. The increase in the interest earned on AltaPacific’s
security portfolio in 2014 was due to a 31 basis point increase in the yield on the portfolio combined with a $3.7 million
increase in the average size of the portfolio.
Interest expense increased only $65 thousand from 2014 to 2015 and increased by $360 thousand from 2013 to
2014. During 2015, average interest bearing liabilities increased by $8.4 million, which increased interest expense by $178
thousand. However, declines in average rates on those interest bearing liabilities reduced interest expense by $113 thousand.
During 2014, average interest bearing liabilities increased $57.8 million, thereby increasing interest expense by $401
thousand, which was offset by a reduction in average rates which served to reduce interest expense by $41 thousand. The
increase in interest bearing liabilities was principally a result of the acquisition of Mission Oaks.
The net interest margin increased 53 basis points in 2015 when compared to 2014 and increased 91 basis points in
2014 when compared to 2013. In each case, the increase resulted principally from increases in interest income and fees on
loans. The percentage of AltaPacific’s deposits that were noninterest bearing increased from 20% in 2013 to 24% in 2014
and 30% in 2015, contributing to the decline in the cost of funds.
The following tables show, for the nine months ended September 30, 2016 and 2015 and for each of the past
three years, the annual average balance for each principal balance sheet category, and the amount of interest income or
expense associated with that category. These tables also show the yields earned on each major component of
AltaPacific’s investment and loan portfolio, the average rates paid on each key segment of AltaPacific’s interest bearing
liabilities, and the net interest margin.
93
(Unaudited)
As of and for the Nine Months Ended September 30,
2016
2015
Interest
Interest
Average
Income/
Income/
Average
Balance
Expense
Expense
Rate/Yield1
(Dollars in thousands)
Average
Balance
Assets:
Earning assets:
Loans, net2 ............................................................
Investment Securities ..........................................
Interest-bearing deposits in banks ........................
Total interest-earning assets ....................................
Noninterest-earning assets:
Cash and due from banks .....................................
Premises and equipment, net ................................
Other real estate owned ........................................
Bank owned life insurance ...................................
Accrued interest receivable
and other assets..................................................
Total noninterest-earning assets ..............................
Total assets .....................................................
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
Money market accounts,
savings and NOW..............................................
Time deposits under $100,000 .............................
Time deposits $100,000 and over ........................
Other indebtedness ...............................................
Total interest-bearing liabilities .....................
Noninterest-bearing liabilities:
Demand deposits ..................................................
Other liabilities .....................................................
Total noninterest-bearing liabilities ...............
Shareholders’ equity ................................................
Liabilities and Stockholders’ equity ..............
Net interest income..................................................
Net interest spread3 ..................................................
Net interest margin4 .................................................
$
238,825
72,660
27,916
339,401
13,329
1,904
83
15,316
7.44%
3.49%
0.40%
6.02%
$
216,390
81,037
5,693
303,120
10,863
2,754
386
12,033
8,179
1,901
448
11,055
12,019
38,055
14,158
35,741
$
377,456
$
168,629
4,418
20,849
37,243
231,139
$
$
$
558
17
138
376
1,089
0.44%
0.51%
0.88%
1.35%
0.63%
86,969
4,751
91,720
54,597
377,456
$
338,861
$
145,535
7,485
21,785
36,599
211,404
$
$
Average
Rate/Yield1
$
14,025
1,926
22
15,973
8.64%
3.17%
0.52%
7.03%
$
503
30
112
343
988
0.46%
0.53%
0.69%
1.25%
0.62%
$
14,985
72,300
4,652
76,952
50,505
338,861
14,227
5.39%
5.59%
1
6.40%
6.59%
Annualized.
Loan fees have been included in the calculation of interest income. Loan fees were approximately $964 and $1,085 for the nine months ended
September 30, 2016 and 2015, respectively. Loans are net of the allowance for loan losses, deferred fees and related direct costs.
2
3
Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities.
4
Represents the net interest income (before provision for loan losses) as a percentage of average interest-earning assets.
94
Average
Balance
Assets:
Earning assets:
Loans, net1 ................................................ $ 219,837
Investment Securities ..............................
80,248
Interest-bearing deposits in banks ............
6,670
Total interest-earning assets ........................ 306,755
Noninterest-earning assets:
Cash and due from banks .........................
8,195
Premises and equipment, net ....................
2,065
Other real estate owned ............................
448
Bank owned life insurance .......................
11,095
Accrued interest receivable
and other assets ......................................
13,593
Total noninterest-earning assets ..................
35,395
Total assets ......................................... $ 342,150
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
Money market accounts,
savings and NOW .................................. $ 148,901
Time deposits under $100,000 .................
6,945
Time deposits $100,000 and over ............
21,198
Other indebtedness ...................................
35,913
Total interest-bearing liabilities ......... 212,957
Noninterest-bearing liabilities:
Demand deposits ......................................
73,391
Other liabilities .........................................
4,967
Total noninterest-bearing liabilities ...
78,358
Shareholders’ equity ....................................
50,835
Total liabilities and shareholders’
equity ........................................................... $ 342,150
Net interest income ......................................
Net interest spread2 ......................................
Net interest margin3 .....................................
2015
Interest
Income/ Average
Expense Rate/Yield
$ 18,140
2,438
29
20,607
$
690
37
145
458
1,330
8.25%
3.04%
0.43%
6.72%
0.46%
0.53%
0.68%
1.28%
0.62%
(Unaudited)
Years Ended December 31,
2014
Interest
Average Income/ Average
Balance Expense Rate/Yield
(Dollars in thousands)
$ 193,007 $14,993
80,555
2,443
8,088
33
281,650 17,469
7.77%
3.03%
0.41%
6.20%
2013
Interest
Average Income/ Average
Balance Expense Rate/Yield
$ 127,084 $ 9,028
76,835
2,090
7,347
22
211,266 11,140
8,437
1,002
526
9,439
4,466
1,290
591
6,597
11,868
31,272
$ 312,922
5,338
18,282
$ 229,548
$ 144,114 $ 738
9,389
59
34,104
238
16,913
230
204,520
1,265
0.51%
0.63%
0.70%
1.36%
0.62%
$ 120,278 $
2,868
16,477
7,101
146,724
57,045
2,908
59,953
48,449
$ 229,548
$16,204
6.09%
6.28%
0.58%
0.66%
0.68%
1.01%
0.62%
33,257
1,988
35,245
47,579
$ 312,922
$ 19,277
702
19
112
72
905
7.10%
2.72%
0.30%
5.27%
$ 10,235
5.58%
5.75%
4.66%
4.84%
The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each
major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such
change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are
equal to the increase or decrease in average balance multiplied by prior period rates, and rate variances are equal to the
increase or decrease in rate times prior period average balances. Variances attributable to both rate and volume changes are
calculated by multiplying the change in rate by the change in average balance, and are allocated to the rate variance.
1
Loan fees have been included in the calculation of interest income. Loan fees were approximately $1,415, 1,280 and $836 for the 12 months ended
December 31, 2015, 2014 and 2013, respectively. Loans are net of the allowance for loan losses, deferred fees and related direct costs.
2
Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities.
3
Represents the net interest income (before provision for loan losses) as a percentage of average interest-earning assets.
95
Rate/Volume Analysis of Net Interest Income
Nine Months Ended
September 30,
2016 vs. 2015
Increase (Decrease)
Due to Change In
Volume
Rate
Total
Earning assets:
Interest Income
Interest-bearing deposits in
86
banks ..................................... $
(199)
Investment Securities ..............
1,454
Loans, net ................................
Total
1,341
Deposits and borrowed funds
Interest Expense
Money market accounts,
savings and NOW .................
Time deposits ..........................
Other indebtedness ..................
Total
Change in Net Interest Income
$
(25)
177
(2,150)
(1,998)
$
Years Ended December 31,
2015 vs. 2014
2014 vs. 2013
Increase (Decrease)
Increase (Decrease)
Due to Change In
Due to Change In
Volume
Rate
Total
Volume
Rate
Total
(Dollars in thousands)
61
(22)
(696)
(657)
$
(6)
(11)
2,088
2,071
$
2
6
1,059
1,067
$
(4)
(5)
3,147
3,138
$
2
101
4,675
4,778
$
9
252
1,290
1,551
$
11
353
5,965
6,329
(80)
17
(6)
(69)
25
(30)
(27)
(32)
(55)
(13)
(33)
(101)
(25)
105
(258)
(178)
73
10
30
113
48
115
(228)
(65)
(139)
(163)
(99)
(401)
103
(3)
(59)
41
(36)
(166)
(158)
(360)
$ 1,272
$ (2,030)
$ (758)
$ 1,893
$ 1,180
$ 3,073
$ 4,377
$ 1,592
$ 5,969
Provision for Loan Losses. The provision for loan losses was $390 thousand in 2015 and $625 thousand in 2014.
The growth in AltaPacific’s allowance for loan losses in 2015 and 2014 was primarily due to loan growth. AltaPacific’s loan
loss provisions have been sufficient to maintain an allowance for loan losses at a level that, in management’s
judgment, is sufficient to absorb probable losses related to specifically identified impairment loans, as well as the probable
incurred losses on the remaining loan portfolio. The process to establish an appropriate allowance for loan loss is discussed
further below under “Allowance for Loan Losses.”
Noninterest Income. The following table sets forth the various components of AltaPacific’s noninterest
income for the periods indicated:
Noninterest Income
(Unaudited)
Nine Months Ended September 30,
2016
2015
Percent
Percent
Amount
of Total Amount
of Total
Service charges and fees ............
Bank owned life insurance ........
Gain on sale of investment
securities ..................................
Gain on recovery of acquired
loans .........................................
Other ...........................................
$
$
As a percentage of average
earning assets ...........................
277
242
37.7%
33.0%
-
0.0%
-
0.0%
-
0.0%
51
3.4%
54
12.6%
195
20
734
26.6%
2.7%
100.0%
199
20
744
26.7%
2.7%
100.0%
410
29
$ 1,129
36.3%
2.6%
100.0%
625
48
$ 1,516
41.2%
3.2%
100.0%
45
428
0.0%
10.5%
100.0%
0.22%
$
$
295
230
Years Ended December 31,
2015
2014
2013
Percent
Percent
Percent
Amount
of Total Amount
of Total Amount
of Total
(Dollars in thousands)
39.7% $ 382
33.8% $ 513
33.8% $ 121
28.3%
30.9%
308
27.3%
279
18.4%
208
48.6%
0.25%
0.37%
0.54%
$
0.20%
In 2015, noninterest income decreased by $387 thousand or 26%, as service charges and fees decreased by $131
thousand, income from gain on sale of investment securities decreased by $51 thousand and gain on recovery of acquired
loans decreased $215 thousand.
96
During 2015, 2014 and 2013, packaging fees and servicing income related to AltaPacific’s SBA operations totaled
$131 thousand, $265 thousand and $21 thousand, respectively, and is recognized as a component of service charges and fees.
In 2014, noninterest income increased by $1.1 million or 254% principally as a result of the acquisition of Mission
Oaks. Of that amount, $625 thousand resulted from gains realized upon the recovery of loans previously charged off by
Mission Oaks.
Noninterest Expense. The following table sets forth AltaPacific’s noninterest expenses for the periods indicated:
Noninterest Expense
(Unaudited)
Nine Months Ended September 30,
2016
2015
Percent
Percent
Amount of Total
Amount of Total
Salaries and employee
benefits ....................................
Occupancy and equipment ........
Professional fees ........................
Data processing .........................
Regulatory assessments .............
Telephone and postage ..............
Amortization of intangible
assets ........................................
Office supplies
Advertising and promotion ........
OREO ........................................
Other ..........................................
As a percentage of average
earning assets ...........................
Efficiency ratio ...........................
$ 5,754
1,011
879
618
143
140
62.3%
10.9%
9.5%
6.7%
1.5%
1.5%
$ 5,257
963
1,009
545
180
109
59.6%
10.9%
11.4%
6.2%
2.0%
1.2%
137
112
64
10
375
$ 9,243
1.5%
1.2%
0.7%
0.1%
4.1%
100.0%
78
96
64
21
515
$ 8,837
0.9%
1.1%
0.7%
0.2%
5.8%
100.0%
1.97%
65.0%
2.07%
58.0%
Years Ended December 31,
2014
2013
Percent
Percent
Percent
Amount
of Total
Amount of Total Amount of Total
(Dollars in thousands)
2015
$
7,261
1,322
769
724
234
154
64.7%
11.8%
6.9%
6.5%
2.1%
1.4%
$ 6,836
1,287
761
835
234
153
60.5%
11.4%
6.7%
7.4%
2.1%
1.4%
$ 4,976
1,109
266
474
153
99
63.0%
14.0%
3.4%
6.0%
1.9%
1.3%
101
120
89
36
408
$ 11,218
0.9%
1.1%
0.8%
0.3%
3.6%
100.0%
240
106
109
45
702
$ 11,308
2.1%
0.9%
1.0%
0.4%
6.2%
100.0%
171
93
65
22
473
$ 7,901
2.2%
1.2%
0.8%
0.3%
6.0%
100.0%
3.66%
55.0%
4.01%
63.8%
3.74%
74.1%
Noninterest expense decreased by $90 thousand in 2015, compared to 2014 and increased $3.4 million in 2014,
compared to 2013. The increase in 2014 is related principally to the May 2014 acquisition of Mission Oaks.
The largest component of noninterest expense is salaries and benefit expense, which increased by $425 thousand, or
6% in 2015 and increased $1.9 million, or 37% in 2014. The number of full-time equivalent staff was reduced from 52 as of
December 31, 2014 to 49 at the end of 2015 with the reduction in staff resulting principally from the May 2015 closure of the
former Mission Oaks branch located in Fallbrook, California. During 2014, the number of full-time staff was increased by 17
with essentially all being added as a result of the acquisition of Mission Oaks.
Occupancy and equipment cost increased by $35 thousand and $178 thousand in 2015 and 2014, respectively. Data
processing fees decreased $111 thousand in 2015 and increased $361 thousand in 2014. In each case, the variances resulted
principally from the acquisition of Mission Oaks.
As a result of AltaPacific’s merger and acquisition activities, it has been the policy of AltaPacific to record monthly
accruals for projected merger and acquisition expenses. The accrued expenses are included in professional fees. At year end,
accrued liabilities and expenses are adjusted to reflect actual expenditures. For the period ending September 30, 2016 and
2015, AltaPacific recorded professional fees totaling $488 thousand and $627 thousand, respectively. For the year ending
December 31, 2015 and 2014, AltaPacific recorded professional fees totaling $769 thousand and $761 thousand respectively.
On February 29, 2016, AltaPacific opened a new branch in Riverside, California. During the nine month period
ending September 30, 2016, noninterest expenses associated with the new branch totaled $336 thousand.
Provision for Income Taxes. Income tax expense was $3.5 million for the year ending December 31, 2015, an
increase of $1.2 million over the tax provision for 2014. In 2014, income tax expense was $2.4 million, which was a $1.4
million increase over 2013. For 2015 and 2014, AltaPacific’s effective tax rates were 40% and 41%, respectively.
97
Financial Condition
Summary. Total assets for AltaPacific increased $5.1 million as of December 31, 2015 when compared to
December 31, 2014. While AltaPacific’s total deposits decreased $100 thousand during the same time period, noninterest
bearing deposits increased $14.0 million and money market, savings and NOW accounts increased $6.6 million. As a result
of the increases in these deposit categories during 2015, AltaPacific elected to reduce its reliance on wholesale certificates of
deposit. During 2015, AltaPacific reduced total certificates of deposit by $20.7 million. AltaPacific originally increased its
level of wholesale certificates of deposit in connection with the acquisition of Stellar Business Bank. They were originated
as a precautionary measure in the event deposit runoff from the acquisition of Stellar Business Bank exceeded projections.
While the deposit runoff levels were less than projected, management decided to maintain the same level of wholesale
certificates of deposit until the acquisition of Mission Oaks was completed. Following the acquisition of Mission Oaks,
management determined that the wholesale certificates of deposit were no longer required.
Loan Portfolio. AltaPacific’s loan portfolio consists almost entirely of loans to customers who have a full banking
relationship with AltaPacific. The largest percentage of the loan portfolio is represented by real estate mortgage loans as
reflected by this category representing 70% and 66% of the outstanding loans as of December 31, 2015 and 2014,
respectively. A substantial percentage of the commercial real estate loans are considered owner-occupied loans. The second
largest category of loans is real estate construction loans that totaled 19% and 25% of total loans at December 31, 2015 and
2014, respectively. AltaPacific’s loans are generated by its relationship managers and executives. AltaPacific’s senior
management is actively involved in its lending, underwriting, and collateral valuation processes. Higher dollar loans or loan
commitments are also approved through a director’s loan committee comprised of executives and outside board members.
The following tables set forth the composition of AltaPacific’s loan portfolio as of the dates indicated:
Loan Portfolio Composition
(Unaudited)
Amount Outstanding as of September 30,
2016
2015
Percent of
Percent of
Amount
Total
Amount
Total
(Dollars in thousands)
Commercial
$ 16,103
Real Estate:
Construction
48,682
Mortgage
167,350
Installment
5,426
Home equity lines of credit
3,006
Total
240,567
Deferred fees and costs
(1,317)
Loans, net of deferred fees
and costs
239,250
Allowance for loan losses
(3,336)
Total net loans
$ 235,914
98
6.7% $ 12,802
20.2%
69.6%
2.3%
1.2%
100.0%
49,541
155,764
5,547
3,104
226,758
(1,300)
225,458
(2,994)
$ 222,464
5.6%
21.8%
68.8%
2.4%
1.4%
100.0%
Amount Outstanding as of December 31,
2014
2013
2012
2011
Percent of
Percent of
Percent of
Percent of
Amount
Total
Amount
Total
Amount
Total
Amount
Total
(Dollars in thousands)
7.0% $ 14,097
6.2% $ 8,630
6.0% $ 8,843
8.9% $ 6,438
10.7%
2015
Percent of
Amount
Total
Commercial
Real Estate:
Construction
Mortgage
Installment
Home equity lines of
credit
Total
Deferred fees and costs
Loans, net of deferred
fees and costs
Allowance for loan
losses
Total net loans
$ 15,785
43,180
158,699
5,765
19.0%
70.1%
2.5%
56,931
148,975
3,447
25.1%
65.7%
1.5%
42,822
88,814
3,051
29.7%
61.6%
2.1%
27,064
57,235
4,822
27.2%
57.6%
4.9%
24,227
25,158
3,350
40.3%
41.8%
5.6%
3,247
226,676
(1,211)
1.4%
100.0%
3,446
226,896
(1,616)
1.5%
100.0%
832
144,149
(917)
0.6%
100.0%
1,415
99,379
(548)
1.4%
100.0%
1,000
60,173
(299)
1.7%
100.0%
225,465
(3,235)
$ 222,230
225,280
143,232
(2,746)
$ 222,534
(2,070)
$ 141,162
98,831
59,874
(1,659)
$ 97,172
(1,300)
$ 58,574
Loan Maturities. The following table shows the maturity distribution for total loans outstanding as of
December 31, 2015. The maturity distribution is grouped by remaining scheduled principal payments that are due within
one year, after one but within five years, or after five years. The principal balance of loans due after one year is
indicated by both fixed and floating rate categories.
Loan Maturities and Repricing Schedule
One Year or
Less
Commercial .....................................................
Real Estate:
Construction .................................................
Mortgage ......................................................
Installment ......................................................
Home equity lines of credit ............................
Total ...........................................................
After One
But Within
Five Years
$ 10,228
$
3,429
39,647
19,051
4,379
$ 73,305
3,205
47,475
1,165
$ 55,274
After
Five Years
Total
(Dollars in thousands)
$ 2,128
$ 15,785
328
92,173
221
3,247
$ 98,097
43,180
158,699
5,765
3,247
$ 226,676
Floating rate:
due after
one year
$
3,139
3,239
92,743
263
3,247
$ 102,631
Fixed rate:
due after
one year
$
2,419
294
46,905
1,119
$ 50,737
Off-Balance Sheet Arrangements. In the normal course of business, AltaPacific makes commitments to extend
credit to its customers as long as there are no violations of any conditions established in contractual arrangements. These
commitments are obligations that represent a potential credit risk to AltaPacific, and a $117 thousand reserve for unfunded
commitments is reflected as a liability in AltaPacific’s balance sheet at December 31, 2015. Total unused commitments to
extend credit were $46.7 million at December 31, 2015, as compared to $51.5 million at December 31, 2014. Unused
commitments represented 21% and 23% of gross loans outstanding at December 31, 2015 and 2014, respectively.
AltaPacific also had $765 thousand and $1.7 million in standby letters of credit at December 31, 2015 and 2014, respectively.
The effect on AltaPacific’s revenues, expenses, cash flows and liquidity from the unused portion of the
commitments to provide credit cannot be reasonably predicted, because there is no certainty that lines of credit will ever be
fully utilized.
Non-performing Assets. Non-performing assets are comprised of loans on non-accrual status, loans 90 days or
more past due and still accruing interest, and other real estate owned (“OREO”). AltaPacific does not have any loans 90
days or more past due and still accruing interest. A loan is placed in non-accrual status if there is concern that principal and
interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is
both well secured and in process of legal collection. When loans are placed on non-accrual status, all interest previously
accrued but not collected is reversed against current period interest income. Income on non-accrual loans is subsequently
recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are
returned to accrual status when they are brought current with respect to principal and interest payments and future payments
are reasonably assured. Loans in which the borrower is encountering financial difficulties and AltaPacific has modified the
terms of the original loan are evaluated for impairment and classified as troubled debt restructurings (“TDRs”).
99
The following table presents information concerning AltaPacific’s non-performing assets and performing TDRs as
of the dates indicated:
Non-performing Assets and Performing TDRs
Unaudited
Nine Months Ended
September 30,
2016
2015
2015
Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
2011
Non-performing loans:
533
$ 3,106
Total non-performing loans ...............
Non-accrual loans ...........................
234
625
533
3,106
110
152
-
Foreclosed assets ...............................
337
448
448
448
591
591
766
Total non-performing assets ..............
571
1,073
981
3,554
701
743
766
Performing TDRs ..............................
-
-
-
778
799
816
-
Non-performing loans as a % of
total gross loans ...............................
0.10%
0.28%
0.24%
1.38%
0.08%
0.15%
0.00%
Non-performing assets as a % of
total gross loans and foreclosed
assets ................................................
0.24%
0.47%
0.43%
1.57%
0.49%
0.75%
1.26%
1
$
234
$
625
$
$
110
$
152
$
-
Allowance for Loan Losses. AltaPacific establishes an allowance for loan loss, through a provision for loan
losses, for both specific losses on impaired loans and the inherent risk of probable loss for non-impaired loans based on loan
grades, loan characteristics, and economic trends. The allowance consists of specific, general, and qualitative
components. The allowance for loan losses is evaluated on a regular basis by management and the estimate is based upon
management’s periodic review of the collectability of the loans that considers historical experience, the nature and volume
of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. The specific component relates to loans that are considered impaired for
which an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available. AltaPacific’s allowance for loan loss was
$3.2 million, at December 31, 2015. During 2015 the allowance for loan loss increased as a result of a $390 thousand
provision for loan loss combined with a $99 thousand increase resulting from recoveries of loans previously charged off.
At December 31, 2014, the allowance for loan loss totaled $2.7 million which was an increase over the balance of $2.1
million at December 31, 2013. The increase during 2014 resulted from a $625 thousand provision for loan loss combined
with $51 thousand in recoveries of loans previously charged off. The allowance for loan loss as a percent of outstanding
loans totaled 1.43% and 1.22% at December 31, 2015 and 2014, respectively. As a result of the acquisition of Stellar
Business Bank in 2012 and Mission Oaks National Bank in 2014, AltaPacific had purchased loans totaling $46 million and
$74 million at December 31, 2015 and 2014, respectively. In accordance with generally accepted accounting principles, no
allowance was provided for the purchased loans. At December 31, 2015 and 2014, the allowance for loan loss as a percent of
originated loans outstanding totaled 1.76% and 1.72%, respectively.
The growth in the allowance in 2015 and 2014 was primarily the result of growth in originated loans, which totaled
approximately $28 million (19%) in 2015 and $30 million (25%) in 2014. The allowance for loan loss is maintained at a
level that management believes is adequate to provide for loan losses based on currently available information. The
following table summarizes the activity in the allowance for loan losses for the periods indicated:
1
A TDR, or troubled debt restructuring, is a loan or lease for which the original terms were renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower. Performing TDRs are not included in nonperforming loans above, nor are they
included in the numerators used to calculate this ratio.
100
Allowance for Loan Losses
Unaudited
Nine Months Ended
September 30,
2016
2015
Balances:
Average total loans .......................
Total loans outstanding at end of
period
Originated .................................
Purchased ..................................
Total .......................................
Allowance for loan losses:
Balance at beginning of period .....
Charge-offs: ..................................
Recoveries: ...................................
Net loan charge-offs
(recoveries) ...............................
Provision for loan losses ...............
Balance at end of period .............
Ratios
Net loan charge-offs to average total
loans .................................................
Provision for loan losses to average
total loans .........................................
Allowance for loan losses to total
loans, gross ......................................
Allowance for loan losses to
originated loans ...............................
Allowance for loan losses to total
nonperforming loans1 .......................
Net loan charge-offs to allowance
for loan losses ..................................
Net loan charge-offs to provision for
loan losses ........................................
2015
Years Ended December 31,
2014
2013
2012
(Dollars in thousands)
$ 238,825
$ 216,390
$ 219,837
$ 193,007
$ 127,084
$ 109,615
205,259
33,991
239,250
175,552
49,906
225,458
184,065
41,400
225,465
159,867
65,413
225,280
122,214
21,018
143,232
64,920
33,911
98,831
2,070
1,659
3,235
(1)
2,746
2
(45)
2,746
(99)
(51)
(1)
100
3,336
(43)
205
2,994
(99)
390
3,235
2011
$
57,116
59,874
59,874
1,423
(1)
1,300
32
(91)
(51)
625
2,746
(1)
410
2,070
(59)
300
1,659
(123)
1,300
-
0.00%
-0.02%
-0.05%
-0.03%
0.00%
-0.05%
0.00%
0.04%
0.09%
0.18%
0.32%
0.32%
0.27%
-0.22%
1.39%
1.33%
1.43%
1.22%
1.45%
1.68%
2.17%
1.63%
1.71%
1.76%
1.72%
1.69%
2.56%
2.17%
1425.64%
479.04%
606.94%
88.41%
0.00%
1091.45%
0.00%
-0.03%
-1.44%
-3.06%
-1.86%
-0.05%
-3.56%
0.00%
-1.00%
-20.98%
-25.38%
-8.16%
-0.24%
-19.67%
0.00%
Allocation of Allowance for Loan Losses. Provided below is a summary of the allocation of the allowance for loan
losses for specific loan categories at the dates indicated. The allocation presented should not be viewed as an indication
that charges to the allowance will be incurred in these amounts or proportions, or that the portion of the allowance
allocated to each loan category represents the total amounts available for charge-offs that may occur within these categories.
Unaudited
Nine Months Ended September 30,
2016
2015
Percent of
Percent of
Loans in
Loans in
Category
Category
to Total
to Total
Amount
Loans
Amount
Loans
Balances at end of period
applicable to:
Commercial ............................
Real Estate:
Construction .......................
Mortgage ............................
Installment ..............................
Home equity lines of credit ....
Total .......................................
1
$
354
6.7%
841
2,030
61
50
$ 3,336
20.2%
69.6%
2.3%
1.2%
100.0%
$
327
5.6%
872
1,706
48
41
$ 2,994
21.8%
68.8%
2.4%
1.4%
100.0%
Performing TDRs are not included in nonperforming loans and are therefore not included in the numerators used to calculate this ratio.
101
2015
Percent of
Loans in
Category
to Total
Amount
Loans
Balances at end of period
applicable to:
Commercial ............................
Real Estate:
Construction .......................
Mortgage ............................
Installment ..............................
Home equity lines of credit ....
Total ........................................
Years Ended December 31,
2014
2013
2012
Percent of
Percent of
Percent of
Loans in
Loans in
Loans in
Category
Category
Category
to Total
to Total
to Total
Amount
Loans
Amount
Loans
Amount
Loans
$ 367
7.0%
$ 169
6.2%
811
1,932
66
59
$ 3,235
19.0%
70.1%
2.5%
1.4%
100.0%
952
1,573
13
39
$ 2,746
25.1%
65.7%
1.5%
1.5%
100.0%
$
126
6.0%
673
1,235
24
12
$ 2,070
29.7%
61.6%
2.1%
0.6%
100.0%
$
372
8.9%
644
563
63
17
$ 1,659
27.2%
57.6%
4.9%
1.4%
100.0%
2011
Percent of
Loans in
Category
to Total
Amount
Loans
$
145
10.7%
595
501
38
21
$ 1,300
40.3%
41.7%
5.6%
1.7%
100.0%
Investment Portfolio. AltaPacific classifies its investment securities as “investment securities available-for-sale”
(AFS) and are reported at fair value. At December 31, 2015 and 2014, AltaPacific’s AFS securities had a total fair value of
$77 million and $85 million, respectively. AltaPacific also maintains surplus liquidity in interest earning accounts at
correspondent banks and at the Federal Reserve Bank (FRB). As of December 31, 2015 and 2014, these assets totaled
approximately $14 million and $4 million, respectively. AltaPacific’s investments provide a substantial source of liquidity as
they can be pledged to support borrowed funds or can be liquidated to generate cash proceeds. The investment portfolio is
also a significant resource to AltaPacific in managing interest rate risk, as the maturity and interest rate characteristics
of this asset class can be readily changed to match changes in the loan and deposit portfolios. The majority of
AltaPacific’s investment portfolio is comprised of mortgage-backed securities (MBSs). In addition, the portfolio includes
highly rated corporate bonds.
During 2015, the bank purchased $10 million in securities and in 2014 the bank purchased $24 million in securities.
No securities were sold in 2015 and securities totaling $5 million were sold in 2014, which resulted in gains totaling $51
thousand in 2014. Proceeds from principal payments of MBS securities totaled $16 million and $16 million in 2015 and
2014, respectively. The unrealized gain, before tax basis, on the available-for-sale portfolio was $1.3 million and $1.7
million at December 31, 2015 and 2014, respectively.
The following Investment Portfolio table reflects the amortized cost and fair market values for the total portfolio
for each category of investments for the periods indicated:
Investment Securities
Unaudited
Nine Months Ended September 30,
2016
2015
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Corporate securities ........
Municipal securities ........
Mortgage backed
securities:
Agency .........................
Non-agency ..................
Total
$ 27,939
622
$ 28,980
618
$ 25,983
-
Years Ended December 31,
2015
2014
2013
Amortized
Fair
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Cost
Value
(Dollars in thousands)
$ 27,205 $ 25,897 $ 26,829 $ 26,230 $ 27,618 $ 22,831 $ 24,454
-
29,085
15,719
$ 73,365
29,565
15,734
$ 74,897
31,214
23,166
$ 80,363
31,604
23,195
$ 82,004
29,464
20,384
$ 75,745
29,597
20,580
$ 77,006
38,539
18,024
$ 82,793
38,602
18,312
$ 84,532
39,377
17,543
$ 79,751
39,378
17,576
$ 81,408
The investment maturities table below summarizes contractual maturities for AltaPacific’s investment securities and
their weighted average yields at December 31, 2015. The actual timing of principal payments may differ from remaining
contractual maturities, because obligors may have the right to repay certain obligations with or without penalties.
102
Investment Maturities and Repricing Schedule
After One But Within
Five Years
Amount
Yield
One Year or Less
Amount
Yield
Corporate
securities..................
Mortgage backed
securities ................
Agency.....................
Non-agency .............
Total
$
1,805
2.65%
$ 18,511
4.51%
$
1,805
2.65%
701
$ 19,212
1.65%
2.96%
After Five But Within
Ten Years
Amount
Yield
(Dollars in thousands)
After Ten Years
Amount
Yield
$
6,480
1.62%
-
$
2,785
572
9,837
1.85%
2.58%
2.96%
$ 23,421
16,378
$ 39,799
Total
Amount
2.13%
4.70%
2.96%
Yield
$ 26,796
3.65%
26,907
16,950
$ 70,653
2.08%
4.42%
3.68%
Deposits. AltaPacific’s deposits are generated through core customer relationships, related predominantly to
business relationships. At December 31, 2015, approximately 30% of AltaPacific’s deposits were in noninterest bearing
demand deposits and approximately 76% of the interest-bearing deposits are held in money market accounts which provide
the bank’s business owners with interest and liquidity. Noninterest bearing demand deposits grew by $14 million or 22% in
2015 and by $30 million or 88% in 2014. Money market account deposits grew by $6 million or 5% and $18 million or 16%
in 2015 and 2014, respectively.
Information concerning average balances and rates paid on deposits by deposit type for the past three fiscal years
is contained in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section on Results of
Operations – Net Interest Income and Net Interest Margin. The following table provides a comparative distribution of
AltaPacific’s deposits by outstanding balance as well as by percentage of total deposits at the dates indicated:
Deposit Distribution
(Unaudited)
Nine Months Ended September 30,
2016
2015
Percent
Percent
Amount
of Total
Amount
of Total
Noninterest bearing demand ......
Money market, savings
and NOW ................................
Time deposits
under $100,000 ........................
Time deposits $100,000 and
over ..........................................
Total deposits .............................
Years Ended December 31,
2014
Percent
Percent
Amount
of Total
Amount of Total
(Dollars in thousands)
29.4%
$ 78,057
29.7%
$ 64,065 24.4%
2015
$ 93,185
31.5%
$ 74,129
178,623
60.4%
155,527
61.6%
154,669
59.0%
148,022
3,222
1.1%
5,108
2.0%
5,283
2.0%
11,480
20,645
$295,675
7.0%
100.0%
17,771
$ 252,535
7.0%
100.0%
24,424
$ 262,433
9.3%
100.0%
2013
Percent
Amount of Total
$ 34,016
20.1%
56.4%
118,260
70.1%
4.4%
2,613
1.5%
38,944 14.8%
$ 262,511 100.0%
14,106
$ 168,995
8.3%
100.0%
The scheduled maturity distribution of AltaPacific’s time deposits at the end of 2015 was as follows:
Maturities of Time Deposits of $100,000 or More
Three months or less.................................................................
Over three months through six months ....................................
Over six months through 12 months .......................................
Over 12 months .......................................................................
Total ....................................................................................
(Unaudited)
Time Certificates of
Deposit
(Dollars in thousands)
$
2,889
1,815
4,240
11,465
$ 20,409
Liquidity and Market Risk Management
Liquidity. AltaPacific’s primary source of funding is deposits from its core banking relationships. The majority of
AltaPacific’s deposits are transaction accounts or money market accounts that are payable on demand. AltaPacific manages
its liquidity in a manner that enables it to meet expected and unexpected liquidity needs under both normal and adverse
103
conditions. AltaPacific maintains significant on-balance sheet and off-balance liquidity sources, including a relatively large
marketable securities portfolio and borrowing capacity through various secured and unsecured sources. AltaPacific maintains
fed funds borrowing lines of $20 million, in addition to its secured borrowing capacity with the FHLB which had unused
capacity of $65 million at December 31, 2015. As of December 31, 2015, AltaPacific had borrowings under its line with the
FHLB totaling $20 million, $15 million of which was a short term borrowing and $5 million that was long term. The board
reviews the AltaPacific’s liquidity position and key liquidity measurements on a monthly basis. As of December 31, 2015,
AltaPacific’s primary liquidity ratio was 33%.
Interest Rate Risk Management. Market risk can arise from changes in interest rates, exchange rates, commodity
prices, or equity prices. AltaPacific does not engage in any trading of financial instruments and does not have any exposure
to currency exchange rates, or price changes for commodities or equities. Interest rate risk arises from the maturity and
re-pricing characteristics of its loans and deposits. AltaPacific is able to balance its interest rate sensitivity through the
composition of its security portfolio. AltaPacific measures its interest rate sensitivity through the use of a simulation model.
The model incorporates the contractual cash flows and re-pricing characteristics from each financial instrument, as well as
certain management assumptions. The model also captures the estimated impacts of optionality and duration and their
expected change due to changes in interest rates and the shape of the yield curve. AltaPacific manages its interest rate risk
through established policies and procedures. AltaPacific measures both the potential short term change in earnings and the
long term change in market value of equity on a quarterly basis. Both measurements use nonparallel rate ramps up and down
the yield curve in 100 basis point increments. There are seven scenarios comprised of rate changes up 400 basis points to
down 300 basis points. AltaPacific has established policy thresholds for each of these rate scenarios. The impact on earnings
for one year and the change in market value of equity are limited to a change of no more than 10%, 20%, 25% and 30% for
rate changes of 100, 200, 300 and 400 basis points, respectively. Based upon the results of the simulation model, AltaPacific
is positioned to be moderately asset sensitive, with earnings increasing in a rising rate environment. The following reflects
AltaPacific’s estimated net interest income sensitivity as of December 31, 2015:
Immediate Change in Rate
-300 b.p.
-200 b.p.
-100 b.p.
+100 b.p.
+200 b.p.
+300 b.p.
+400 b.p.
(Dollars in thousands)
Change in net interest income ..........
-$480
-$361
-$161
$799
$1,594
$2,386
$3,179
Percentage (%) change .....................
-3.1%
-2.4%
-1.1%
5.2%
10.4%
15.6%
20.8%
In an effort to measure the long-term impact of interest rate risk, AltaPacific uses a technique called the market
value of equity (MVE), which calculates the net present value of AltaPacific’s assets and liabilities, based on a discount rate
derived from current replacement rates. The market value of equity is obtained by subtracting the market value of
liabilities from the market value of assets. The change in market value of equity will differ based on the characteristics of
each financial instrument and type of deposit. The longer the duration of a financial instrument, the greater the impact a
rate change will have on its market value. As AltaPacific has minimal deposits with contractual maturities, the decay rate
assumptions used for non-maturity deposits can have a significant impact on the market value of equity. The following
reflects AltaPacific’s estimated changes in MVE as of December 31, 2015:
Immediate Change in Rate
-300 b.p.
-200 b.p.
-100 b.p.
+100 b.p. +200 b.p. +300 b.p. +400 b.p.
(Dollars in thousands)
Change in MVE..................................
-$15.8
-$9.9
-$3.9
$4.5
$8.5
$12.2
$15.5
Percentage (%) change .......................
-23.8%
-14.9%
-5.9%
6.8%
12.9%
18.4%
23.4%
Capital Resources. As of December 31, 2015 AltaPacific had total shareholders’ equity of $52.3 million, compared
to $48.8 million at the end of 2014. Management uses a variety of measures to evaluate capital adequacy. As part of our
evaluation, we view various capital measurements on a quarterly basis and take appropriate action to ensure that such
measurements are within established internal and external guidelines. The external guidelines, which are issued by the
FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off balance sheet exposures. There
are two categories of capital under the FDIC guidelines: Tier 1 and Tier 2 Capital. Tier 1 Capital includes common
shareholders’ equity less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax
adjustments) on securities available for sale, which are carried at fair market value.
104
AltaPacific Bank’s current capital position exceeds all current guidelines established by the FDIC. By the current
regulatory definitions, we were “well capitalized,” the highest rating of the five capital categories defined under FDIC
regulations, at September 30, 2016, December 31, 2015 and 2014. The following table reflects the AltaPacific Bank’s actual
capital ratios at those dates as well as the minimum capital ratios for capital adequacy.
Common equity tier 1 capital
to risk-weighted assets) .....................................
Total capital (to risk-weighted assets) .................
Tier 1 capital (to risk-weighted assets) ................
Tier 1 capital (to average assets) ..........................
September 30,
2016
December 31,
2015
December 31,
2014
18.5%
19.6%
18.5%
15.0%
18.1%
19.3%
18.1%
15.0%
15.8%
16.8%
15.8%
13.8%
Minimum
Regulatory
Capital Ratios
6.5%
10.0%
8.0%
5.0%
Directors and Executive Officers of AltaPacific Bancorp
The following table sets forth certain information as of February 16, 2017 with respect to (i) each of our directors
and executive officers, and (ii) our directors and executive officers as a group.
Name, Address and
Offices Held with Company1
Frank Basirico
President,
Chief Operating Officer
and Director
Harold J. Borak
Director
Randy M. DeCaminada
Director
Gary W. Deems
Director
Principal Occupation
for the Past Five Years
President and
Chief Operating Officer,
AltaPacific Bancorp and
AltaPacific Bank5
Retired insurance
industry professional
Retired division
manager with Pacific
Gas & Electric
Retired, former
Riverside County
Market President,
AltaPacific Bank;
Former President and
Chief Executive Officer,
Mission Oaks National
Bank
Common Stock
Beneficially Owned on
February 16, 2017
Number of Exercisable
Percent
Shares2
Options3
of Class4
Age
Director
Since
62
2014
8,038
36,269
0.7%
79
2012
43,100
13,062
1.0%
64
2010
(2006)6
95,207
300
1.6%
70
2014
18,717
4,710
0.4%
1
The business address of each of the executive officers and directors is c/o AltaPacific Bancorp, 3725 Westwind Boulevard, Suite 100, Santa Rosa,
California, 94503-1099.
2
Except as otherwise noted, may include shares held by or with such person’s spouse (except where legally separated) and minor children, and by any other
relative of such person who has the same home; shares held in "street name" for the benefit of such person; shares held by a family trust as to which such
person is a trustee and primary beneficiary with sole voting and investment power (or shared power with a spouse); or shares held in an Individual
Retirement Account or pension plan as to which such person is the sole beneficiary and has pass-through voting rights and investment power.
3
Represents option shares which are vested or will vest within 60 days of February 16, 2017 pursuant to our 2016 Equity Incentive Plan. See “ – Executive
Officer And Director Compensation – Outstanding Equity Awards at Fiscal Year End” and “- Compensation of Directors.”
4
This percentage is based on the total number of shares of our common stock outstanding, plus the numbers of option shares for the applicable individual, or
for the directors and executive officers collectively, which are vested or will vest within 60 days of February 16, 2017 pursuant to our 2016 Equity Incentive
Plan. See “ – Executive Officer And Director Compensation – Outstanding Equity Awards at Fiscal Year End” and “ – Compensation of Directors.”
5
Mr. Basirico was appointed President and Chief Operating Officer of both AltaPacific Bancorp and AltaPacific Bank on December 7, 2016. Previously, he
served as Senior Executive Vice President and Chief Operating Officer of those same entities since October 7, 2015; and before that as Executive Vice
President, Mergers and Acquisitions of AltaPacific Bancorp and President, Southern California Region of AltaPacific Bank.
6
Year first elected or appointed a director of AltaPacific Bank.
(Table continues on following page.)
105
Name, Address and
Offices Held with Company1
Richard A. Dowd7
Director
Robin R. Goble
Director
Charles O. Hall
Chief Executive Officer
and Director
Richard J. Jett
Director
Timothy J. Jorstad
Chairman of the Board
Randall J. Verrue
Vice Chairman of the Board
Joseph C. Zils
Director
Allen R. Christenson
Executive Vice President
and Chief Financial Officer
Jeanne M. Reade
Executive Vice President
and Chief Credit Officer
Principal Occupation
for the Past Five Years
Home builder and
developer
Director of Sustainable
Development, Ygrene
Energy Fund
Director, former elected
official, Town of
Windsor
Chief Executive Officer,
AltaPacific Bancorp and
AltaPacific Bank8
Retired banking
professional
CPA
President, Jorstad Inc.
Real estate developer
President and CEO of
HCV Pacific Partners
Attorney
Executive Vice
President and
Chief Financial Officer,
AltaPacific Bancorp
and AltaPacific Bank
Executive Vice
President and
Chief Credit Officer,
AltaPacific Bancorp
and AltaPacific Bank
All directors and
executive officers as a group
(13 in number)
Age
74
Director
Since
2010
(2006)6
Common Stock
Beneficially Owned on
February 16, 2017
Number of Exercisable
Percent
Shares2
Options3
of Class4
95,345
300
1.6%
60
2010
(2006)6
70,355
300
1.2%
62
2010
(2006)6
99,137
4,000
1.7%
76
2012
25,858
13,062
0.7%
65
2010
(2006)6
2010
(2006)6
439,7599
300
7.5%
73,534
300
1.3%
80,459
300
1.4%
59
2010
(2006)6
n/a
45,089
1,600
0.8%
73
n/a
62,577
1,600
1.1%
1,157,175
76,103
20.7%
73
62
(Certain footnotes appear on previous page.)
7
In February 2011, two project partnerships managed by Pinnacle Homes, of which Mr. Dowd is a co-owner and President/CEO, filed voluntary petitions
for reorganization under the U. S. Bankruptcy Code. Mr. Dowd filed a voluntary petition under the U. S. Bankruptcy Code in June 2011 and the debtor was
discharged in December 2011.
8
Mr. Hall served as President and Chief Executive Officer of AltaPacific Bancorp and AltaPacific Bank until December 7, 2016, when Frank Basirico was
promoted to President and Chief Operating Officer of those entities. Since that date, Mr. Hall has served as Chief Executive Officer of both entities.
9
Includes 14,071 shares held in an IRA of a client of Mr. Jorstad for whom Mr. Jorstad holds power of attorney.
106
Executive Officer and Director Compensation
Summary Executive Compensation Information
The following table sets forth certain summary compensation information with respect to AltaPacific Bancorp’s
Chief Executive Officer and its only other executive officers whose total compensation for the fiscal year ended
December 31, 2015 exceeded $100,000 (the “Named Executive Officers”):
Summary Executive Compensation Table
Name and Principal
Position
Nonqualified Deferred
Compensation
Earnings2
All Other
Compensation3
Total
$72,944
69,393
$13,566
12,732
$516,510
286,792
50,000
50,000
54,708
52,045
21,701
19,740
326,409
301,634
174,348
168,452
35,000
34,000
54,708
52,045
17,698
17,084
281,754
271,581
174,348
168,452
35,000
34,000
69,795
66,398
14,039
13,584
293,182
282,434
Year
Salary1
Bonus
Charles O. Hall
President and Chief
Executive Officer
2015
2014
$230,000
204,667
$200,000
--
Frank Basirico
Senior Executive
Vice President and
Chief Operating Officer
2015
2014
200,000
179,849
Allen R. Christenson
Executive Vice President
and Chief Financial
Officer
2015
2014
Jeanne M. Reade
Executive Vice President
and Chief Credit Officer
2015
2014
Grants of Plan-Based Awards; Option Exercises
No options or other awards were granted to or exercised by the Named Executive Officers during 2015.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth outstanding stock options, which were the only form of equity awards held by the
Named Executive Officers as of December 31, 2015:
1
Salary figures include amounts deferred pursuant to AltaPacific Bank’s 401(k) Plan (the “401(k) Plan”). The 401(k) Plan permits participants to contribute
a portion of their annual compensation on a pre-tax basis (subject to a statutory maximum), which contributions vest immediately when made. AltaPacific
Bank’s policy is to match 100% of employee contributions which do not exceed 4% of such employee’s annual compensation, which contributions also vest
immediately when made. Participants have discretion to invest their 401(k) account funds in a variety of investment alternatives.
2
Represents Supplemental Executive Retirement Plan (“SERP”) accruals, i.e., the total change for each year in the accrued liability balance established with
respect to the benefit obligation associated with the post-retirement SERP of each Named Executive Officer. See “− Supplemental Executive Retirement
Plans” for more information about the SERPs.
3
The figures in the “All Other Compensation” column include amounts for vehicle and equipment allowances, employer contributions to these individual’s
accounts pursuant to the 401(k) Plan, and the imputed value and tax costs associated with their split dollar life insurance benefits.
107
Name
Number of Shares
Number of Shares
Underlying Unexercised Underlying Unexercised
Options - Exercisable1 Options - Unexercisable1,2
Option
Exercise
Price1,3
Option
Expiration
Date
Charles O. Hall
211,065
--
$7.11
08/25/2016
Frank Basirico
21,106
12,762
---
6.82
6.47
11/02/2019
04/06/2021
Allen R. Christenson
35,177
--
7.11
08/25/2016
Jeanne M. Reade
35,177
--
7.11
08/25/2016
Employment Agreements
AltaPacific Bank has entered into an employment agreement with Charles O. Hall, effective September 2006, for an
indeterminate term. The agreement provides for a base salary of $260,000 to be increased annually by no less than the
percentage increase in the CPI for the San Francisco Bay Area, participation in any formalized bonus and incentive plan as
approved by the board of directors, the use of a company owned automobile and any other benefits provided to AltaPacific
Bank’s employees generally. In addition, Mr. Hall was granted stock options to purchase AltaPacific Bancorp stock as
detailed in the table above titled “Outstanding Equity Awards at Fiscal Year-End.” Mr. Hall’s employment with AltaPacific
Bank may be terminated at any time with or without cause. In the event of termination without cause, including a change in
control of AltaPacific Bank or AltaPacific Bancorp, Mr. Hall will receive 24 month’s base salary.
AltaPacific Bank has also entered into employment agreements with Frank Basirico, Allen R. Christenson and
Jeanne M. Reade, effective April 6, 2011, September 1, 2006, and September 1, 2006, respectively; for terms of one year,
with automatic renewals unless cancelled by either party. The agreements provide for a base salary of $230,000 for
Mr. Basirico and $181,473 for both Mr. Christenson and Ms. Reade, which is reviewed annually based upon a review of their
performance in the past year and current market conditions; participation in any formalized bonus and incentive plan as
approved by the board of directors; a monthly vehicle allowance of $600; and any other benefits provided to AltaPacific
Bank‘s employees generally. In addition, each of these executive officers were granted stock options to purchase AltaPacific
Bancorp stock as detailed in the table above titled “Outstanding Equity Awards at Fiscal Year-End.” The officer’s
employment with the AltaPacific Bank may be terminated at any time with or without cause. In the event of termination
without cause, they will receive six month’s base salary. In the event of termination following a change in control of
AltaPacific Bank or AltaPacific Bancorp, they will receive 24 month’s base salary.
AltaPacific Bank has purchased life insurance policies on the lives of Messrs. Hall, Basirico and Christenson.
AltaPacific Bank is the sole owner and beneficiary or co-beneficiary under such life insurance policies, which policies
indirectly offset the anticipated costs for certain death, disability and other benefits. AltaPacific Bank has entered into SplitDollar Agreements with Messrs. Hall, Basirico and Christenson, each of which designates AltaPacific Bank as beneficiary of
the insurance policies after the interest of Messrs. Hall, Basirico and Christenson have been paid to their respective
designated beneficiaries.
Supplemental Executive Retirement Plans
AltaPacific Bank has entered into Supplemental Executive Retirement Plan agreements (“SERPs”) with certain
executive officers and employees which provide for the payment of benefits upon retirement. Benefits accrue for a period of
10 years commencing January 1, 2013 for Messrs. Hall, Basirico and Christenson; and for a period of five years commencing
January 1, 2013 for Ms. Reade. Currently, the SERPs provide for AltaPacific Bank’s annual payment of $100,000 to
Messrs. Hall and Basirico and $75,000 to Mr. Christenson over a period of 15 years, and an annual payment of $50,000 per
year to Ms. Reade over a period of 10 years, assuming no separation from service prior to full vesting. Such payments will
commence for Messrs. Hall, Basirico and Christenson on the later of January 1, 2023 or the beginning of the month following
1
As adjusted to reflect stock dividends declared since the date of grant.
2
Options are for terms of 10 years. Unvested options accelerate in the event of a change in control of AltaPacific Bancorp, and options terminate in the
event of termination of employment, with the time period for exercise of the vested portion depending on the reason the service ceases. In the case of
termination for cause, the options expire immediately.
3
The exercise price for all options is the fair market value on the date of grant, as determined by the board of directors in accordance with the terms of the
Equity Incentive Plan.
108
such officer’s separation from service; and for Ms. Reade on the later of January 1, 2018 or the beginning of the month
following her separation from service. Annual payments are to be made in monthly installments. Lesser benefits are
provided for retirement or disability prior to the full vesting date as defined in the individual agreements. In the event the
officer is terminated For Cause (as defined in the SERP agreements), no benefits will be payable to the officer under the
SERP and all obligations of AltaPacific Bank with respect to the officer’s SERP may be terminated.
In the event of a “change in control” of AltaPacific Bank or AltaPacific Bancorp (as defined in the SERP
agreements), the officer shall become 100% vested, and thus entitled to the full retirement benefit following any subsequent
separation from service. Payments will commence on the same dates as specified in the previous paragraph.
AltaPacific Bank accrues monthly for post-retirement benefit obligations under the SERPs in a systematic and
orderly way using an appropriate discount rate. AltaPacific Bank also purchased single premium life insurance policies when
the SERPs were originally established, in part to provide tax advantaged income to offset the cost of the accruals. These
policies name AltaPacific Bank as beneficiary and the proceeds or cash surrender value of the policies will ultimately
reimburse AltaPacific Bank for the original investments in the policies, as well as for payments made under the SERPs.
AltaPacific Bank may purchase additional life insurance from time to time such that the aggregate amount is appropriate in
relation to the accruals and ultimate obligations under the SERPs. The amounts expensed for the Named Executive Officers
for the SERPs in 2015 are included as part of the “Summary Executive Compensation Table,” and were more than offset by
income.
Compensation of Directors
Directors receive no compensation for their service on AltaPacific Bancorp’s board of directors, but each director of
the AltaPacific Bancorp is also a director of the AltaPacific Bank. During 2015, non-employee directors of the AltaPacific
Bank were each paid a fee of $2,000 per month.
As of December 31, 2015, the following directors held fully vested stock options to purchase the following numbers
of shares of AltaPacific Bancorp common stock: directors DeCaminada, Dowd, Goble, Verrue and Zils: 35,177 shares1 each;
and director Jorstad: 70,355 shares.1 In addition, directors Borak and Jett held stock options covering 12,762 shares1 each,
which were 60% vested at that date; and director Deems held stock options covering 11,025 shares1 which were 20% vested
at that date. Stock option information concerning Messrs. Hall and Basirico, who are also Named Executive Officers, is set
forth above under “Grants of Plan-Based Awards” and “Outstanding Equity Awards at Fiscal Year-End.”
Related Party Transactions
Certain of AltaPacific Bancorp’s executive officers and directors and the companies with which they are associated
have been customers of, and have had banking transactions with AltaPacific Bank in the ordinary course of the AltaPacific
Bank’s business since January 1, 2015 and AltaPacific Bank expects to continue to have such banking transactions in the
future. All loans and commitments to lend included in such transactions were made in the ordinary course of business and
were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable loans with other persons not related to AltaPacific Bank, and in the opinion of the board of directors, did not
involve more than the normal risk of repayment or present any other unfavorable features.
Director Joseph C. Zils was a participant in a construction loan originated by AltaPacific Bank. The loan originated
in June 2015 and matured June 2016. The loan was renewed at maturity and paid in full on February 16, 2017. The principal
amount of the loan was $3,250,000 and Director Zils’ investment totaled $750,000. The loan’s interest rate, payment terms
and collateral requirements were all made on substantially the same terms as those prevailing at the time for comparable
loans with non-affiliated parties. The original transaction and renewal thereof were approved by the AltaPacific Bank’s
board of directors, with Director Zils abstaining, and in the opinion of the board of directors, the terms of the loan
participation were no less favorable to AltaPacific Bank than would have been obtained from non-affiliated third parties.
In September 2016 AltaPacific Bancorp repurchased 21,000 shares of its common stock from director Randall J.
Verrue pursuant to its existing stock repurchase program. Proceeds from the repurchase totaled $200,550. The date of the
trade was September 22, 2016 and the per share price of $9.55 was the closing share price on that date. As indicated above,
this transaction was made in accordance with AltaPacific Bancorp’s repurchase program; accordingly, the terms of the
repurchase were no less favorable to AltaPacific Bancorp than for similar transactions with non-affiliated third parties.
1
As adjusted to reflect stock dividends declared since the date of grant, including the 5% stock dividend paid in February 2016.
109
INFORMATION ABOUT COMMERCE BANK
General
Commerce Bank is a California state-chartered bank which was incorporated under the laws of California on
April 17, 2007 and commenced operations on September 17, 2007. Commerce Bank operates one office, its headquarters
office, located at 25220 Hancock Avenue, Suite 140, Murrieta, California 92562. Commerce Bank is authorized to engage in
general commercial banking business. Commerce Bank’s deposit accounts are insured by the Federal Deposit Insurance
Corporation up to the maximum legal limits, and Commerce Bank is subject to regulation by the FDIC and the DFI.
In 2007, Commerce Bank completed an initial public offering in which it sold a total of 1,502,374 shares of
common stock at a price of $10 per share. The net proceeds of that offering (after deducting the costs of raising capital)
totaled $14,978,731.
At September 30, 2016, Commerce Bank had total assets of $71.0 million, total deposits of $57.8 million, and total
shareholders’ equity of $12.9 million.
Additional information about Commerce Bank, including its Proxy Statement for the 2016 Annual Meeting of
Shareholders and 2015 Annual Report to Shareholders are available electronically at www.commercebanktv.com. See
“WHERE YOU CAN FIND MORE INFORMATION” on page 6.
Recent Developments
On January 24, 2017 Commerce Bank reported net income for the quarter totaling $58 thousand, and year-to-date
net income totaling $2.757 thousand, or $1.77 per diluted share, for the periods ended December 31, 2016, respectively.
Assets totaled $74.7 million at December 31, 2016, an increase of $13.2 million (21.4%) over December 31, 2015. At
December 31, 2016, gross loans totaled $55.2 million and deposits totaled $61.6 million for increases of $7.2 million (15%)
and $9.9 million (19.1%), respectively. During the fourth quarter of 2016, the Company had no borrowings with the Federal
Home Loan Bank of San Francisco. Shareholders’ equity at December 31, 2016 totaled $12.99 million. At December 31,
2016, the allowance for loan losses totaled $782 thousand. During 2016 there were no additions to the provision for loan
losses, $3 thousand was charged off and there was $12 thousand in recoveries of loans previously charged off. Nonaccrual
loans at the end the quarter totaled $189 thousand and loans past due 30-89 days totaled $49 thousand.
Strategy
Commerce Bank provides clients with a high degree of personalized services by offering a full range of deposit
accounts, including personal and business/professional checking accounts, savings accounts, attorney-client trust accounts,
money market demand accounts, NOW accounts, and time certificates of deposit. Commerce Bank also provides other
customary banking products and services, including, among other things, wire transfers. Other convenience-oriented services
and products Commerce Bank offers are direct payroll deposits, bank-by-mail services, merchant bank card processing,
telephone transfers, credit cards, ATM debit cards, check imaging, and electronic check capture, courier service for bank
transactions and a 24 hour Internet online banking capability to allow clients to obtain account information, transfer funds
between accounts, place stop payment orders and re-order checks, as well as Mobile Banking.
Commerce Bank also provides a full array of lending products tailored to meet the needs of clients in its service
market. These products will include business lines of credit, term loans, SBA and State guaranteed loans, equipment loans,
accounts receivable and inventory financing, construction loans, commercial real estate loans, letters of credit, and individual
lines of credit.
Services Offered
Lending
Commerce Bank offers a range of commercial and personal loans to individuals and businesses within its immediate
market area. Commercial loans include both secured and unsecured loans for working capital (including inventory and
receivables), real estate acquisition and development, dental practice and purchase of machinery and equipment. Commerce
Bank also offers loans guaranteed in part by the Small Business Administration. Commerce Bank also makes various types
of real estate loans. Commerce Bank’s types of lending are discussed below.
110
Commerce Bank is subject to a variety of regulatory lending limits. While different limits apply in certain
circumstances based on the loan type or the borrower's relationship with Commerce Bank, it is generally subject to a loan to
one borrower limit of 15% of its total capital in the case of loans that are not guaranteed by an agency of the U.S.
Government, or are secured by either marketable securities or other permissible types of collateral, such as certificates of
deposit. As of September 30, 2016, the unsecured legal lending limit was $2.1 million, which satisfies the credit needs of a
significant portion of Commerce Bank’s markets. The secured legal lending limit is $3.5 million, which includes loans that
are secured by readily marketable collateral. Commerce Bank has established relationships with correspondent banks to
participate in loans when the requested loan amount exceeds its legal lending limit.
Commercial Loans: Commerce Bank offers a variety of commercial loan products that are customized to fit the
needs of the individual business or professional client. Commerce Bank is an active commercial lender in the greater
Riverside County area. Commerce Bank’s areas of emphasis include, but are not limited to, loans to professional services,
manufacturers, retailers, wholesalers and business service companies. Commerce Bank also provides a wide range of
business loans, including lines of credit for working capital and operational purposes, as well as term loans for the acquisition
of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and
real estate. Additionally, when appropriate, Commerce Bank requires personal guarantees to help assure payment. Terms of
commercial business loans generally range from one to five years. A significant portion of Commerce Bank’s commercial
business loans have floating interest rates or re-price within one year. Commerce Bank also makes commercial real estate
loans, which are generally secured by the underlying real estate and improvements.
Real Estate Loans: Commerce Bank does not make residential real estate mortgage loans. Commerce Bank does
finance construction, refinance and improvement of commercial real estate. Commercial real estate lending is secured by first
or second mortgages on commercial properties that are typically owner occupied in Commerce Bank primary market areas.
Small Business Administration Loans: Commerce Bank markets Small Business Administration (“SBA”) loans
for qualifying businesses to meet their working capital and real estate needs. Depending on Commerce Bank’s needs and the
pricing offered for SBA loans, the portion of the loan that is guaranteed by the SBA may either be sold in the secondary
market or retained in Commerce Bank’s loan portfolio.
Loan Participations: When loans exceed Commerce Bank’s lending limit, Commerce Bank, as the lead bank, will
sell a portion of the loan in order to remain within its lending limit. Commerce Bank also sells loan participations to reduce
risk and manage credit concentrations in particular businesses and industries. Banks with which Commerce Bank
participates are generally located in California.
Reciprocally, Commerce Bank may purchase portions of loans originated by other banks as a means of increasing
Commerce Bank’s fee and interest income. Participating with other banks allows Commerce Bank to earn additional revenue
without the additional overhead associated with originating a loan and to diversify Commerce Bank’s loan products across a
wider geographic, demographic and industry range.
Commerce Bank has not engaged in any material research activities relating to the development of new services or
the improvement of existing bank services.
There has been no significant change in the types of services offered by Commerce Bank since its inception, except
in connection with new types of accounts allowed by statute or regulation in recent years. Commerce Bank has no present
plans regarding "a new line of business" requiring the investment of a material amount of total assets. Most of Commerce
Bank’s business originates from within Riverside County, including the communities comprising Murrieta, Temecula,
Canyon Lake, Corona, Fallbrook, Hemet/San Jacinto, Lake Elsinore, Menifee, Sun City, and Winchester plus the
unincorporated areas contiguous to these cities. There is no emphasis on foreign sources and application of funds.
Commerce Bank's business, based upon performance to date, does not appear to be seasonal. Except as described above, a
material portion of Commerce Bank's loans is not concentrated within a single industry or group of related industries, nor is
Commerce Bank dependent upon a single customer or group of related customers for a material portion of its deposits.
Management of Commerce Bank is unaware of any material effect upon Commerce Bank's capital expenditures, earnings or
competitive position as a result of federal, state or local environmental regulation.
Commerce Bank holds no patents, licenses (other than licenses obtained from bank regulatory authorities),
franchises or concessions.
111
Deposit and Other Banking Services
Commerce Bank offers deposit products that are typically available in most banks including checking accounts,
NOW accounts, money market and savings accounts, and other time certificates of deposit. The transaction accounts and
time deposits are tailored to Commerce Bank’s primary market area at rates competitive to those offered in the area. All
deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by
law (generally $250,000 per depositor, subject to aggregation rules). Commerce Bank solicits accounts from individuals,
businesses, associations and organizations. Other services include cashier’s checks, direct deposit of payroll checks, and
automatic drafts.
Online Banking: Commerce Bank is committed to technology and e-commerce in its broadest terms and as it
directly applies to financial service providers. To best serve Commerce Bank’s clients’ needs, Commerce Bank offers
complete banking service online. Although Commerce Bank’s clients are always able to discuss specific banking needs with
a knowledgeable service representative available in its office, Commerce Bank offers its clients the option to conduct
banking activities from its secure web site - www.commercebanktv.com. Commerce Bank’s web site is designed to be userfriendly, simple and to expedite client transactions. From Commerce Bank’s web site, its clients are able to access their
accounts, loan information and complete many common transactions including data download, transfer funds, reorder checks,
view images of the front and back of cancelled checks, view deposits, view their account statements, change addresses and
issue stop payment requests, all at their convenience seven-days-a-week, 24-hours-a-day. Commerce Bank also provides
businesses with the ability to receive cancelled check images and statements online for storage and retrieval.
Commerce Bank is sensitive to the privacy and security concerns of its clients, especially where internet banking is
concerned. Accordingly, Commerce Bank has put in place various procedures designed to maintain appropriate security
levels. The vendors who support Commerce Bank’s internet banking platform work with Commerce Bank to enhance the
security of these services. Commerce Bank’s responsibility to its clients is to select appropriate hardware and software in the
context of the right vendor relationships to provide the best assurance to its clients that, subject to applicable law, Commerce
Bank can protect their privacy and finances.
Outsource Operational Function: Commerce Bank has entered into agreements with third parties that provide a
variety of specialized services and technologies to us. In each of these relationships, Commerce Bank benefits from the
service provider's expertise and economies of scale while retaining the flexibility to take advantage of changes in available
technology without impacting client service. Among others, Commerce Bank has entered into agreements for data
processing services, electronic funds transfer processing services, merchant bankcard processing, and loan documentation.
Commerce Bank believes that outsourcing some of its operational functions allows it to better focus on providing the best
service to its clients.
Commerce Bank processes its data and check items under a non-cancelable agreement expiring in 2019. The
agreement calls for monthly minimum payments of approximately $32,000. The monthly payment will increase as
Commerce Bank’s volume of transactions increases. The agreement contains a termination clause whereby Commerce Bank
would be liable to the service bureau for an immediate lump sum payment of 80% based on the average monthly billings over
the number of months remaining on the contract.
Remote Deposit Solution: Commerce Bank remains focused on providing technology today that is well ahead of its
competitors. This product allows clients to make deposits to their accounts from their desk top. Using web-based software,
Commerce Bank’s clients have the ability to make deposits whenever it is convenient for them, without leaving their
workplace.
Marketing Focus
Commerce Bank relies principally upon direct personal contact by officers, directors, employees, and shareholders;
and specialized services such as courier pick-up and delivery of non-cash banking items. Commerce Bank emphasizes to its
clients the advantages of dealing with a locally owned and community oriented institution that is more responsive.
Service Area
Commerce Bank’s current market is Riverside county and surrounding areas in Southern California.
112
Commerce Bank attracts the majority of its loan and deposit business from the residents and numerous small to
medium-sized businesses, professional firms, dentists and service entities located in Southern California. Commerce Bank
does not have direct dealings with any foreign sources and has no known risks in any international business.
Competition
Banking and financial services business in California generally, and in Commerce Bank’s service area specifically,
is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in
technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.
Commerce Bank’s business is concentrated in their service area that originates from within Riverside County,
including the communities comprising Murrieta, Temecula, and Canyon Lake, Corona, Fallbrook, Hemet/San Jacinto, Lake
Elsinore, Menifee, Sun City, and Winchester plus the unincorporated areas contiguous to these cities. In order to compete
with other financial institutions in its service area, Commerce Bank relies principally upon direct personal contact by officers,
directors, employees, and shareholders; and specialized services such as courier pick-up and delivery of non-cash banking
items. Commerce Bank emphasizes to its customers the advantages of dealing with a locally owned and community oriented
institution. Commerce Bank also seeks to provide special services and programs for individuals in its primary service area
who are employed in the professional and business fields, such as loans for equipment, furniture, and tools of the trade or
expansion of practices or businesses. Larger banks may have a competitive advantage because of higher lending limits and
major advertising and marketing campaigns. Larger banks also perform services, such as trust services, international
banking, discount brokerage and insurance services that Commerce Bank is not authorized or prepared to offer currently but
Commerce Bank has made arrangements with its correspondent banks and with other third parties to provide such services
for its customers if needed.
Increasing levels of competition in banking and financial services businesses may reduce market share or cause the
prices charged for services to fall. Results may differ in future periods depending on the nature or level of competition. The
increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product
delivery systems, and the accelerating pace of consolidation among financial services providers.
In addition, Commerce Bank has an experienced lending and marketing officer base. Commerce Bank’s strategic
plan anticipated the retention of highly experienced sales officers with known loan and deposit clients that desire to continue
to be serviced by experienced officers.
Commerce Bank has approximately $51.507 million on deposit from 1,600 clients as of September 30, 2016. A
significant portion of these amounts consists of demand deposits that may fluctuate significantly during the upcoming year.
Commerce Bank seeks to avoid undue concentrations to a single client or industry. Some of Commerce Bank’s commercial
and real estate loans are to some extent dependent on the real estate market.
Commercial banks compete with savings banks, credit unions, other financial institutions, securities brokerage
firms, and other entities for funds. For instance, yields on corporate and government debt securities and other commercial
paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with
savings banks, credit unions, consumer finance companies, mortgage companies and other lending institutions.
Employees
As of September 30, 2016 Commerce Bank had 17 full time equivalent employees. None of these employees are
covered by a collective bargaining agreement. Commerce Bank considers relations with its employees to be good.
Properties
Commerce Bank initially entered into a seven-year lease, with one three-year options to renew, from an entity not
affiliated with Commerce Bank, for approximately 6,157 square feet of a 76,486 square foot building located on the ground
floor of at Crossroads Corporate Center which is part of a 273,121 square foot office center located at 25220 Hancock
Avenue, Murrieta California, for an initial lease rent of approximately $2.50 per rentable square foot, or a total of
approximately $15,393 per month, increasing by a fixed three and one-half percent each year of the lease, which is intended
to be the location of Commerce Bank’s headquarters office. The lease was extended on July 11, 2014 with an expiration date
of July 31, 2019 with an option to extend an additional five years at the end of that period. The renewal rental rate is $15,085
per month increasing by a fixed 3% each year of the extended lease period. The location provides ample parking and is
easily accessible from the major highways in the area. Commerce Bank management considers these premises adequate for
113
its current needs. In management’s opinion, Commerce Bank has sufficient insurance to cover its interests in the premises it
occupies.
Legal Proceedings
Commerce Bank is, from time to time, subject to various pending and threatened legal actions that arise out of the
normal course of its business. Commerce Bank is currently not a party to any pending material legal or administrative
proceedings.
Executive Officer and Director Compensation
Summary Executive Compensation Information
The following table sets forth certain summary compensation information with respect to Commerce Bank’s
President and Chief Executive Officer and its only other executive officers whose total compensation for the fiscal year
ended December 31, 2015 exceeded $100,000 (the “Named Executive Officers”).
Summary Compensation Table
All Other
Compensation2
Total
$0
0
$19,653
19,428
$224,176
207,951
166,000
152,500
0
0
12,234
12,570
181,757
168,593
145,167
56,250
0
0
12,707
3,559
164,505
59,809
Name and Principal Position
Year
Salary1
Donald W. Murray
President and
Chief Executive Officer
2015
2014
$201,000
185,000
LouEllen Ficke
Executive Vice President
and Chief Financial Officer
2015
2014
Carl P. Patsko
Executive Vice President
and Chief Credit Officer
2015
2014
Option
Awards
Grants of Plan-Based Awards; Option Exercises and Stock Vested
No options or other awards were granted to or exercised by the Named Executive Officers during 2015.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth outstanding stock options, which were the only form of equity awards held by the
Named Executive Officers as of December 31, 2015:
1
Salary figures include amounts deferred pursuant to Commerce Bank’s 401(k) Plan. Employees, after obtaining the age of 21, are eligible to make
contributions up to maximum legal amount of the participant’s compensation as contained in the plan, provided they meet the hours of service requirement
of 1,000 hours each year. Commerce Bank does not match employee contributions.
2
The amounts in this column above consist of health insurance premiums and automobile allowances for all three Named Executive Officers. In the case of
Mr. Murray, health insurance premiums totaled $10,653 and $10,428 for 2015 and 2014, respectively. All other amounts were less than $10,000 per
individual per year.
114
Name
Number of Shares
Underlying
Unexercised
Options –
Exercisable
Number of Shares
Underlying
Unexercised
Options –
Unexercisable1
Option Exercise
Price2
Option Expiration
Date
Donald W. Murray
30,000
20,000
3,334
0
0
1,666
$ 6.50
4.30
4.25
10/28/20
04/26/22
01/24/23
LouEllen Ficke
30,047
2,000
10,000
10,000
3,334
0
0
0
0
1,666
10.00
5.10
4.00
4.30
4.25
11/09/17
11/21/18
07/29/20
04/26/22
01/24/23
Carl P. Patsko
3,334
6,666
4.00
11/04/24
Employment Agreements
Commerce Bank has entered into an employment agreement to pay Donald W. Murray an annual base salary of
$175,000 which was increased to $190,000 effective January 1, 2015, discretionary bonus, an automobile allowance, stock
options and group insurance coverage. If Mr. Murray is terminated without cause, he would receive a severance payment in
the amount of 12 months of his then current annual salary and reimbursement of the premiums for Employee’s COBRA
insurance coverage for 12 months or until he has found employment. Following a change in control, if Mr. Murray’s
employment is terminated by Commerce Bank or our successor, without cause, or if Mr. Murray's employment is materially
adversely altered, then Mr. Murray will be entitled to receive from Commerce Bank or our successor, severance in an amount
equal to 24 months of Mr. Murray’s then current annual salary and reimbursement of the premiums for Employee’s COBRA
insurance coverage for 24 months or until he has found employment. The amount of severance for a change of control was
increased from 12 months to 24 months by the board of directors on October 20, 2015. If the merger is completed,
Mr. Murray’s employment agreement with Commerce Bank will be terminated upon payment of his $380,000 severance
amount, and will be superseded by his employment agreement with AltaPacific Bank. See “PROPOSAL NO. 1 – THE
MERGER AGREEMENT AND THE MERGER – Interests of Directors and Executive Officers in the Merger – Retention
Incentives, and – Change in Control Payments” above.
Commerce Bank has also entered into an employment agreement to pay LouEllen Ficke an annual base salary of
$145,000 which was increased to $155,000 effective January 1, 2015, discretionary bonus, auto allowance, stock options and
group insurance coverage. If Ms. Ficke is terminated without cause, she would receive a severance payment in the amount of
12 months of her then current annual salary and reimbursement of the cost of her Medicare insurance coverage for one year
or until she has found new employment. Following a change in control, if Ms. Ficke’s employment is terminated by
Commerce Bank or our successor, without cause, or if Ms. Ficke's employment is materially adversely altered, then Ms.
Ficke will be entitled to receive from Commerce Bank or our successor severance in an amount equal to 24 months of
Ms. Ficke’s then current annual salary and reimbursement of Employee’s Medicare insurance coverage for 24 months or until
she has found new employment. The amount of severance for a change of control was increased from 12 months to 24
months by the board of directors on October 20, 2015. If the merger is completed, Ms. Ficke’s employment agreement with
Commerce Bank will be terminated upon payment of her $310,000 severance amount, and will be superseded by her
employment agreement with AltaPacific Bank. See “PROPOSAL NO. 1 – THE MERGER AGREEMENT AND THE
MERGER – Interests of Directors and Executive Officers in the Merger – Retention Incentives, and – Change in Control
Payments” above.
Commerce Bank has also entered into an employment agreement to pay Carl Patsko a current annual base salary of
$130,000 which was increased to $140,000 effective August 1, 2015, discretionary bonus, auto allowance, stock options and
group insurance coverage. If Mr. Patsko is terminated without cause, he would receive a severance payment in the amount of
12 months of his then current annual salary and reimbursement of the premiums for his Medicare insurance coverage for one
year or until he has found new employment. Following a change in control, if Mr. Patsko’s employment is terminated by
Commerce Bank or our successor, without cause, or if Mr. Patsko’s employment is materially adversely altered, then
Mr. Patsko will be entitled to receive from Commerce Bank or our successor, severance in an amount equal to 24 months of
1
Options are for terms of 10 years and vest over a period of not greater than five years at 20% per year. Unvested options become fully vested in the event
of a change in control of Commerce Bank, and options terminate in the event of termination of employment, with the time period for exercise of the vested
portion depending on the reason the service ceases. In the case of termination for cause, the options expire immediately.
2
The exercise price for all options is the fair market value on the date of grant, as determined by the board of directors in accordance with the terms of the
stock option plan.
115
Mr. Patsko’s then current annual salary and reimbursement of the premiums for his Medicare insurance coverage for 24
months or until he has found employment. The amount of severance for a change of control was increased from 12 months
to 24 months by the board of directors on October 20, 2015.
All of the above increases in severance payments for a change in control were approved by the board of directors
prior to the commencement of service of board members Enrique R. Schon, Jaquelyn Schon and Paul A. Schon in January
2016.
Director Compensation
Non-employee directors received $500 per board meeting attended in 2015. Beginning January 2016, non-employee
directors receive $500 per month for attendance at regular board meetings.
The table below summarizes the compensation paid by Commerce Bank to non-employee directors for the year
ended December 31, 2015. Compensation paid to Mr. Murray, who is also a Named Executive Officer, is set forth above in
the various sections concerning compensation paid to Named Executive Officers.
Director
Total Paid in 2015
Nancy K. Hughes
Philip D. Oberhansley
Thomas T. Pangelinan
Enrique R. Schon1
Jaquelyn Schon1
Paul A. Schon1
Richard K. Shuman, M.D.
Thomas G. Williams, M.D.
Gerald R. Wilson
Kumar S. Yamani
$5,500
5,500
5,500
0
0
0
5,000
5,000
5,500
5,500
Related Party Transactions
Certain of Commerce Bank’s executive officers and directors and the companies with which they are associated
have been customers of, and have had banking transactions with Commerce Bank in the ordinary course of the Commerce
Bank’s business since January 1, 2015 and Commerce Bank expects to continue to have such banking transactions in the
future. All loans and commitments to lend included in such transactions were made in the ordinary course of business and
were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable loans with other persons not related to Commerce Bank, and in the opinion of the board of directors, did not
involve more than the normal risk of repayment or present any other unfavorable features.
DESCRIPTION OF ALTAPACIFIC BANCORP COMMON STOCK
General
The authorized capital stock of AltaPacific Bancorp consists of 24,000,000 shares of common stock, no par value,
and 10,000,000 shares of serial preferred stock, no par value. As of March 2, 2017, there were 5,889,601 shares of common
stock, and no shares of preferred stock, issued and outstanding. As of that same date there were options outstanding to
purchase an aggregate of 360,560 shares of AltaPacific Bancorp’s common stock and an additional 746,276 shares available
remaining for grant under its 2016 Equity Incentive Plan. The AltaPacific Bancorp preferred stock may be divided into such
number of series as AltaPacific Bancorp’s board of directors may determine. AltaPacific Bancorp’s board of directors is
authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly
unissued series of AltaPacific Bancorp preferred stock, and to fix the number of shares of any series of AltaPacific Bancorp
preferred stock and the designation of any such series of AltaPacific Bancorp preferred stock. AltaPacific Bancorp’s board of
directors, within the limits and restrictions stated in any resolution or resolutions of AltaPacific Bancorp’s board of directors
1
Directors Enrique R. Schon, Jaquelyn Schon and Paul A. Schon were appointed to the board of directors in January 2016 and accordingly did not receive
director compensation in 2015.
116
originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series.
Voting Rights
All voting rights are vested in the holders of AltaPacific Bancorp’s common stock. Each shareholder is entitled to
one vote on each proposal per share of common stock held as of the record date, except that in connection with the election of
directors, the shares are entitled to be voted cumulatively if a candidate’s or candidates’ name(s) have been properly placed in
nomination prior to the voting and a shareholder present at the shareholders’ meeting has given notice of his or her intention
to vote his or her shares cumulatively. If a shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination. Cumulative voting entitles a shareholder to give one nominee as many votes as is equal to the
number of directors to be elected multiplied by the number of shares owned by such shareholder, or to distribute his or her
votes on the same principle between two or more nominees as he or she deems appropriate.
Dividends
After the preferential dividends upon all other classes and series of stock entitled thereto shall have been paid or
declared and set apart for payment and after AltaPacific Bancorp shall have complied with all requirements, if any, with
respect to the setting aside of sums as a sinking fund or for a redemption account on any class of stock, then the holders of
AltaPacific Bancorp’s common stock are entitled to such dividends as may be declared by AltaPacific Bancorp’s board of
directors out of funds legally available therefore under the laws of the State of California. For more information on
AltaPacific Bancorp’s dividend policy and historical dividend practices, as well as legal restrictions on the payment of
dividends by AltaPacific Bancorp, see “COMPARATIVE MARKET PRICE DATA AND DIVIDEND INFORMATION –
Dividends” above.
Miscellaneous
AltaPacific Bancorp’s common stock has no conversion or redemption rights or sinking fund provisions applicable
to it. The common stock does not have preemptive rights; therefore, future shares of common stock may be offered to the
investing public or to existing shareholders, in the discretion of AltaPacific Bancorp’s board of directors, and existing
shareholders will not have the right to maintain their current percentage ownership in our common stock. In addition, the
shares of common stock:
•
are not deposit accounts and are subject to investment risk;
•
are not insured or guaranteed by the FDIC or any other government agency; and
•
are not guaranteed by AltaPacific Bancorp or AltaPacific Bank.
117
COMPARISON OF THE RIGHTS OF COMMON STOCK SHAREHOLDERS OF
ALTAPACIFIC BANCORP AND COMMERCE BANK
When the merger becomes effective, the shareholders of Commerce Bank may receive shares of AltaPacific
Bancorp common stock in exchange for their shares of Commerce Bank common stock and become shareholders of
AltaPacific Bancorp. The following is a summary of material differences between the rights of holders of AltaPacific
Bancorp common stock and the holders of Commerce Bank common stock.
The following summary does not purport to be a complete statement of the provisions affecting, and differences
between, the rights of holders of AltaPacific Bancorp common stock and holders of Commerce Bank common stock. This
summary is intended to provide a general overview of the differences in shareholders’ rights under applicable law and the
governing corporate instruments of AltaPacific Bancorp and Commerce Bank, and other known material differences.
AltaPacific Bancorp and Commerce Bank are both California corporations incorporated under the laws of California and the
California General Corporation Law, or Corporations Code, and therefore subject to all of the provisions of the Corporations
Code. Commerce Bank, as a California state-chartered bank, is also subject to all of the provisions of the Financial Code,
certain of which supersede corresponding provisions of the Corporations Code.
We urge you to carefully read this entire proxy statement/prospectus, the relevant provisions of the Corporations
Code and the other documents to which we refer in this proxy statement/prospectus for a more complete understanding of the
differences between being a AltaPacific Bancorp common stock shareholder and a Commerce Bank common stock
shareholder.
AltaPacific Bancorp
Commerce Bank
Authorized Capital Stock
The authorized capital stock of AltaPacific
Bancorp consists of 40,000,000 shares of
common stock, no par value, and
10,000,000 shares of preferred stock, no par
value. As of February 16, 2017, there were
5,889,601 shares of common stock, and no
shares of preferred stock, issued and
outstanding.
The authorized capital stock of Commerce
Bank consists of 10,000,000 shares of
common stock, no par value, and
10,000,000 shares of preferred stock, no par
value. As of February 16, 21017, there were
1,616,041 shares of common stock, and no
shares of preferred stock, issued and
outstanding.
Indemnification and
Liability Exculpation
of Directors and Officers
AltaPacific
Bancorp’s
articles
of
incorporation
authorize
AltaPacific
Bancorp to provide indemnification of
directors and officers in excess of the
indemnification provided under the
Corporations Code, subject to certain
exceptions. AltaPacific Bancorp’s articles
of incorporation also provide for the
elimination of director liability for
monetary damages to the maximum extent
allowed by California law.
Same.
Voting Rights
AltaPacific Bancorp shareholders have the
right to one vote for each share of common
stock held. Holders of common stock have
cumulative voting rights in the election of
directors. AltaPacific Bancorp’s articles of
incorporation prohibit shareholders from
taking action by written consent.
Same, except that Commerce Bank
shareholders can take action by written
consent. Holders of outstanding shares
having not less than the minimum number
of votes would be necessary to authorize or
take such action as at a meeting. Directors
may not be elected by written consent
except by unanimous written consent.
118
AltaPacific Bancorp
Commerce Bank
Number and
Classes of Directors
AltaPacific Bancorp’s bylaws provide that
the number of directors shall be no less than
seven and no more than 13, with the exact
number to be fixed by resolution of the
board of directors or the shareholders. The
current number of directors is 11.
AltaPacific Bancorp’s board of directors is
elected annually to one-year terms of office.
Same.
Removal of Directors
Any or all of the directors may be removed
without cause if such removal is approved
by a majority of the outstanding shares
entitled to vote; provided, however, that no
director may be removed if the votes cast
against removal of the director would be
sufficient to elect the director if voted
cumulatively at an election at which the
same total number of votes were cast and
either the number of directors elected at the
most recent annual meeting of shareholders,
or if greater, the number of directors for
whom removal is being sought, were then
being elected.
Same.
Director Nominations
Notice of intention to make any
nominations shall be made to the President
of AltaPacific Bancorp not less than 21
days nor more than 60 days prior to any
meeting of shareholders called for the
election of directors; provided, however,
that if less than 21 days' notice of the
meeting is given to shareholders, the time
period is 10 days after the notice of the
meeting is sent to shareholders.
Same, except that notice is the later of the
close of business 21 days prior to the
meeting of shareholders or seven days after
the date of mailing of notice of the meeting
to shareholders.
Payment of Dividends
Shareholders of AltaPacific Bancorp will be
entitled to receive dividends when and as
declared by its board of directors, out of
funds legally available for the payment of
dividends, as provided in the Corporations
Code. The Corporations Code provides that
a corporation may make a distribution to its
shareholders
if
retained
earnings
immediately prior to the dividend payout is
at least equal to the amount of the proposed
distribution. For additional information on
legal restrictions on the ability to pay
dividends if this requirement is not met, as
well as concerning AltaPacific Bancorp’s
dividend policy, see “COMPARATIVE
MARKET
PRICE
DATA
AND
DIVIDEND INFORMATION – Dividends”
above.
Same, but payment of dividends is governed
by the Financial Code rather than the
Corporations Code. For details concerning
applicable Financial Code provisions and
Commerce Bank’s dividend policy, see
information concerning Commerce Bank
rather than AltaPacific Bancorp referenced
in “Dividends” section.
119
AltaPacific Bancorp
Commerce Bank
Dissenters’ Rights
Under the Corporations Code, because
AltaPacific Bancorp’s common stock is not
listed on a national securities exchange,
AltaPacific Bancorp shareholders generally
have dissenters’ rights with respect to a
business
combination
or
other
reorganization requiring their vote i.e., a
combination or reorganization in which
shareholders AltaPacific Bancorp would
end up owning less than five-sixths of the
voting power of the surviving corporation.
Since this is not the case with respect to the
merger, AltaPacific shareholders do not
have dissenters’ rights in this transaction.
Same, but pursuant to the Financial Code,
shareholders of Commerce Bank would not
entitled to dissenters’ rights in connection
with a reorganization (as defined in the
Financial Code) where Commerce Bank
would be the surviving corporation, even if
dissenters’ rights were otherwise available
pursuant to Chapter 13 of the Corporations
Code. Shareholders of Commerce Bank are
entitled to dissenters’ rights in connection
with the merger as discussed elsewhere
herein.
Amendment of Articles
of Incorporation
Generally the Corporations Code requires a
vote of the majority of the outstanding
shares entitled to vote to amend the articles
of incorporation. Any amendments to
AltaPacific
Bancorp’s
Articles
of
Incorporation must be approved by
shareholders at a meeting, and not by
written consent.
Same, except that amendments to
Commerce Bank’s Articles of Incorporation
may be approved by the written consent of
the shareholders.
Amendment of Bylaws
Subject to the right of shareholders to
adopt, amend or repeal bylaws, the board of
directors may adopt, amend or repeal
bylaws other than a bylaw or an amendment
thereof changing the authorized number of
directors.
Same.
Required Vote
for Mergers
The Corporations Code requires the
affirmative vote of the majority of
outstanding shares entitled to vote of each
class of shares.
Same.
Meetings of Shareholders
AltaPacific Bancorp’s bylaws provide that
an annual meeting of shareholders is to be
held on a date and time determined by the
board of directors. Special meetings of
shareholders may be called at any time by
the Chairman of the Board, the President,
the board of directors or shareholders
holding in the aggregate 10% or more of the
outstanding shares entitled to vote.
Same.
Preemptive Rights
Holders of AltaPacific Bancorp’s common
stock have no preemptive rights.
Same.
Anti-takeover Provisions
The Corporations Code does not provide for
any specific anti-takeover provisions, and
AltaPacific
Bancorp’s
Articles
of
Incorporation and Bylaws do not contain
any provisions that make it more difficult
for another company to acquire AltaPacific
Bancorp.
Same.
120
PROPOSAL NO. 2
DISCRETIONARY AUTHORITY TO ADJOURN
General
If there are not sufficient shares of Commerce Bank stock represented to constitute a quorum at the special meeting
or the number of shares of Commerce Bank common stock voting “FOR” approval of the merger proposal is not sufficient to
approve that proposal at the meeting, then the person(s) designated as the proxy holder stated in the proxy card of Commerce
Bank intends to move to adjourn the special meeting in order to enable the Commerce Bank board of directors to solicit
additional proxies for approval of the merger proposal.
In this proposal, Commerce Bank is asking its shareholders to grant discretionary authority to the person(s)
designated as the proxy holder stated in the proxy card to move to adjourn the special meeting if there are not sufficient
shares represented to constitute a quorum at the meeting or if the number of shares voting for approval of the merger proposal
is not sufficient to approve that proposal at the meeting. If the shareholders of Commerce Bank approve the adjournment
proposal, Commerce Bank could adjourn the special meeting to another time and use the additional time to solicit additional
proxies, including the solicitation of proxies from shareholders that have previously voted on the merger proposal. Among
other things, approval of the adjournment proposal could mean that, even if Commerce Bank has received proxies
representing a sufficient number of votes against approval and adoption of the merger proposal, Commerce Bank could
adjourn the special meeting without a vote on the merger proposal and seek to convince the holders of those shares to
changes their votes to votes in favor of the approval and adoption of the merger proposal.
If the special meeting is adjourned so that the board can solicit additional proxies to approve the merger proposal,
Commerce Bank is not required to give any notice of the adjourned meeting other than an announcement of the place, date
and time provided at the special meeting.
Vote Required
At the special meeting, the adjournment proposal requires the affirmative vote of at least a majority of the shares of
Commerce Bank stock voted in person or represented by proxy and entitled to vote on the adjournment proposal. Abstentions
and broker non-votes will have no effect on the proposal to adjourn the special meeting, but will be treated as present at the
meeting for purposes of determining a quorum.
Brokers may not vote on the adjournment proposal without specific instructions from the person who beneficially
owns the shares. However, shares held by a broker to whom you do not give instructions on how to vote will have no effect
on the outcome of the vote on the adjournment proposal.
Recommendation of the Board of Directors of Commerce Bank
The Commerce Bank board of directors recommends a vote “FOR” adjournment of the special meeting, if
necessary, to solicit additional proxies if there are not sufficient votes in favor of the merger proposal.
121
LEGAL MATTERS
The validity of the AltaPacific Bancorp common stock to be issued in the merger will be passed upon by King,
Holmes, Paterno & Soriano, LLP, Los Angeles, California, legal counsel to AltaPacific Bancorp.
INDEPENDENT AUDITORS
The consolidated financial statements of AltaPacific Bancorp as of December 31, 2015 and 2014, and for each of the
years in the two-year period ended December 31, 2015 included in this proxy statement/prospectus, have been so included in
reliance on the report of Vavrinek, Trine, Day & Co., LLP, an independent public accounting firm, given on the authority of
such firm as experts in accounting and auditing.
OTHER MATTERS
Management of Commerce Bank is not aware of any other matters to come before the special meeting. If any other
matter not mentioned in this proxy statement/prospectus is brought before the special meeting, the persons named in the
enclosed form of proxy for such meeting will have discretionary authority to vote all proxies with respect thereto in
accordance with their judgment.
122
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Interim Consolidated Financial Statements of AltaPacific Bancorp
as of September 30, 2016 and for the Nine Months Ended September 30, 2016 and 2015
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
Consolidated Statements of Income for the Nine Months Ended September 30, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2016 and 2015
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
Notes to the Condensed Interim Financial Statements
F-1
F-2
F-3
F-4
F-5 to F-18
Page
Audited Consolidated Financial Statements of AltaPacific Bancorp
as of December 31, 2015 and 2014 and for the Two Years Ended December 31, 2015
Independent Auditor’s Report
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the Years Ended December 31, 2015 and 2014
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2015 and 2014
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014
Notes to Consolidated Financial Statements
123
F-19
F-20
F-21
F-22
F-23
F-24
F-25 to F-66
ALTAPACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS
September 30,
2016
(unaudited)
ASSETS
Cash and due from banks
Interest-bearing deposits in banks
Available-for-sale investment securities
Loans
Less: allowance for loan losses
Loans, net
Premises and equipment
Other real estate owned
Bank owned life insurance
Accrued interest receivable and other assets
Total assets
$
$
LIABILITIES
Deposits
Non-interest bearing
Interest bearing
Total deposits
Other borrowings
Junior subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
$
SHAREHOLDERS’ EQUITY
Common stock - no par value; 40,000,000 shares authorized; 5,961,601
shares issued and outstanding at September 30, 2016 and 5,667,927
shares issued and outstanding at December 31, 2015
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
$
41,277,000
996,000
74,897,000
239,250,000
(3,336,000)
235,914,000
2,947,000
337,000
12,479,000
15,263,000
384,110,000
93,185,000
202,490,000
295,675,000
20,000,000
5,612,000
5,531,000
326,818,000
47,816,000
8,573,000
903,000
57,292,000
384,110,000
See Notes to Unaudited Consolidated Financial Statements
F-1
December 31,
2015
$
$
$
$
15,271,000
77,006,000
225,465,000
(3,235,000)
222,230,000
2,523,000
448,000
11,238,000
17,031,000
345,747,000
78,057,000
184,376,000
262,433,000
20,000,000
5,531,000
5,480,000
293,444,000
46,343,000
5,216,000
744,000
52,303,000
345,747,000
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Nine Months Ended
September 30,
2016
2015
INTEREST INCOME:
Interest and fees on loans
$
Interest on available-for-sale investment securities
13,329,000
$
14,025,000
1,904,000
1,926,000
83,000
5,000
-
17,000
15,316,000
15,973,000
Interest on deposits in banks
713,000
645,000
Interest on borrowings
376,000
343,000
1,089,000
988,000
14,227,000
14,985,000
100,000
205,000
14,127,000
14,780,000
Service charges and fees
277,000
295,000
Bank owned life insurance
241,000
230,000
Gain on recovery of acquired loans
195,000
199,000
21,000
20,000
734,000
744,000
5,779,000
5,271,000
971,000
947,000
2,493,000
2,619,000
9,243,000
8,837,000
Income before income taxes
5,618,000
6,687,000
INCOME TAX
2,261,000
2,760,000
Interest on deposits in banks
Interest on Federal funds sold
Total interest income
INTEREST EXPENSE:
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses
NONINTEREST INCOME:
Miscellaneous income
Total noninterest income
NONINTEREST EXPENSE:
Salaries and employee benefits
Occupancy and equipment
Other
Total noninterest expense
NET INCOME
$
3,357,000
$
3,927,000
Basic earnings per share
$
0.58
$
0.68
Diluted earnings per share
$
0.57
$
0.66
Weighted average number of shares outstanding - basic
5,739,391
5,778,439
Weighted average number of shares outstanding - diluted
5,879,826
5,959,021
See Notes to Unaudited Consolidated Financial Statements
F-2
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Nine Months Ended
September 30,
2016
2015
Net income
Change in net unrealized gain (loss) on available-for-sale
investment securities
Comprehensive income
$
3,357,000
159,000
3,516,000
See Notes to Unaudited Consolidated Financial Statements
F-3
$
3,927,000
(58,000)
3,869,000
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months
Ended September 30,
2016
2015
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Depreciation and amortization, net
Deferred loan origination costs and fees, net
Share-based compensation
Increase in cash surrender value of life insurance
Decrease (increase) in accrued interest receivable and other assets
Increase in accrued interest payable and other liabilities
Other, net
$
3,357,000
$
3,927,000
100,000
(1,254,000)
106,000
79,000
(241,000)
1,689,000
51,000
1,000
205,000
(1,851,000)
(317,000)
68,000
(230,000)
238,000
2,371,000
43,000
3,888,000
4,454,000
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits in banks
Purchase of available-for-sale investment securities
Purchase of Federal Reserve Bank stock
Purchase of Federal Home Loan Bank stock
Proceeds from maturity of available for sale securities
Proceeds from principal payments of mortgage-backed securities
Net (increase) decrease in loans
Purchase of life insurance
Proceeds from sale of other real estate owned
Purchase of premises and equipment
(996,000)
(9,068,000)
(2,000)
(30,000)
4,300,000
6,757,000
(11,964,000)
(1,000,000)
111,000
(626,000)
980,000
(7,812,000)
(266,000)
(39,000)
9,321,000
3,329,000
(2,062,000)
Net cash (used in) provided by investing activities
(12,518,000)
3,451,000
39,082,000
(5,840,000)
2,240,000
(846,000)
-
17,570,000
(27,546,000)
(1,622,000)
9,445,000
Net cash provided by (used in) financing activities
34,636,000
(2,153,000)
Increase in cash and cash equivalents
26,006,000
5,752,000
15,271,000
3,274,000
Net cash provided by operating activities
Cash flows from financing activities:
Increase in demand and money market deposits, net
Decrease in time deposits, net
Proceeds from issuance of common stock
Repurchase of common stock
Increase (decrease) in borrowings
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
41,277,000
$
9,026,000
$
$
1,083,000
775,000
$
$
972,000
1,335,000
Supplemental disclosure of cash flow information:
Cash paid during the period for interest expense
Cash paid during the period for income taxes
See Notes to Unaudited Consolidated Financial Statements
F-4
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Business of AltaPacific Bancorp
AltaPacific Bancorp (the Company) is a California corporation registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and is headquartered in Santa Rosa, California. The Company was incorporated
in March, 2010, and subsequently acquired all of the outstanding shares of AltaPacific Bank (the Bank). The formation of the
bank holding company provides the Company and the Bank greater flexibility in terms of operation, expansion, and
diversification.
AltaPacific Bancorp's principal business is to serve as a holding company for the Bank and its principal source of income will
be derived from dividends paid by the Bank. The payment of dividends by the Bank is subject to restrictions that could limit
AltaPacific Bancorp's payment of dividends to its shareholders.
AltaPacific Bank was organized under the laws of the State of California on February 16, 2006. The Bank opened for
business as a State-chartered non-member bank on July 10, 2006. On November 5, 2010, the Company became a member of
the Federal Reserve System (FRB). On August 3, 2009, the Bank amended its articles of incorporation to change its legal
name from Atlantic Pacific Bank to AltaPacific Bank.
The Bank is subject to regulation by the California Department of Business Oversight (the DBO) and the FRB and its
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank is
headquartered in Santa Rosa, California, and also has branch offices in Ontario, Covina, Temecula, and Riverside, California.
In February, 2017 the bank submitted applications with the DBO and FRB to establish a branch in San Bernardino,
California. The Bank provides products and services to customers who are predominately small to middle-market business,
professionals, and not-for-profit organizations. Generally, deposits are insured by the FDIC up to $250,000 per depositor.
Note 2 – Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for
interim financial reporting. Accordingly, certain information and notes required by accounting principles generally accepted
in the United States of America (‘‘GAAP’’) for annual financial statements are not included herein. The interim statements
should be read in conjunction with the audited financial statements and notes that are included elsewhere in this proxy
statement/prospectus. The accounting and reporting policies of the Bank conform with accounting principles generally
accepted in the United States of America and prevailing practices within the banking industry. In management’s opinion, all
adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a
normal and recurring nature.
Note 3 – Summary of Significant Accounting Policies
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through February 28, 2017, which is the date
the financial statements were available for issuance and no subsequent events occurred requiring accrual or disclosure.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates. The allowance for loan losses and fair values of
financial instruments are particularly subject to change.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the
nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic
F-5
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged off. Amounts are charged-off when available
information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs
is consistently applied to each segment.
The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as
impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining
impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of
impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan's effective
interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a
collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateraldependent loans for which foreclosure is probable are measured at the fair value of the collateral.
The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on
nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired with measurement of
impairment based on expected future cash flows discounted using the loan's effective rate immediately prior to the
restructuring.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the
collateral. Smaller balance, homogeneous loans are collectively evaluated for impairment.
General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the
effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ
from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in
lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes
in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of
past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the
underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as
competition and legal and regulatory requirements.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly,
the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio,
current economic conditions, and other factors. If the Board of Directors and management determine that changes are
warranted based on those reviews, the allowance is adjusted. In addition, the Company's primary regulators, the FRB and the
DBO, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may
require additions to the allowance based on their judgment about information available at the time of their examinations.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated
losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is included in
accrued interest payable and other liabilities on the balance sheet.
Earnings Per Share Computation
Basic earnings per share (EPS), which excludes dilution, is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock
which shares in the earnings of the Company. The treasury stock method is applied to determine the dilutive effect of stock
options in computing diluted earnings per share.
F-6
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Comprehensive Income
Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of other comprehensive income or loss that historically
has not been recognized in the calculation of net income. Unrealized gains and losses on the Company's available-forsale investment securities are included in other comprehensive income, adjusted for realized gains or losses included in
net income. Total comprehensive income or loss and the components of accumulated other comprehensive income or
loss is presented in the consolidated statements of comprehensive income.
Note 4- Commitments and Contingencies
In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the
financial statements, including loan commitments of approximately $54,974,000 and standby letters of credit of
approximately $2,596,000 at September 30, 2016. Such loans relate primarily to real estate construction loans, revolving
lines of credit and other commercial loans. However, all such commitments will not necessarily culminate in actual
extensions of credit by the Company during 2016 as some of these are expected to expire without being fully drawn upon.
Standby letters of credit are commitments issued to guarantee the performance or financial obligation of a client to a third
party. These guarantees are issued primarily relating to purchases of inventory or as security for real estate rents by
commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan
commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are
used. The majority of all such commitments are collateralized. The fair value of the liability related to these standby letters
of credit, which represents the fees received for issuing the guarantees, was not significant at September 30, 2016.
Note 5 – Investment Securities
The amortized cost and estimated fair value of investment securities at September 30, 2016 and December 31, 2015 consisted
of the following:
Available-for-Sale
September 30, 2016
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Amortized
Cost
Corporate securities
Municipal securities
Mortgage-backed securities:
Agency
Non-agency
$
27,939,000 $
622,000
29,085,000
15,720,000
$
73,366,000 $
F-7
1,067,000 $
496,000
265,000
1,828,000 $
(27,000) $
(4,000)
Estimated
Fair
Value
28,979,000
618,000
(16,000)
(250,000)
29,565,000
15,735,000
(297,000) $
74,897,000
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
December 31, 2015
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Amortized
Cost
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
$
25,897,000 $
29,464,000
20,384,000
$
1,017,000 $
196,000
400,000
75,745,000 $
1,613,000 $
(85,000) $
Estimated
Fair
Value
26,829,000
(63,000)
(204,000)
29,597,000
20,580,000
(352,000) $
77,006,000
Net unrealized gains on available-for-sale investment securities totaling $270,000, net of $111,000 in tax expense, were
recorded as other comprehensive income within shareholders' equity for the nine month period ended September 30, 2016.
Net unrealized losses on available-for-sale investment securities totaling $478,000 were recorded net of $196,000 in tax
benefits, as other comprehensive income within shareholders' equity for the year ended December 31, 2015. There were no
sales, calls or transfers of available- or-sale investment securities during the nine and twelve month periods ended September
30, 2016 and December 31, 2015, respectively.
Investment securities with unrealized losses at September 30, 2016 and December 31, 2015 are summarized and classified
according to the duration of the loss period as follows:
Corporate securities
Municipal securities
Mortgage-backed
securities:
Agency
Non-agency
Corporate securities
Mortgage-backed
securities:
Agency
Non-agency
$
Less than 12 Months
Fair
Unrealized
Value
Losses
4,073,000 $
(27,000) $
618,000
(4,000)
5,534,000
1,360,000
$
7,911,000
$
(248,000)
(49,000) $
7,911,000
$
(248,000) $
11,585,000
$
Less than 12 Months
Fair
Unrealized
Value
Losses
6,415,000 $
(85,000) $
$
14,025,000
December 31, 2015
12 Months or More
Fair
Unrealized
Value
Losses
- $
-
(1,000)
(101,000)
$
$
(16,000)
(2,000) $
$
167,000
7,443,000
September 30, 2016
12 Months or More
Fair
Unrealized
Value
Losses
- $
-
(187,000) $
7,465,000
2,871,000
10,336,000
$
Total
Fair
Unrealized
Value
Losses
4,073,000 $
(27,000)
618,000
(4,000)
5,534,000
9,271,000
$
19,496,000
(16,000)
(250,000)
$
(297,000)
Total
Fair
Unrealized
Value
Losses
6,415,000 $
(85,000)
(62,000)
(103,000)
7,632,000
10,314,000
(165,000) $
24,361,000
(63,000)
(204,000)
$
(352,000)
As of September 30, 2016, the Company held 14 corporate securities of which 2 were in an unrealized loss positions, 1
municipal security of which 1 was in an unrealized loss position, 37 agency residential mortgage-backed securities of which
11 were in unrealized loss positions and 22 non-agency mortgage-backed securities of which 14 were in an unrealized loss
position. Securities which had been in an unrealized loss position for less than 12 months include the 2 corporate securities,
the 1 municipal security and all 11 agency residential mortgage-backed securities. Regarding the non-agency mortgagebacked securities, 13 had been in an unrealized loss position for more than 12 months. These unrealized losses were
primarily caused by illiquidity in the marketplace and downgrades made by the rating agencies of the issuers. Management
performed an impairment analysis using detailed cash flow analysis to determine the recoverability of all principal and
interest contractually due. This analysis projects prepayments, expected housing price changes, delinquency and default
rates, expected loss severities, and interest rates, while factoring in the underlying collateral. For all securities in an
unrealized loss position, based on management's analysis, and because management does not have the intent to sell these
securities nor does management believe it is more likely than not that the Company will be required to sell these securities
F-8
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
before a recovery of amortized cost, the Company does not consider these investments to be other-than-temporarily impaired
at September 30, 2016 or December 31, 2015.
The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2016, by contractual
maturity are shown below.
Estimated
Fair
Value
Amortized
Cost
Corporate securities
Less than one year
One through five years
After five years through ten years
$
Municipal securities
After five years through ten years
Mortgage-backed securities
Agency
One through five years
After five years through ten years
After ten years
Non-agency
After five years through ten years
After ten years
$
2,039,000
19,400,000
6,500,000
27,939,000
$
2,086,000
20,334,000
6,559,000
28,979,000
622,000
618,000
2,797,000
3,531,000
22,757,000
29,085,000
2,799,000
3,565,000
23,201,000
29,565,000
532,000
15,188,000
15,720,000
530,000
15,205,000
15,735,000
73,366,000
$
74,897,000
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties.
Investment securities with amortized cost totaling $29,085,000 and estimated fair values totaling $29,565,000 were pledged
to secure borrowings with the Federal Home Loan Bank at September 30, 2016. Investment securities with amortized cost
totaling $29,464,000 and estimated fair values totaling $29,597,000 were pledged to secure borrowings with the Federal
Home Loan Bank at December 31, 2015.
Note 6 - Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
Beginning balance
Provision charged to operations
Recoveries of loans previously charged off
Ending balance
Nine Month
Period Ended
September 30, 2016
Twelve Month
Period Ended
December 31, 2015
Nine Month
Period Ended
September 30, 2015
$3,235,000
100,000
1,000
$3,336,000
$2,746,000
390,000
99,000
$3,235,000
$2,746,000
205,000
43,000
$2,994,000
F-9
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table presents the activity in the allowance for loan losses for the nine month period ended September 30,
2016, and the recorded investment in loans and impairment method as of September 30, 2016, by portfolio segment:
Commercial
Commercial
Real
Estate –
Construction
Commercial
Real
Estate –
Mortgage
Installment
Home
Equity
Lines of
Credit
Total
Allowance for Loan Losses
Beginning of Year
Provisions (credits)
Charge-offs
Recoveries
End of Year
Reserves
General
Loans Evaluated for
Impairment
Individually
Collectively
$
$
367,000 $
(13,000)
354,000 $
811,000 $
29,000
840,000 $
1,932,000 $
98,000
2,030,000 $
66,000 $
(5,000)
1,000
62,000 $
59,000 $
(9,000)
50,000 $
3,235,000
100,000
1,000
3,336,000
$
354,000 $
840,000 $
2,030,000 $
62,000 $
50,000 $
3,336,000
69,000 $
- $
16,034,000
48,682,000
16,103,000 $ 48,682,000 $
165,000 $
167,185,000
167,350,000 $
$
$
- $
- $
234,000
5,426,000
3,006,000
240,333,000
5,426,000 $ 3,006,000 $ 240,567,000
The following table presents the activity in the allowance for loan losses for the year 2015, and the recorded investment in
loans and impairment method as of December 31, 2015, by portfolio segment:
Commercial
Commercial
Real
Estate –
Construction
Commercial
Real
Estate –
Mortgage
Installment
Home
Equity
Lines of
Credit
Total
Allowance for Loan Losses
Beginning of Year
Provisions (credits)
Charge-offs
Recoveries
End of Year
Reserves
General
Loans Evaluated for
Impairment
Individually
Collectively
$
$
169,000 $
97,000
101,000
367,000 $
952,000 $
(141,000)
811,000 $
1,573,000 $
359,000
1,932,000 $
13,000 $
55,000
(2,000)
66,000 $
39,000 $
20,000
59,000 $
2,746,000
390,000
(2,000)
101,000
3,235,000
$
367,000 $
811,000 $
1,932,000 $
66,000 $
59,000 $
3,235,000
84,000 $
- $
15,701,000
43,180,000
17,785,000 $ 43,180,000 $
449,000 $
158,250,000
158,699,000 $
$
$
F-10
- $
- $
533,000
5,765,000
3,247,000
226,143,000
5,765,000 $ 3,247,000 $ 226,676,000
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table shows the loan portfolio allocated by management's internal risk ratings at September 30, 2016 and
December 31, 2015:
Pass
Special Mention
Substandard
Impaired
Total
September 30, 2016
Commercial
Real Estate:
Construction
Mortgage
Installment
Home equity lines of credit
$
14,316,000 $
932,000 $
786,000 $
69,000 $
16,103,000
48,682,000
165,438,000
5,261,000
3,006,000
$ 236,703,000 $
965,000
1,897,000 $
782,000
165,000
1,733,000 $
165,000
234,000 $
48,682,000
167,350,000
5,426,000
3,006,000
240,567,000
Pass
Special Mention
Substandard
Impaired
Total
December 21, 2015
Commercial
Real Estate:
Construction
Mortgage
Installment
Home equity lines of credit
$
14,166,000 $
911,000 $
624,000 $
84,000 $
15,785,000
43,124,000
156,615,000
5,601,000
3,247,000
$ 222,753,000 $
988,000
1,899,000 $
56,000
647,000
164,000
1,491,000 $
449,000
533,000 $
43,180,000
158,699,000
5,765,000
3,247,000
226,676,000
As of September 30, 2016 there were zero loans past due between 30 and 89 days and still accruing. As of December 31,
2015, there were zero commercial loans past due between 30 and 89 days and still accruing. At September 30, 2016 and
December 31, 2015, there were zero loans past due 90 days or more and still accruing. Nonaccrual loans presented by loan
class were as follows as of September 30, 2016 and December 31, 2015.
September 30,
December 31,
2016
2015
$
69,000 $
84,000
165,000
449,000
$
234,000 $
533,000
Commercial
Real Estate - Mortgage
Information relating to individually impaired loans presented by class of loans was as follows as of September 30,
2016 and December 31, 2015:
Unpaid
Principal
Balance
September 30, 2016
Without a Related Allowance Recorded
Commercial
Real Estate
$
$
Recorded
Investment
83,000 $
170,000
253,000 $
Unpaid
Principal
Balance
December 31, 2015
Without a Related Allowance Recorded
Commercial
Real Estate
$
$
69,000 $
165,000
234,000 $
Recorded
Investment
105,000 $
768,000
873,000 $
F-11
84,000 $
449,000
533,000 $
Average
Recorded
Investment
Related
Allowance
- $
- $
77,000 $
608,000
685,000 $
Average
Recorded
Investment
Related
Allowance
- $
- $
110,000 $
3,125,000
3,235,000 $
Interest
Income
Recognized
2,000
333,000
335,000
Interest
Income
Recognized
1,000
965,000
966,000
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
There was no interest income included above recognized on a cash basis for the nine and twelve month periods ended
September 30, 2016 and December 31, 2015, respectively.
Note 7 - Other Real Estate Owned
At September 30, 2016 and December 31, 2015, the recorded investment in other real estate owned (“OREO”) was $337,000
and $448,000, respectively. The OREO property consists of undeveloped residential lots which were acquired through
foreclosure in July 2010. The Company periodically obtains independent third party property valuations to determine
whether the recorded book value is considered fair value.
Note 8 – Interest-Bearing Deposits
Interest-bearing deposits consisted of the following:
September 30, December 31,
2016
2015
$
3,008,000 $ 2,713,000
164,890,000
139,592,000
10,725,000
12,364,000
14,535,000
14,222,000
9,332,000
15,485,000
$ 202,490,000 $ 184,376,000
Savings accounts
Money market accounts
Interest-bearing demand accounts
Time certificate of deposit accounts under $250,000
Time certificate of deposit accounts over $250,000
Note 9 - Borrowing Arrangements
The Company has unsecured Federal funds lines of credit with three of its correspondent banks under which it can borrow up
to $20,000,000. There were no borrowings outstanding under these arrangements at September 30, 2016 or December 31,
2015.
The Company has a borrowing arrangement with the Federal Home Loan Bank of San Francisco (FHLBSF) under which it
may borrow an amount not to exceed 25% of total assets. Various loans totaling approximately $168,280,000 were pledged
to secure FHLBSF borrowings as of September 30, 2016. In addition, investment securities with amortized costs of
$29,085,000 and estimated fair values of $29,565,000 were pledged to secure the borrowing arrangement as of September 30,
2016. The total borrowing capacity under these arrangements was $111,599,000 at September 30, 2016. Investment
securities with amortized costs of $29,463,000 and estimated fair values of $29,597,000 were pledged to secure the
borrowing arrangement as of December 31, 2015. Total borrowing capacity under these arrangements was $85,241,000 at
December 31, 2015.
At September 30, 2016 the Company’s borrowings with the FHLBSF totaled $20,000,000 and had a weighted average rate of
0.82%. Of that amount, $15,000,000 was short-term and $5,000,000 was long-term. At December 31, 2015 the Company’s
borrowings with the FHLBSF totaled $20,000,000 and had a weighted average rate of 0.65%. Of that amount, $15,000,000
was short-term and $5,000,000 was long-term.
F-12
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 10 - Operating Lease
The Company leases its branch facilities and administrative office under long-term non-cancelable lease agreements, which
have been accounted for as operating leases. Such lease agreements expire on various dates through the year 2019, and
contain renewal options for various periods.
Future minimum lease payments are as follows:
Year Ending
December 31,
Operating
Leases
2016
2017
2018
2019
2020
Thereafter
$
537,000
352,000
386,000
238,000
135,000
81,000
$
1,729,000
Rental expense included in occupancy and equipment expense totaled $436,000 and $672,000 for the nine and twelve month
periods ended September 30, 2016 and December 31, 2015, respectively.
Note 11 - Share – Based Compensation
The Company has one share-based compensation plan, the AltaPacific Bancorp 2016 Equity Incentive Plan (the "Plan"),
which has been approved by its shareholders and permits the grant of stock options and restricted stock for up to 1,500,000
shares of the Company's common stock of which 835,074 were available for future grants at September 30, 2016. The Plan
is designed to attract and retain employees and directors. The amount, frequency, and terms of share-based awards may vary
based on competitive practices, the Company's operating results and government regulations. New shares are issued upon
option exercise or restricted share grants. The Plan does not provide for the settlement of awards in cash. The Plan requires
that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock
must be paid in full at the time the option is exercised. All options expire on a date determined by the Board of Directors but
not later than ten years from the date of grant. The vesting period is determined by the Board of Directors and is generally
over a five year period.
Restricted stock awards are grants of shares of common stock that are subject to forfeiture until specific conditions or goals
are met. Conditions may be based on continuing employment or achieving specified performance goals. During the period
of restriction, participants holding restricted stock may have full voting and dividend rights. The restrictions lapse in
accordance with a schedule or with other conditions determined by the board of directors. There have been no restricted
stock awards granted since inception of the Company or its subsidiary.
The Company accounts for share-based compensation using a fair-value based method and requires that share-based
compensation expense be recorded for all stock options that are ultimately expected to vest as the requisite service is
rendered.
Management estimates the fair value of each option award as of the date of grant using a Black-Scholes-Merton option
pricing formula and the following assumptions. Expected volatility is based on historical volatility of similar entities over a
preceding period commensurate with the expected term of the option because the Company's common stock has been
publicly traded for a shorter period than the expected term for the options. The "simplified" method described in the
Securities and Exchange Commission's Staff Accounting Bulletin No. 110 is used to determine the expected term of the
options due to the lack of sufficient historical data. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant with substantially the same term as the expected term of the option. Expected dividend yield was
not considered in the option pricing formula since cash dividends have not been paid and there are no current plans to do so
in the foreseeable future. In addition to these assumptions, management makes estimates regarding pre-vesting forfeitures
that will impact total compensation expense recognized under the Plan.
F-13
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During the nine month period ended September 30, 2016, the Company granted 82,000 stock options under the Company’s
Equity Incentive Plan to certain employees. The aggregate value of these shares at the grant date amounts to approximately
$334,000 and is recognized ratably as compensation expense or director expense over the vesting periods. The shares of
common stock granted pursuant to such agreements vest in increments over one to five years from the date of grant. The
stock options awarded to employees and directors under the Equity Incentive Plan vest on the applicable vesting dates only to
the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each
recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.
A summary of option activity under the Plans as of September 30, 2016 and changes during the period then ended is
presented below:
Options
Shares
Weighted
Average Exercise
Price
Outstanding at January 1, 2016
Granted
Exercised
Forfeited or expired
Outstanding at September 30, 2016
769,086
82,000
(383,441)
(201,585)
266,060
$
Exercisable at September 30, 2016
123,453
Weighted Average
Remaining
Contractual Term
Aggregate Intrinsic
Value ($000)
$
7.25
9.31
7.11
7.19
8.14
6.8 years
$
349,000
$
6.96
4.4 years
$
307,000
Note 12 - Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiary, AltaPacific Bank. The allocation of income
tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for (benefit from) income
taxes.
The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are
recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other
assets.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The
Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of tax
expense in the consolidated statement of income. There were no unrecognized tax benefits or accrued interest and penalties at
September 30, 2016 or for the nine month period then ended.
F-14
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 13 - Fair Value Measurements
Fair Value of Financial Instruments
The estimated carrying fair values of the Company’s financial instruments are as follows as of the dates noted:
September 30, 2016
Estimated
Carrying
Fair
Amount
Value
December 31, 2015
Estimated
Carrying
Fair
Amount
Value
Financial assets:
Cash and due from banks
$ 41,277,000 $ 41,277,000 $ 15,271,000 $ 15,271,000
Interest-bearing deposits in banks
996,000
996,000
Available-for-sale investment securities
74,897,000
74,897,000
77,006,000
77,006,000
Loans, net
235,914,000
238,032,000
222,230,000
224,225,000
Federal Reserve Bank stock
1,589,000
1,589,000
1,588,000
1,588,000
Federal Home Loan Bank stock
1,676,000
1,676,000
1,646,000
1,646,000
Accrued interest
1,226,000
1,226,000
1,047,000
1,047,000
Financial liabilities:
Deposits
Other borrowings
Junior subordinated debentures
Accrued interest
$ 295,675,000 $ 295,702,000 $ 262,433,000 $ 262,457,000
$ 20,000,000
20,000,000
20,000,000
20,000,000
5,612,000
5,612,000
5,531,000
5,531,000
47,000
47,000
40,000
40,000
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a
particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business
related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any of these estimates.
The following methods and assumptions were used to estimate the fair value of financial instruments. For cash and due from
banks, interest-bearing deposits in banks, Federal funds sold, variable-rate loans, accrued interest receivable and payable,
Federal Reserve Bank stock, Federal Home Loan Bank stock, demand deposits and Federal Home Loan Bank Advances, the
carrying amount is estimated to be fair value. For investment securities, fair values are based on quoted market prices,
quoted market prices for similar securities and indications of value provided by brokers. The fair values for fixed-rate loans
are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans
with similar terms to borrowers of comparable creditworthiness. Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with
similar remaining maturities. The fair values of commitments are estimated using the fees currently charged to enter into
similar agreements and are not significant and, therefore, not included in the above table.
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are
based upon:
Level 1 – Quoted market prices for identical instruments traded in active exchange markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can
be corroborated by observable market data.
F-15
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Level 3 – Model-based techniques that use at least one significant assumption not observable in the market. These
unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the
asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial
instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may
require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at
the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size
of the transfer relative to total assets, total liabilities or total earnings.
Assets Recorded at Fair Value
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and
nonrecurring basis:
Recurring Basis
Description
Level 1
Level 2
Level 3
September 30, 2016
Assets Measured at Fair Value
on a Recurring Basis
Securities available-for-sale
$
-
$
74,897,000
$
-
Assets Measured at Fair Value
on a Non-Recurring Basis
Collateral-Dependent Impaired Loans,
Net of Specific Reserves:
Real Estate
Other real estate owned
Total
Losses
$
-
$
337,000
$
$
-
$
77,006,000
$
165,000 $
-
-
December 31, 2015
Assets Measured at Fair Value
on a Recurring Basis
Securities available-for-sale
-
Assets Measured at Fair Value
on a Non-Recurring Basis
Collateral-Dependent Impaired Loans,
Net of Specific Reserves:
Real estate – Commercial
Other real estate owned
Total
Losses
$
-
$
448,000
$
449,000 $
-
-
As of September 30, 2016, collateral-dependent impaired loans, which are measured for impairment using the fair value of
the collateral, had a carrying value of approximately $165,000, with a specific reserve of $0. At December 31, 2015,
collateral-dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying
value of approximately $449,000, with a specific reserve of $0.
The Company had no liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2016 and
December 31, 2015.
F-16
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 14 - Junior Subordinated Debt Securities
The Company through the acquisition of Mission Oaks Bancorp, assumed the outstanding amount of Mission's junior
subordinated debentures of $7,500,000. Mission's Capital Trust I (the Trust) was formed by Mission Oaks Bancorp in 2006
for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. The
Company issued $7,732,000 of junior subordinated debentures to the Trust in exchange for ownership of all of the
common security of the Trust and the proceeds of the preferred securities sold by the Trust. The Company is not considered
the primary beneficiary of this Trust, therefore the Trust is not consolidated in the Company's financial statements, but
rather the fair value of the junior subordinated debentures is shown as a liability. The Company's investment in the
common stock of the Trust is $232,000 and is included in other assets. At acquisition in May 2014, the debentures were
recorded at a fair value of $5,351,000, with the discount being accreted to interest expense over the remaining life of the
debentures.
The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples
of $1,000, at any time at 100 percent of the principal amount, plus accrued and unpaid interest. The subordinated
debentures mature on June 15, 2036. The Company has the option to defer interest payments on the subordinated debentures
from time to time for a period not to exceed five consecutive years.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory
guidelines and interpretations. The subordinated debentures have a variable rate of interest of three- month London
Interbank Offered Rate (LIBOR) plus 1.65 percent. At September 30, 2016, the interest rate for the subordinated debentures
was 2.50 percent. At September 30, 2016, the carrying value of the subordinated debentures totaled $5,612,000.
Note 15 - Recently Issued Accounting Pronouncements
On February 25, 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). The new standard is
being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance
sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance
sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. This Update
is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company is currently evaluating the effects of ASU 2016-02 on its financial statements and
disclosures.
On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting
for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other
comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and
financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial
instruments including a requirement that public business entities use exit price when measuring the fair value of financial
instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business
entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company
is currently evaluating the effects of ASU 2016-01 on its financial statements and disclosures.
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic
606). As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods
beginning after December 15, 2017. The Update modifies the guidance companies use to recognize revenue from contracts
with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the
scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information
about contract balances and performance obligations. The Company does not expect these amendments to have a material
effect on its financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs. The Update changes the balance sheet presentation for debt issuance costs. Under the
new guidance, debt issuance costs should be reported as a deduction from debt liabilities rather than as a deferred charge
classified as an asset. The Update is effective for us in first quarter 2016 with retrospective application. Early adoption is
F-17
ALTAPACIFIC BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
permitted. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial
Statements.
In August 2014, the FASB issued guidance within ASU 2014-15, Presentation of Financial Statements - Going Concern
(Subtopic 205-40):Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This Update
provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to
continue as a going concern. The amendments require management to assess an entity's ability to continue as a going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This Update is
effective for interim and annual periods ending after December 15, 2016. The adoption of this guidance is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15,
2016, and interim periods therein. The Company is currently evaluating the impact of ASU 2016-09 on its financial
statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with
a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. For public business entities, the amendment is effective for annual
periods beginning after December 15, 2019 and interim period within those annual periods. The Company is currently
evaluating the effects of ASU 2016-13 on its financial statements and disclosures.
F-18
Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
VA L U E T H E D I F F E R E N C E
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of
AltaPacific Bancorp
Santa Rosa, California
We have audited the accompanying consolidated financial statements of AltaPacific Bancorp, which are
comprised of the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated
statements of income, comprehensive income (loss), changes in shareholders' equity, and cash flows for the years
then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of AltaPacific Bancorp as of December 31, 2015 and 2014, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
Rancho Cucamonga, California
March 16, 2016
F-19
10681 Foothill Blvd., Suite 300 Rancho Cucamonga, CA 91730 Tel: 909.466.4410 www.vtdcpa.com Fax: 909.466.4431
ALTAPACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
2015
ASSETS
Cash and due from banks
Interest-bearing deposits in banks
Available-for-sale investment securities
$
Loans, less allowance for loan losses of $3,235,000 in 2015,
and $2,746,000 in 2014
Premises and equipment, net
Other real estate owned (OREO)
Bank owned life insurance
Accrued interest receivable and other assets
Total Assets
2014
15,271,000
77,006,000
$
3,274,000
980,000
84,532,000
222,230,000
2,523,000
448,000
11,238,000
17,031,000
$ 345,747,000
222,534,000
897,000
448,000
10,930,000
17,077,000
$ 340,672,000
$
$
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing deposits
Interest-bearing deposits
Total Deposits
Other borrowings
Junior subordinated debentures
Accrued interest payable and other liabilities
Total Liabilities
78,057,000
184,376,000
262,433,000
20,000,000
5,531,000
5,480,000
293,444,000
64,065,000
198,446,000
262,511,000
20,555,000
5,423,000
3,342,000
291,831,000
Commitments and Contingencies (Note 12)
-
-
Shareholders' Equity
Preferred stock, no par value, 10,000,000 shares authorized;
none issued or outstanding
-
-
46,343,000
5,216,000
744,000
52,303,000
$ 345,747,000
45,367,000
2,448,000
1,026,000
48,841,000
$ 340,672,000
Common stock, no par value, 40,000,000 shares authorized;
5,667,671 and 5,826,114 shares issued and outstanding
for 2015 and 2014, respectively
Retained earnings
Accumulated other comprehensive income
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
F-20
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
2015
2014
$ 18,140,000
24,000
2,438,000
5,000
20,607,000
$ 14,993,000
27,000
2,443,000
6,000
17,469,000
872,000
458,000
1,330,000
1,035,000
230,000
1,265,000
19,277,000
390,000
18,887,000
16,204,000
625,000
15,579,000
Noninterest Income
Service charges and fees
Bank owned life insurance
Gain on sale of investment securities
Gain on recovery of acquired loans
Miscellaneous income
Total Noninterest Income
382,000
308,000
410,000
29,000
1,129,000
513,000
279,000
51,000
625,000
48,000
1,516,000
Noninterest Expense
Salaries and other employee benefits
Occupancy and equipment
Other
Total Noninterest Expense
7,261,000
1,322,000
2,635,000
11,218,000
6,836,000
1,287,000
3,185,000
11,308,000
8,798,000
3,527,000
5,271,000
5,787,000
2,360,000
3,427,000
Interest Income
Interest and fees on loans
Interest on Federal funds sold
Interest on available-for-sale investment securities
Interest on deposits with other financial institutions
Total Interest Income
Interest Expense
Interest expense on deposits
Interest on short-term borrowings
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Net Interest Income After Provision for Loan Losses
Net Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
$
Income Per Share
Basic
Diluted
Weighted average number of shares outstanding - basic
Weighted average number of shares outstanding - diluted
$
$
0.91
0.88
5,750,427
5,951,246
The accompanying notes are an integral part of these consolidated financial statements.
F-21
$
$
$
0.57
0.55
5,998,437
6,157,801
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
2015
Net income
$
2014
5,271,000
$
3,427,000
Other Comprehensive Income (Loss):
Unrealized gains (losses) on securities available-for-sale
(478,000)
Reclassification of realized losses on sale of available-for-sale
securities included in net income
-
Income tax effect relating to available-for-sale securities
Total Other Comprehensive Income (Loss)
$
Total Comprehensive Income
(51,000)
(478,000)
180,000
196,000
(74,000)
(282,000)
106,000
4,989,000
The accompanying notes are an integral part of these consolidated financial statements.
F-22
231,000
$
3,533,000
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Common Stock
Shares
Outstanding
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
5,551,294
$ 45,324,000
$ 1,739,000
Net income
-
-
Share-based compensation
expense
-
75,000
263,849
2,718,000
(266,536)
(2,750,000)
Balance, January 1, 2014
5% stock dividend
Purchase and retirement of stock
Unrealized gain on available-for-sale
investment securities, net of tax
$
Total
Shareholders'
Equity
920,000
$ 47,983,000
3,427,000
-
3,427,000
-
-
75,000
-
-
(2,718,000)
-
-
(2,750,000)
-
-
-
106,000
106,000
5,548,607
$ 45,367,000
$ 2,448,000
$ 1,026,000
$ 48,841,000
Net income
-
-
5,271,000
-
5,271,000
Share-based compensation
expense
-
93,000
-
-
93,000
10,207
5,000
-
-
5,000
277,507
2,498,000
(2,498,000)
-
-
-
-
(5,000)
-
(5,000)
-
(1,620,000)
Balance, December 31, 2014
Stock options exercised
5% stock dividend
Cash in lieu for fractional shares
Purchase and retirement of stock
Unrealized loss on available-for-sale
investment securities, net of tax
Balance, December 31, 2015
(168,394)
(1,620,000)
-
-
-
-
5,667,927
$ 46,343,000
$ 5,216,000
(282,000)
$
The accompanying notes are an integral part of these consolidated financial statements.
F-23
744,000
(282,000)
$ 52,303,000
ALTAPACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
2015
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Depreciation and amortization, net
Gain on disposal of premises and equipment
Gain on sale of investment securities
Deferred loan origination costs and fees, net
Share-based compensation
Deferred tax expense
Increase in cash surrender value of life insurance
(Increase) decrease in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
Other, net
Net Cash Flows Provided by Operating Activities
$
5,271,000
2014
$
3,427,000
390,000
(2,144,000)
(407,000)
93,000
1,999,000
(308,000)
(1,452,000)
2,138,000
99,000
5,679,000
625,000
(341,000)
(5,000)
(51,000)
700,000
75,000
409,000
(279,000)
378,000
(1,550,000)
51,000
3,439,000
Cash Flows From Investing Activities
Net decrease in interest-bearing deposits in banks
Purchase of available-for-sale investment securities
(Purchase) redemption of Federal Reserve Bank stock
(Purchase) redemption of Federal Home Loan Bank stock
Proceeds from sale of available for sale securities
Proceeds from principal payments of mortgage-backed securities
Decrease (increase) in loans funded, net
Proceeds from sale of OREO
Proceeds from sale of premises and equipment
Purchase of premises and equipment
Cash acquired in acquisition
Net Cash Flows Provided by (Used in) Investing Activities
980,000
(10,003,000)
(266,000)
(39,000)
16,129,000
3,832,000
(2,062,000)
8,571,000
1,399,000
(23,784,000)
282,000
23,000
4,898,000
15,829,000
(23,037,000)
143,000
10,000
(139,000)
15,870,000
(8,506,000)
Cash Flows From Financing Activities
Increase (decrease) in demand and money market deposits, net
(Decrease) increase in time deposits, net
Repurchase of common stock
(Decrease) increase in other borrowings
Net Cash Flows (Used in) Provided by Financing Activities
20,640,000
(20,718,000)
(1,620,000)
(555,000)
(2,253,000)
(3,474,000)
7,931,000
(2,750,000)
555,000
2,262,000
$
(2,805,000)
6,079,000
3,274,000
$
$
1,374,000
2,150,000
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
$
11,997,000
3,274,000
15,271,000
Supplemental Cash Flow Information:
Interest paid
Taxes paid
$
$
1,419,000
1,885,000
The accompanying notes are an integral part of these consolidated financial statements.
F-24
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of AltaPacific Bancorp (the Company) are in accordance with accounting
principles generally accepted in the United States of America and conform to practices within the banking
industry. A summary of the accompanying consolidated financial statements follows:
Nature of Operation
AltaPacific Bancorp is a California corporation registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and is headquartered in Santa Rosa, California. The Company was
incorporated in March, 2010, and subsequently acquired all of the outstanding shares of AltaPacific Bank
(the Bank). The formation of the bank holding company provides the Company and the Bank greater flexibility in
terms of operation, expansion, and diversification.
AltaPacific Bancorp's principal business is to serve as a holding company for the Bank and its principal source of
income will be derived from dividends paid by the Bank. The payment of dividends by the Bank is subject to
restrictions that could limit AltaPacific Bancorp's payment of dividends to its shareholders.
The Bank
AltaPacific Bank was organized under the laws of the State of California on February 16, 2006. The Bank opened
for business as a State-chartered non-member bank on July 10, 2006. On November 5, 2010, the Company
became a member of the Federal Reserve System (FRB). On August 3, 2009, the Bank amended its articles of
incorporation to change its legal name from Atlantic Pacific Bank to AltaPacific Bank.
The Bank is subject to regulation by the California Department of Business Oversight (the DBO) and the FRB and
its deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The
Bank is headquartered in Santa Rosa, California, and also has branch offices in Rancho Cucamonga, Covina,
Temecula, and Riverside, California. The Bank provides products and services to customers who are
predominately small to middle-market business, professionals, and not-for-profit organizations. Generally,
deposits are insured by the FDIC up to $250,000 per depositor.
Principles of Consolidation
The accounting and reporting policies of AltaPacific Bancorp and its subsidiary AltaPacific Bank (collectively,
the Company) conform with accounting principles generally accepted in the United States of America and
prevailing practices within the banking industry. Significant inter-company balances and transactions have been
eliminated through consolidation.
In accordance with U.S. GAAP, the Company's investments in Mission Oaks Capital Trust I are not consolidated
and are accounted for under the equity method and included in other assets on the consolidated balance sheet. The
junior subordinated debentures issued and guaranteed by the Company and held by the trust are reflected on the
Company's consolidated balance sheet.
F-25
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Operating Segments
While the Company's executive officers monitor the revenue streams of the various products and services,
operations are managed and financial performance is evaluated on a Company-wide basis. Operating results are
not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the
financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications
Certain reclassifications have been made to the prior year's balances to conform to the classifications used in the
current year.
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March 16, 2016, which is
the date the financial statements were available to be issued.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from these estimates. The
allowance for loan losses, deferred tax assets, and fair values of financial instruments are particularly subject to
change.
Cash and Cash Equivalents
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and due
from banks and Federal funds sold. Generally, Federal funds are sold for one-day periods.
Investment Securities
Investment securities are classified into the following categories:

Available-for-sale securities, reported at fair value, with unrealized gains and losses, to the extent losses
are not considered other than temporary, excluded from earnings and reported, net of taxes, as
accumulated other comprehensive income (loss) within shareholders' equity.

Held-to-maturity securities, which management has the positive intent and ability to hold, reported at
amortized cost, adjusted for the accretion of discounts and amortization of premiums.
F-26
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities, (Continued)
Management determines the appropriate classification of its investments at the time of purchase and may only
change the classification in certain limited circumstances. All transfers between categories are accounted for at
fair value. At December 31, 2015 and 2014, all securities are classified as available-for-sale and there were no
transfers between categories for the years ended December 31, 2015 and 2014.
Gains and losses on the sale of investment securities are computed using the specific identification method.
Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion
of discounts and amortization of premiums.
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that
are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether such a decline in their fair value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the
Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated
recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is
other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent,
but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack
of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a
decline in value is determined to be other than temporary, and management does not intend to sell the security or it
is more likely than not that the Company will not be required to sell the security before recovery, only the portion
of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance
recognized as a charge to other comprehensive income. If management intends to sell the security or it is more
likely than not that the Company will be required to sell the security before recovering its forecasted cost, the
entire impairment loss is recognized as a charge to earnings.
Loans
Loans are stated at their outstanding principal balances reduced by any charge-offs or specific valuation accounts
and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased
loans. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of
management, loans are considered to be impaired and the future collectability of interest and principal is in serious
doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued
but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to
ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the
ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to
principal. Generally, loans are placed on non-accrual status when they are 90 days past due. Past due status is
based on the contractual terms of the loan. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured. The Company's policy
for placing loans on nonaccrual status, recording payments received on nonaccrual loans, resuming accrual of
interest, and determining past due or delinquency status does not differ by portfolio segment, nor does it differ for
loans modified in troubled debt restructurings.
F-27
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans, (Continued)
All classified loans are evaluated for impairment and are considered impaired when, based on current information
and events, it is probable that the Company will be unable to collect all amounts due (including both principal and
interest) in accordance with the contractual terms of the loan agreement. The policy for recognizing interest on
impaired loans is the same as the policy described above and does not differ by portfolio segment.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal
reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise
consider. Restructured workout loans typically present an elevated level of credit risk, as the borrowers are not
able to perform according to the original contractual terms. Loans that are reported as TDRs are considered
impaired and measured for impairment as described below.
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and
discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over
the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of
net loans.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's
judgment, should be charged off. Amounts are charged-off when available information confirms that specific
loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied
to each segment.
The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually
classified as impaired. A loan is impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Factors considered in determining impairment include payment status, collateral value and the probability of
collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an
impaired loan, which are to be discounted at the loan's effective interest rate, or measured by reference to an
observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The
Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for
which foreclosure is probable are measured at the fair value of the collateral.
F-28
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses, (Continued)
The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest
income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for
which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified
as impaired with measurement of impairment based on expected future cash flows discounted using the loan's
effective rate immediately prior to the restructuring.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Smaller balance, homogeneous loans are collectively evaluated for impairment.
General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment,
adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of
the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include
consideration of the following: changes in lending policies and procedures; changes in economic conditions,
changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending
management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other
adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for
collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and
legal and regulatory requirements.
Portfolio segments identified by the Company include commercial, commercial real estate construction (including
land and development loans) commercial real estate mortgage, installment, and home equity lines of credit.
Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value
ratios and financial performance on non-consumer loans and credit scores, debt-to income, collateral type, and
loan-to-value ratios for consumer loans.
These risk ratings are also subject to examination by independent specialists engaged by the Company and the
Company's regulators. During these internal reviews, management monitors and analyzes the financial condition
of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral
securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The
risk ratings do not differ by portfolio segment, and can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's
close attention.
Special Mention - A special mention loan has potential weaknesses that deserve management's close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or
in the Company's credit position at some future date. Special Mention loans are not adversely classified and do
not expose the Company to sufficient risk to warrant adverse classification.
F-29
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses, (Continued)
Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of
the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's
lack of marketability, inadequate cash flow, or collateral support, failure to complete construction on time or the
project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known
facts, conditions, and values, highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for loan losses also consists of reserve factors that are based on
management's assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses,
and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment
risk associated with each portfolio segment described below.
Commercial - Commercial loans generally possess a lower inherent risk of loss than real estate portfolio
segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt
coverage is provided by business cash flows and economic trends influenced by unemployment rates and other
key economic indicators are closely correlated to the credit quality of these loans.
Real Estate Construction - Commercial real estate construction loans (including land and development loans)
generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from
the necessity to complete projects within specified cost and time lines. Trends in the construction industry
significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in
real estate values significantly impact the credit quality of these loans, as property values determine the economic
viability of construction projects.
Real Estate Mortgage - Commercial real estate mortgage loans generally possess a higher inherent risk of loss
than other real estate portfolio segments, except land and construction loans. Adverse economic developments or
an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy
rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating
revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Consumer Installment - An installment loan portfolio is usually comprised of a large number of small loans
scheduled to be amortized over a specific period. Most installment loans are made directly for consumer
purchases, but business loans granted for the purchase of heavy equipment or industrial vehicles may also be
included. Economic trends determined by unemployment rates and other key economic indicators are closely
correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay
their obligations may be deteriorating.
F-30
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses, (Continued)
Consumer Other: Home Equity Lines of Credit - The degree of risk in the home equity lines of credit portfolio
depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to
repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate
portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are
closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity
to repay their obligations may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At
least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the
relative risks in the portfolio, current economic conditions, and other factors. If the Board of Directors and
management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition,
the Company's primary regulators, the FRB and the DBO, as an integral part of their examination process, review
the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their
judgment about information available at the time of their examinations.
There were no significant changes to the Company's accounting policies or methodologies with respect to the
allowance for loan losses from the prior year.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates
anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet
commitments is included in accrued interest payable and other liabilities on the balance sheet.
Premises and Equipment
Premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the
estimated useful lives of the related assets. The useful lives of premises range between 25 to 39 years. The useful
lives of furniture, fixtures and equipment are estimated to be 3 to 10 years. Leasehold improvements are
amortized over the lesser of the respective lease term (including renewal periods that are reasonably assured) or
their useful lives, which are generally 3 to 10 years. Leased equipment meeting certain capital lease criteria is
capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capital
leases is computed using a straight-line method over the shorter of the estimated and useful life of the equipment
or the initial lease term.
Certain operating leases contain scheduled and specified rent increases or incentives in the form of tenant
improvement allowances or credits. The scheduled rent increases are recognized on a straight-line basis over the
lease term as an increase in the amount of rental expense recognized each period. Lease incentives, including
tenant improvement credits, are capitalized at the inception of the lease and amortized on a straight-line basis over
the lease term as a reduction of rental expense. Amounts accrued in excess of amounts paid related to the
scheduled rent increases and the unamortized deferred tenant improvement credits are included in accrued interest
payable and other liabilities on the balance sheet.
F-31
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment, (Continued)
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for
financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable.
Federal Home Loan Bank and Federal Reserve Bank Stock
The Company, as a member of the Federal Home Loan Bank of San Francisco (FHLB) and the FRB, is required to
hold shares of capital stock in the FHLB and FRB in an amount specified by regulation and is adjusted
periodically based on a determination made by the FHLB and FRB. At December 31, 2015 and 2014, the
Company owned $1,646,000 and $1,607,000, respectively, of FHLB stock. At December 31, 2015 and 2014, the
Company owned $1,588,000 and $1,322,000, respectively, of FRB stock.
These investments are recorded at cost, carried as restricted securities, and are periodically evaluated for
impairment. Cash and stock dividends are both reported as income. These stocks are included in accrued interest
receivable and other assets on the balance sheet.
Other Real Estate Owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded
through expense. Operating costs after acquisition are expensed.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded
at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates which are expected to be applied to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if, based on the weight of available evidence, management
believes it is more likely than not that some portion or all of the deferred tax assets will not be realized.
F-32
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes, (Continued)
The Company considers all tax positions recognized in its financial statements for the likelihood of realization.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by
the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount
of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence, management believes it is more likely than
not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the morelikely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above, if any, is reflected as a
liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties
associated with unrecognized tax benefits, if any, are classified as income tax expense in the statement of
operations. The Company does not have a liability for unrecognized tax benefits, or uncertain tax positions, and
has not accrued for any interest or penalties as of December 31, 2015 and 2014.
Earnings Per Share (EPS)
Basic earnings per share (EPS), which excludes dilution, is computed by dividing net income by the weightedaverage number of common shares outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the
issuance of common stock which shares in the earnings of the Company. The treasury stock method is applied to
determine the dilutive effect of stock options in computing diluted earnings per share. Stock options totaling
48,000 and 65,000 for the years ended December 31, 2015 and 2014, respectively, were considered anti-dilutive
and were excluded from the computation of diluted earnings per share because the assumed proceeds from
exercise price, tax benefits, and average future compensation exceeded the average market price of the Company's
common stock.
Share-Based Compensation
The Company has one share-based compensation plan, the Atlantic Pacific Bank 2006 Equity Incentive Plan
(the Plan), which has been approved by its shareholders and permits the grant of stock options and restricted stock
for up to 1,160,855 shares of the Company's common stock of which 382,048 were available for future grants at
December 31, 2015. The Plan is designed to attract and retain employees and directors. The amount, frequency,
and terms of share-based awards may vary based on competitive practices, the Company's operating results, and
government regulations. New shares are issued upon option exercise or restricted share grants. The Plan does not
provide for the settlement of awards in cash. The Plan requires that the option price may not be less than the fair
market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the
option is exercised. All options expire on a date determined by the Board of Directors but not later than ten years
from the date of grant. The vesting period is determined by the Board of Directors and is generally over a three to
five year period.
F-33
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share-Based Compensation, (Continued)
Restricted stock awards are grants of shares of common stock that are subject to forfeiture until specific conditions
or goals are met. Conditions may be based on continuing employment or achieving specified performance goals.
During the period of restriction, participants holding restricted stock may have full voting and dividend rights.
The restrictions lapse in accordance with a schedule or with other conditions determined by the board of directors.
There have been no restricted stock awards granted since inception of the Company or its subsidiary.
The Company account for share-based compensation using a fair-value based method and requires that sharebased compensation expense be recorded for all stock options that are ultimately expected to vest as the requisite
service is rendered.
Management estimates the fair value of each option award as of the date of grant using a Black-Scholes-Merton
option pricing formula and the following assumptions. Expected volatility is based on historical volatility of the
Company's common stock over a preceding period commensurate with the expected term of the option. The
"simplified" method described in the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 is
used to determine the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant with substantially the same term as the expected term of the option. Expected
dividend yield was not considered in the option pricing formula since cash dividends have not been paid and there
are no current plans to do so in the foreseeable future. In addition to these assumptions, management makes
estimates regarding pre-vesting forfeitures that will impact total compensation expense recognized under the Plan.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. That guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has
the ability to access as of the measurement date
Level 2: Significant other observable inputs (other than Level 1 prices) such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data
Level 3: Significant unobservable inputs that reflect an entity's own assumptions about the factors that
market participants would use in pricing an asset or liability
See Notes 18 and 19 for more information and disclosures relating to the Company's fair value measurements.
F-34
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a
more inclusive financial reporting methodology that includes disclosure of other comprehensive income or loss
that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the
Company's available-for-sale investment securities are included in other comprehensive income, adjusted for
realized gains or losses included in net income. Total comprehensive income or loss and the components of
accumulated other comprehensive income or loss is presented in the consolidated statements of comprehensive
income (loss).
Recent Accounting Guidance Not Yet Effective
In January 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled
Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. This
Update provides clarification as to when an in-substance repossession or foreclosure has occurred, i.e., the
creditor is considered to have received physical possession of residential real estate property collateralizing a
consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property
should be recognized. Under ASU No. 2014-04, a creditor has received physical possession of residential real
estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the
property upon completion of a foreclosure or (2) the borrower conveying all interest in the property to the creditor
to satisfy the loan through completion of a deed in lieu of foreclosure or a similar legal agreement. The Update
also will require disclosure in annual and interim financial statements of both (1) the amount of foreclosed
residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans
collateralized by residential real estate property that are in the process of foreclosure according to local
requirements of the applicable jurisdiction. The amendments in this Update are effective for interim and annual
periods beginning after December 15, 2014. Adoption of this Update did not have a material impact on the
Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-02, Intangibles – Goodwill and Other (Topic 350): "Accounting
for Goodwill". This Update allows an accounting alternative for the subsequent measurement of goodwill for
entities that are not considered public business entities. An entity that elects the accounting alternative in this
Update would amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity
demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further
required to make an accounting policy election to test goodwill for impairment at either the entity level or the
reporting unit level. Goodwill would be tested for impairment when a triggering event occurs that indicates that
the fair value of an entity (or a reporting unit) may be below its carrying amount. The accounting alternative, if
elected, would be applied prospectively to goodwill existing as of the beginning of the period of adoption and new
goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015. Early application is permitted, including application to any period
for which the entity's annual or interim financial statements have not yet been made available for issuance. The
Company is currently in the process of evaluating the impact of the adoption of this Update, but does not expect a
material impact on the Company's consolidated financial statements.
F-35
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Guidance Not Yet Effective, (Continued)
In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860):"Repurchase-to-Maturity
Transactions, Repurchase Financings, and Disclosures". This Update aligns the accounting for repurchase-tomaturity transactions and repurchase agreements executed as repurchase financings with the accounting for other
typical repurchase agreements. Going forward, these transactions would all be accounted for as secured
borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the
guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be
accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as offbalance-sheet accounting. The Update requires a new disclosure for transactions economically similar to
repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on
the transferred financial assets throughout the term of the transaction. The Update also requires expanded
disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for
as secured borrowings. The Update is effective for interim or annual period beginning after December 15, 2014.
All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or
repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As
such, the adoption of ASU No. 2014-11 did not have a material impact on the Company's consolidated financial
statements.
In August 2014, the FASB issued ASU Update ("ASU") No. 2014-14 Receivables – Troubled Debt
Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage
Loans upon Foreclosure. This Update addresses classification of government-guaranteed mortgage loans,
including those where guarantees are offered by the Federal Housing Administration ("FHA"), the U.S.
Department of Housing and Urban Development ("HUD"), and the U.S. Department of Veterans Affairs ("VA").
Although current accounting guidance stipulates proper measurement and classification in situations where a
creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current
guidance does not specify how to measure and classify foreclosed mortgage loans that are governmentguaranteed. Under the provisions of this Update, a creditor would derecognize a mortgage loan that has been
foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a
government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the
creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and
the creditor has the ability to recover under that claim, (3) at the time of foreclosure, any amount of the claim that
is determined on the basis of the fair value of the real estate is fixed. This Update is effective for interim and
annual periods beginning after December 15, 2014, for public business entities and after December 15, 2015, for
non public business entities. The adoption of this Update did not have a material impact of the Company's
consolidated financial statements.
F-36
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Guidance Not Yet Effective, (Continued)
On January 5, 2016, the FASB issued ASU Update 2016-01, Financial Instruments–Overall: Recognition and
Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model
primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair
value will impact earnings instead of other comprehensive income. The accounting for other financial
instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The
Update also changes the presentation and disclosure requirements for financial instruments including a
requirement that public business entities use exit price when measuring the fair value of financial instruments
measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities
in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company is currently evaluating the effects of ASU 2016-01 on its financial statements and disclosures.
On February 25, 2016, the FASB issued ASU Update 2016-02, Leases (Topic 842). The new standard is being
issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance
sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the
balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial
statements. This Update is generally effective for public business entities in fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the
effects of ASU 2016-02 on its financial statements and disclosures.
NOTE 2 - ACQUISITIONS
Mission Oaks Bancorp Acquisition
On May 2, 2014, the Company acquired all of the assets and assumed all of the liabilities of Mission Oaks
Bancorp (Mission) in exchange for cash of $3.5 million. Mission operated two branches, one of which was
located at its headquarters in Temecula, California. The other branch was located in Fallbrook, California. The
Company acquired Mission to strategically increase its existing presence in Southern California.
The acquisition of Mission is accounted for under the acquisition method of accounting. The acquired assets,
assumed liabilities and identifiable intangible assets are recorded at their respective acquisition date fair values.
Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as
additional information regarding the closing date fair values become available.
F-37
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2 - ACQUISITIONS, (CONTINUED)
Mission Oaks Bancorp Acquisition, (Continued)
The following table represents the assets acquired and liabilities assumed of Mission as of May 2, 2014, and the
provisional fair value adjustments and amounts recorded by the Company in 2014, under the acquisition method
of accounting.
Mission Book
Value
Assets Required
Cash and cash equivalents
Interest-bearing deposits in banks
Investments
Loans, gross
Allowance for loan losses
Fixed assets
Deferred tax assets
Other assets
Total Assets Acquired
Liabilities Assumed
Deposits
Junior subordinated debentures
Other liabilities
Total Liabilities Assumed
$
$
$
Excess of Assets Acquired Over
Liabilities Assumed
$
19,332,000
2,379,000
7,571,000
66,683,000
(2,488,000)
93,000
66,000
5,466,000
99,102,000
88,893,000
7,732,000
2,879,000
99,504,000
(402,000)
99,102,000
Goodwill recognized
Fair Value
Adjustments
$
$
$
$
(3,462,000)
(9,006,000)
2,488,000
3,248,000
660,000
(6,072,000)
166,000
(2,381,000)
91,000
(2,124,000)
402,000
(1,722,000)
Fair
Value
$
$
$
15,870,000
2,379,000
7,571,000
57,677,000
93,000
3,314,000
6,126,000
93,030,000
89,059,000
5,351,000
2,970,000
97,380,000
$
97,380,000
$
4,350,000
In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash
flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The
most significant category of assets for which this procedure was used was that of acquired loans. The excess of
expected cash flows above the fair value of the majority of loans will be accreted to interest income over the
remaining lives of the loans in accordance with FASB Accounting Standards Codification (ASC) 310-20
(formerly SFAS 91).
F-38
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2 - ACQUISITIONS, (CONTINUED)
Mission Oaks Bancorp Acquisition, (Continued)
Certain loans, for which specific credit-related deterioration, since origination, was identified, are recorded at fair
value, reflecting the present value of the amounts expected to be collected. Income recognition on these
"purchased credit-impaired" loans is based on a reasonable expectation about the timing and amount of cash flows
to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale
of loan collateral indeterminate, remain on non-accrual status.
For loans acquired from Mission, the outstanding balance, expected cash flows to be collected and fair value as of
the respective acquisition dates were as follows:
Outstanding balance
Cash flows not expected to be collected
Expected cash flows
Interest component of expected cash flows
Fair value of acquired loans
Purchased
Credit
Impaired
$
6,343,000
1,274,000
All Other
Acquired
Loans
$ 60,340,000
-
5,069,000
169,000
4,900,000
60,340,000
7,563,000
52,777,000
$
$
In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan
losses that had been previously recorded by Mission.
The Company recorded a deferred income tax asset of $3,314,000 related to Mission's net operating loss carryforward, as well as other tax attributes of Mission, along with the effects of fair value adjustments resulting from
applying the acquisition method of accounting.
The fair value of savings and transaction deposit accounts acquired from Mission were assumed to approximate
their carrying value, as these accounts have no stated maturity and are payable on demand.
F-39
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2 - ACQUISITIONS, (CONTINUED)
Mission Oaks Bancorp Acquisition, (Continued)
The operating results of the Company for the year ending December 31, 2014, includes the operating results of
Mission since the acquisition date of May 2, 2014. The following summarizes the net interest and other income,
net income, and earnings per share as if the merger with Mission was effective as of the beginning of the
comparable prior annual reporting period presented. There was no material, nonrecurring adjustments to the
proforma net interest and other income, net income, and earnings per share presented below:
December 31,
2014
$ 19,088,000
Net interest and other income
Net income
3,064,000
Basic earnings per share
0.51
Diluted earnings per share
0.49
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2015
consisted of the following:
December 31, 2015
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
Total Securities
Amortized
Cost
$ 25,897,000
Gross
Unrealized
Gains
$ 1,017,000
Gross
Unrealized
Losses
$
(85,000)
Fair Value
$ 26,829,000
29,464,000
20,384,000
$ 75,745,000
196,000
400,000
1,613,000
(63,000)
(204,000)
(352,000)
29,597,000
20,580,000
$ 77,006,000
$
F-40
$
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2014
consisted of the following:
December 31, 2014
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
Total Securities
Amortized
Cost
$ 26,230,000
Gross
Unrealized
Gains
$ 1,388,000
38,539,000
18,024,000
$ 82,793,000
194,000
489,000
2,071,000
$
Gross
Unrealized
Losses
$
$
(131,000)
(201,000)
(332,000)
Fair Value
$ 27,618,000
38,602,000
18,312,000
$ 84,532,000
Net unrealized losses on available-for-sale investment securities totaling $478,000 were recorded net of $196,000
in tax benefits, within shareholders' equity for the year ended December 31, 2015. Net unrealized gains on
available-for-sale investment securities totaling $180,000 were recorded net of $74,000 in tax expense, within
shareholders' equity for the year ended December 31, 2014. For the years ended December 31, 2015 and 2014,
proceeds from the sales of securities available-for-sale were $-0- and $4,898,000, respectively. There were no
calls, or transfers of available-for-sale investment securities for the years ended December 31, 2015 or 2014.
Investment securities with unrealized losses at December 31, 2015 and 2014, are summarized and classified
according to the duration of the loss period as follows:
December 31, 2015
Corporate securities
Mortgage-backed
securities:
Agency
Non-agency
December 31, 2014
Mortgage-backed
securities:
Agency
Non-agency
Less Than 12 Months
Unrealized
Fair Value
Loss
$ 6,415,000
$ (85,000)
12 Months or More
Unrealized
Fair Value
Loss
$
$
-
Fair Value
$ 6,415,000
Unrealized
Loss
$ (85,000)
167,000
7,443,000
$14,025,000
(1,000)
(101,000)
$ (187,000)
7,465,000
2,871,000
$10,336,000
(62,000)
(103,000)
$ (165,000)
7,632,000
10,314,000
$24,361,000
(63,000)
(204,000)
$ (352,000)
$12,475,000
1,236,000
$13,711,000
$ (128,000)
(22,000)
$ (150,000)
$ 1,970,000
6,334,000
$ 8,304,000
$
$14,445,000
7,570,000
$22,015,000
$ (131,000)
(201,000)
$ (332,000)
F-41
(3,000)
(179,000)
$ (182,000)
Total
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 3 - INVESTMENT SECURITIES, (CONTINUED)
The Company held 36 agency residential mortgage-backed securities of which 12 were in an unrealized loss
position as of December 31, 2015, and 23 non-agency residential mortgage-backed securities of which 12 were in
an unrealized loss position as of December 31, 2015. Two agency residential mortgage-backed securities had
been in an unrealized loss position for less than 12 months, and six non-agency residential mortgage-backed
securities had been in an unrealized loss position for more than 12 months. The Company held one corporate
security which was in an unrealized loss position as of December 31, 2015. The corporate security had been in a
loss position for less than 12 months. These unrealized losses were primarily caused by illiquidity in the
marketplace and downgrades made by the rating agencies of the issuers. Management performed an impairment
analysis using detailed cash flow analysis to determine the recoverability of all principal and interest contractually
due. This analysis projects prepayments, expected housing price changes, delinquency and default rates, expected
loss severities, and interest rates, while factoring in the underlying collateral.
The Company had 48 agency residential mortgage-backed securities of which 14 were not in an unrealized loss
position as of December 31, 2014, and 20 non-agency residential mortgage-backed securities of which nine were
not in an unrealized loss position as of December 31, 2014. Twelve agency residential mortgage-backed securities
had been in an unrealized loss position for less than 12 months, and eight non-agency residential mortgage-backed
securities had been in an unrealized loss position for more than 12 months. None of the Company's corporate
securities were in an unrealized loss position as of December 31, 2014. These unrealized losses were primarily
caused by illiquidity in the marketplace and downgrades made by the rating agencies of the issuers. Management
performed an impairment analysis using detailed cash flow analysis to determine the recoverability of all principal
and interest contractually due. This analysis projects prepayments, expected housing price changes, delinquency
and default rates, expected loss severities, and interest rates, while factoring in the underlying collateral.
For all securities in an unrealized loss position, based on management's analysis, and because management does
not have the intent to sell these securities nor does management believe it is more likely than not that the Company
will be required to sell these securities before a recovery of amortized cost, the Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2015 and 2014.
F-42
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 3 - INVESTMENT SECURITIES, (CONTINUED)
The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2015, by
contractual maturity are shown below.
Amortized
Cost
Corporate Securities
Less than one year
One through five years
Five through ten years
$
Mortgage-backed Securities
One through five years
Five through ten years
After ten years
Non-agency Securities
Five through ten years
After ten years
$
1,800,000
15,537,000
8,560,000
25,897,000
Estimated
Fair Value
$
1,804,000
16,364,000
8,661,000
26,829,000
897,000
3,278,000
25,289,000
29,464,000
900,000
3,300,000
25,397,000
29,597,000
721,000
19,663,000
20,384,000
75,745,000
724,000
19,856,000
20,580,000
77,006,000
$
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Investment securities with amortized cost totaling $29,463,000 and estimated fair values totaling $29,597,000
were pledged to secure borrowings with the Federal Home Loan Bank at December 31, 2015. Investment
securities with amortized cost totaling $34,856,000 and estimated fair values totaling $34,917,000 were pledged to
secure borrowings with the Federal Home Loan Bank at December 31, 2014 (see Note 10).
F-43
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4 - LOANS
Outstanding loans are summarized below:
Commercial
Real estate:
Construction
Mortgage
Installment
Home equity lines of credit
Loans Receivable
Allowances for loan losses
Net deferred loan origination fees
Loans Receivable, net
$
December 31,
2015
2014
15,785,000
$ 14,097,000
43,180,000
158,699,000
5,765,000
3,247,000
226,676,000
(3,235,000)
(1,211,000)
$ 222,230,000
56,931,000
148,975,000
3,447,000
3,446,000
226,896,000
(2,746,000)
(1,616,000)
$ 222,534,000
Salaries and employee benefits totaling $183,000 and $192,000 were deferred as loan origination costs for the
years ended December 31, 2015 and 2014, respectively.
As of December 31, 2015 and 2014, the Company's loans included the remaining unaccreted discount of
$4,545,000 and $8,530,000, respectively, related to the acquisition of Stellar Business Bank in 2012, and Mission
Oaks Bancorp in 2014.
Certain loans are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled
$151,785,000 and $152,840,000 at December 31, 2015 and 2014, respectively (see Note 10).
Purchased Credit Impaired Loans (PCI)
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality
since origination and it was probable, at acquisition, that all contractually required payments would not be
collected. The Company has not recorded an allowance for loan and lease losses for these PCI loans. The
carrying amount of those loans is as follows:
December 31,
Real estate - Mortgage
$
F-44
2015
449,000
$
2014
3,106,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4 - LOANS (CONTINUED)
Accretable yield, or income expected to be collected, is as follows:
December 31,
Balance at January 1
New loans purchased
Accretion of income
Disposals
Balance at December 31
2015
6,000
(6,000)
-
$
$
$
$
2014
10,000
169,000
(4,000)
(169,000)
6,000
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses follows as of December 31:
Balance, beginning of year
Provision for credit losses
Recoveries of loans previously charged off
Balance, end of year
$
$
F-45
2015
2,746,000
390,000
99,000
3,235,000
$
$
2014
2,070,000
625,000
51,000
2,746,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table presents the activity in the allowance for loan losses for the year 2015, and the recorded
investment in loans and impairment method as of December 31, 2015, by portfolio segment:
December 31, 2015
Allowance for Loan Losses:
Beginning of Year
Provisions (credits)
Charge-offs
Recoveries
End of Year
Reserves:
General
Loans Evaluated for
Impairment:
Individually
Collectively
Commercial
Real Estate
Construction
$
$
$
169,000
97,000
101,000
367,000
$
Real Estate
Mortgage
$
952,000
(141,000)
811,000
367,000
$
84,000
15,701,000
$ 15,785,000
$
$
$
$
1,573,000
359,000
1,932,000
811,000
$
43,180,000
$ 43,180,000
$
Installment
$
13,000
55,000
(2,000)
66,000
1,932,000
$
449,000
158,250,000
$ 158,699,000
$
F-46
$
Home Equity
Lines of Credit
$
Total
$
39,000
20,000
59,000
$
$
2,746,000
390,000
(2,000)
101,000
3,235,000
66,000
$
59,000
$
3,235,000
5,765,000
$ 5,765,000
$
3,247,000
$ 3,247,000
$
533,000
226,143,000
$ 226,676,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table presents the activity in the allowance for loan losses for the year 2014, and the recorded
investment in loans and impairment method as of December 31, 2014, by portfolio segment:
December 31, 2014
Allowance for Loan Losses:
Beginning of Year
Provisions (credits)
Recoveries
End of Year
Reserves:
Specific
General
Commercial
Real Estate
Construction
$
126,000
(8,000)
51,000
169,000
$
169,000
169,000
$
14,097,000
$ 14,097,000
$
$
$
$
Loans Evaluated for
Impairment:
Individually
Collectively
$
Real Estate
Mortgage
673,000
279,000
952,000
$
952,000
952,000
$
56,931,000
$ 56,931,000
$
$
$
Installment
1,235,000
338,000
1,573,000
$
240,000
1,333,000
1,573,000
$
3,884,000
145,091,000
$ 148,975,000
$
$
$
F-47
Home Equity
Lines of Credit
24,000
(11,000)
13,000
$
13,000
13,000
$
3,447,000
$ 3,447,000
$
$
$
Total
12,000
27,000
39,000
$
39,000
39,000
$
3,446,000
$ 3,446,000
$
$
$
$
$
2,070,000
625,000
51,000
2,746,000
240,000
2,506,000
2,746,000
3,884,000
223,012,000
$226,896,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table shows the loan portfolio allocated by management's internal risk ratings at December 31, 2015
and 2014:
December 31, 2015
Commercial
Real estate:
Construction
Mortgage
Installment
Home equity lines of credit
December 31, 2014
Commercial
Real estate:
Construction
Mortgage
Installment
Home equity lines of credit
Pass
$ 14,166,000
Special
Mention
$ 911,000
Substandard
$ 624,000
Impaired
$
84,000
Total
$ 15,785,000
43,124,000
156,615,000
5,601,000
3,247,000
$ 222,753,000
988,000
$ 1,899,000
56,000
647,000
164,000
$ 1,491,000
$
449,000
533,000
43,180,000
158,699,000
5,765,000
3,247,000
$ 226,676,000
$ 13,144,000
$
$
$
-
$ 14,097,000
56,859,000
139,936,000
3,447,000
3,289,000
$ 216,675,000
994,000
$ 1,840,000
3,884,000
$ 3,884,000
56,931,000
148,975,000
3,447,000
3,446,000
$ 226,896,000
846,000
107,000
72,000
4,161,000
157,000
$ 4,497,000
As of December 31, 2015, there were zero commercial loans past due between 30 and 89 days and still accruing.
At December 31, 2015, there were zero loans past due 90 days or more and still accruing. At December 31, 2014,
there was $2,000 in commercial loans past due between 30 and 89 days and still accruing. Nonaccrual loans
presented by loan class were as follows as of December 31, 2015 and 2014.
Nonaccrual
Commercial
Real estate - Mortgage
$
$
F-48
2015
84,000
449,000
533,000
2014
$
$
3,106,000
3,106,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Information relating to individually impaired loans presented by class of loans was as follows as of
December 31, 2015 and 2014:
December 31, 2015
Without a Related Allowance
Recorded
Commercial
Real estate
Total
Unpaid
Principal
Balance
$
Recorded
Investment
$
$
104,642
768,000
872,642
December 31, 2014
With a Related Allowance
Recorded
Real estate
$
778,000
Without a Related Allowance
Recorded
Real estate
Total
4,537,000
$ 5,315,000
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
110,104
3,125,000
$ 3,235,104
$
$
1,000
965,000
966,000
$
39,000
$
39,000
$
$
84,000
449,000
533,000
$
-
$
778,000
$
240,000
$
$
240,000
4,651,000
$ 5,441,000
3,106,000
$ 3,884,000
790,000
There was no interest income included above recognized on a cash basis in 2015 or 2014.
Troubled Debt Restructurings
At December 31, 2014, the Company had one recorded investment in troubled debt restructurings of $778,000.
The Company allocated $240,000 of specific reserves for the loan at December 31, 2014, and has not committed
to lend additional amounts. There were no new TDRs in 2015 and 2014.
F-49
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
$
Accumulated depreciation and amortization
$
2015
1,806,000
4,349,000
1,889,000
8,044,000
(5,521,000)
2,523,000
2014
$
$
4,093,000
1,889,000
5,982,000
(5,085,000)
897,000
Depreciation and amortization included in occupancy and equipment expense totaled $436,000 and $422,000 for
the years ended December 31, 2015 and 2014, respectively.
NOTE 7 - CORE DEPOSIT INTANGIBLE ASSET
The core deposit intangible asset (CDI) is associated with the acquisition of Stellar Business Bank in 2012, and the
acquisition of Mission Oaks Bancorp in 2014. The CDI asset is subject to amortization and is included in other
assets on the Company's balance sheet. The following tables summarize the gross carrying amount, accumulated
amortization and net carrying amount of CDI and provide an estimate for future amortization as of
December 31, 2015.
Core deposit intangible
$
Gross
Carrying
Amount
1,760,000
Year Ending
2016
2017
2018
2019
2020
Thereafter
Total
Accumulated
Amortization
$
(861,000)
$
$
$
F-50
Net
Carrying
Amount
899,000
Amount
183,000
169,000
156,000
140,000
123,000
128,000
899,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 8 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
Savings accounts
Money market accounts
Interest-bearing demand accounts
Time certificate of deposit accounts under $250,000
Time certificate of deposit accounts over $250,000
2015
$
2,713,000
139,592,000
12,364,000
14,222,000
15,485,000
$ 184,376,000
2014
$
2,801,000
133,375,000
11,846,000
44,052,000
6,372,000
$ 198,446,000
2015
19,368,000
10,339,000
29,707,000
2014
41,074,000
9,282,000
68,000
50,424,000
The maturity of time deposits is as follows:
Within one year
One year to three years
Over three years
$
$
$
$
Interest expense recognized on interest-bearing deposits for the years ended December 31, consists of the
following:
Savings and money market accounts
Interest-bearing demand accounts
Time certificate of deposit accounts under $250,000
Time certificate of deposit accounts over $250,000
$
$
F-51
2015
679,000
11,000
111,000
71,000
872,000
$
$
2014
730,000
9,000
234,000
62,000
1,035,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 9 - INCOME TAXES
Income taxes for the years ended December 31, consisted of the following:
2015
Current Taxes:
Federal
State
$
Deferred Taxes:
Federal
State
Income Tax Expense
$
1,124,000
404,000
1,528,000
1,481,000
518,000
1,999,000
3,527,000
2014
$
$
1,476,000
475,000
1,951,000
252,000
157,000
409,000
2,360,000
The following table reconciles the statutory tax rate to the consolidated effective income tax rate for the years
ended December 31:
2015
34.0%
7.0%
-1.2%
0.3%
0.0%
0.0%
40.1%
Federal tax rate
State taxes, net of Federal tax benefits
Bank owned life insurance
Stock option compensation
Merger Expenses
Other items, net
Provision for Income Tax
F-52
2014
34.0%
7.1%
-1.6%
0.3%
0.9%
0.1%
40.8%
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) at December 31, 2015 and 2014, consisted of the following:
2015
Deferred Tax Assets:
Allowance for loan losses due to tax limitations
Organization costs
Share-based compensation
Unrealized losses on available-for-sale investment
securities reported in net income
Net operating losses
Acquisition accounting adjustments
Depreciation
Reserves
Other
Total Deferred Tax Assets
$
Deferred Tax Liabilities:
Unrealized losses on available-for-sale investment
securities reported in other comprehensive income
Cash basis reporting for income tax purposes
Total Deferred Tax Liabilities
Net Deferred Tax Assets
$
39,000
326,000
308,000
2014
$
193,000
382,000
300,000
181,000
1,496,000
610,000
457,000
1,010,000
55,000
4,482,000
181,000
1,796,000
2,147,000
427,000
810,000
301,000
6,537,000
517,000
517,000
3,965,000
713,000
56,000
769,000
5,768,000
$
The determination of the amount of deferred income tax assets which are more likely than not to be realized is
primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may
change given economic conditions and other factors. The realization of deferred income tax assets is assessed and
a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not
be realized. "More likely than not" is defined as greater than a 50 percent chance. All available evidence, both
positive and negative is considered to determine whether, based on the weight of that evidence, a valuation
allowance is needed. Based upon its analysis of available evidence, management has determined that it is "more
likely than not" that the Company's deferred income tax assets as of December 31, 2015 and 2014, will be fully
realized and therefore no valuation allowance was recorded.
At December 31, 2015, the Company had Federal and State net operating loss carryforwards (NOLs) of
approximately $3,477,000 and $4,139,000, respectively. The Federal and State NOLs expire in 2028.
F-53
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 9 - INCOME TAXES (CONTINUED)
The Company files income tax returns in the United States and California jurisdictions. There are currently no
pending Federal, State or local income tax examinations by tax authorities. Federal and California tax returns for
2012 to 2014 and 2011 to 2014, respectively, are currently open for examination. The total amount of
unrecognized tax benefits, including interest and penalties, at December 31, 2015, was not material. The amount
of tax benefits that would impact the effective rate, if recognized, is not expected to be material. The Company
does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.
NOTE 10 - BORROWINGS
The Company has unsecured Federal funds lines of credit with three of its correspondent banks under which it can
borrow up to $20,000,000. There were no outstanding lines of credit at December 31, 2015.
The Company has a borrowing arrangement with the Federal Home Loan Bank of San Francisco under which
it may borrow an amount not to exceed 25 percent of total assets. Various loans totaling approximately
$93,253,000 were pledged to secure FHLB borrowings as of December 31, 2015. In addition, investment
securities with amortized costs of $29,463,000 and estimated fair values of $29,597,000 were pledged to secure
the borrowing arrangement as of December 31, 2015. The total borrowing capacity under these arrangements was
$85,241,000 at December 31, 2015. Various loans totaling approximately $152,840,000 were pledged to secure
FHLB borrowings as of December 31, 2014. In addition, investment securities with amortized cost totaling
$34,856,000 and estimated fair values of $34,917,000 were pledged to secure the borrowing arrangement as of
December 31, 2014.
The total borrowing capacity under these arrangements was $84,480,000 at
December 31, 2014.
Advances under these arrangements were at fixed interest rates and consisted of the following at
December 31, 2015 and 2014:
Balance at December 31,
2015
Borrowings
Short-term
Long-term
Amount
$ 15,000,000
5,000,000
$ 20,000,000
Average
Balance
$ 11,741,000
18,767,000
$ 30,508,000
2014
Weighted
Average
Rate
0.39%
0.81%
0.65%
F-54
Amount
555,000
20,000,000
$ 20,555,000
$
Average
Balance
$ 2,716,000
10,466,000
$ 13,182,000
Weighted
Average
Rate
0.28%
0.53%
0.48%
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 11 - JUNIOR SUBORDINATED DEBT SECURITIES
The Company through the acquisition of Mission Oaks Bancorp, assumed the outstanding amount of Mission's
junior subordinated debentures of $7,500,000. Mission's Capital Trust I (the Trust) was formed by Mission Oaks
Bancorp in 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by
the Company. The Company issued $7,732,000 of junior subordinated debentures to the Trust in exchange for
ownership of all of the common security of the Trust and the proceeds of the preferred securities sold by the Trust.
The Company is not considered the primary beneficiary of this Trust, therefore the Trust is not consolidated in the
Company's financial statements, but rather the fair value of the junior subordinated debentures is shown as a
liability. The Company's investment in the common stock of the Trust is $232,000 and is included in other assets.
At acquisition in May 2014, the debentures were recorded at a fair value of $5,351,000, with the discount being
accreted to interest expense over the remaining life of the debentures. At December 31, 2014, the carrying value
of the subordinated debentures totaled $5,423,000.
The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral
multiples of $1,000, at any time at 100 percent of the principal amount, plus accrued and unpaid interest. The
subordinated debentures mature on June 15, 2036. The Company has the option to defer interest payments on the
subordinated debentures from time to time for a period not to exceed five consecutive years.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current
regulatory guidelines and interpretations. The subordinated debentures have a variable rate of interest of threemonth London Interbank Offered Rate (LIBOR) plus 1.65 percent. At December 31, 2015, the interest rate for the
subordinated debentures was 2.16 percent. At December 31, 2015, the carrying value of the subordinated
debentures totaled $5,531,000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain buildings used for branch offices and administrative facilities under long-term, noncancelable lease agreements, which have been accounted for as operating leases. Such lease agreements expire
between 2016 and 2019, and contain renewal options for various periods.
F-55
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases, (Continued)
Future minimum lease payments are as follows:
December 31,
2016
2017
2018
2019
2020
Thereafter
Total
$
$
Amount
537,000
352,000
386,000
238,000
135,000
81,000
1,729,000
Rental expense included in occupancy and equipment expense totaled $672,000 and $638,000 for the years ended
December 31, 2015 and 2014, respectively. Management does not plan on exercising renewal options at some of
the locations.
Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in
order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments consist of the following at December 31, 2015 and 2014, respectively:
2015
Financial instruments whose contract amounts
represent credit risks:
Commitments to extend credit
Standby letters of credit
$
$
46,675,000
765,000
47,440,000
2014
$
$
51,469,000
1,697,000
53,166,000
The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to
extend credit is represented by the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for loans included on the balance sheet.
F-56
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Financial Instruments With Off-Balance Sheet Risk, (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies, but may include accounts receivable, inventory, and deeds of trust on residential real estate
and income-producing commercial properties.
At December 31, 2015, commercial loan commitments represent approximately 32 percent of total commitments
and are generally unsecured or secured by collateral other than real estate and have variable interest rates. Real
estate loan commitments represent approximately 60 percent of total commitments and are generally secured by
property with a loan-to-value ratio not to exceed 80 percent. The majority of real estate commitments also have
variable interest rates. Home equity lines of credit represent nine percent of total commitments and are generally
secured by residential real estate and have both variable and fixed interest rates.
Concentrations of Credit Risk
The Company grants real estate mortgage, real estate construction, and commercial loans to customers throughout
the counties of Sonoma, Marin, San Francisco, San Bernardino, Riverside, and Los Angeles. Although
management intends to continue to diversify the Company's loan portfolio, a substantial portion of the portfolio is
secured by commercial and residential real estate at December 31, 2015 and 2014.
In management's judgment, a concentration of loans exists in real estate related loans with approximately
92 percent of the Company's loans being real estate related. Although management believes the loans within this
concentration have no more than the normal risk of collectability, a substantial decline in the performance of the
economy in general or a decline in real estate values in the Company's primary market area, in particular, could
have an adverse impact on the collectability of these loans. Personal and business income represents the primary
source of repayment for a majority of these loans.
Correspondent Companying Agreements
The Company maintains funds on deposit with other federally insured financial institutions under correspondent
banking agreements. Coverage through December 31, 2015, was $250,000 per depositor available under the
FDIC's general deposit insurance rules.
F-57
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13 - RELATED PARTY TRANSACTIONS
As of December 31, 2015 and 2014, the Company's balance sheet included deposits from executive officers and
directors and their related companies totaling $9,620,000 and $5,676,000, respectively, and loans to executive
officers and directors and their related companies, which are detailed below:
December 31,
Outstanding balance, beginning of year
Repayments
Outstanding balance, end of year
$
$
2015
151,000
(151,000)
-
Undisbursed commitments at end of year
$
505,000
$
2014
308,000
(157,000)
151,000
$
505,000
$
In management's opinion, the terms and conditions associated with these arrangements are comparable to those of
transactions with unaffiliated parties.
NOTE 14 - SHARE-BASED COMPENSATION
Stock Option Awards
A summary of option activity under the Plan for the years ended December 31, 2015, is presented below:
Balance, beginning of year
Granted
Exercised
Forfeited or expired
Balance, end of year
2015
Options
Exercise Price
779,578
$
7.17
32,550
9.45
(10,207)
7.10
(32,835)
7.53
769,086
7.25
Options exercisable
681,576
Options available for granting
382,048
$
F-58
7.07
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
2.09 Years
$ 2,067,000
1.29 Years
$ 1,955,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 14 - SHARE-BASED COMPENSATION (CONTINUED)
As of December 31, 2015, the unrecognized share-based compensation expense related to non-vested stock option
awards totaled $261,000. That cost is expected to be amortized on a straight-line basis over a weighted average
period of 1.8 years and will be adjusted for subsequent changes in estimated forfeitures. Total compensation cost
included in operating expenses was $93,000 and $75,000 for the years ended December 31, 2015 and 2014,
respectively. The weighted-average grant date fair value of options vested during the year was $91,000 and
$77,000 for the years ended December 31, 2015 and 2014, respectively.
The following stock option information is for the year ended December 31:
2015
0.00%
6.50 Years
37.32%
1.73%
$3.81
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
Weighted-average grant date fair value
2014
0.00%
6.50 Years
45.70%
1.97%
$4.44
NOTE 15 - SHAREHOLDERS' EQUITY
Cash Dividends
Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of
funds legally available, therefore, under certain Federal laws and regulations governing the banking and financial
services business. In addition, the Company is subject to certain restrictions under certain Federal and State laws
and regulations governing banks which limit their ability to transfer funds to the Company through intercompany
loans, advances, or cash dividends.
Stock Dividends
On December 2, 2015, the Board of Directors declared a five percent stock dividend which was payable on
February 19, 2016. On December 3, 2014, the Board of Directors declared a five percent stock dividend which
was payable on February 20, 2015. All share and per share amounts have been restated to give retroactive effect
to these five percent stock dividends.
F-59
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 16 - BENEFIT PLANS
Salary Continuation Agreements and Officer Supplemental Life Insurance Plans
The Company has entered into salary continuation agreements with certain officers. The plans provide for annual
benefits for up to fifteen years after retirement or death. The benefit obligation under these plans totaled
$1,943,000 and $1,562,000, and was fully accrued for the years ended December 31, 2015 and 2014, respectively.
The expense recognized under these arrangements totaled $427,000 and $529,000 for the years ended
December 31, 2015 and 2014, respectively. Certain officers of the Company have supplemental life insurance
policies with death benefits available to the officers' beneficiaries.
In connection with these plans, the Company has purchased, single premium life insurance policies with cash
surrender values totaling $11,238,000 and $10,930,000 at December 31, 2015 and 2014, respectively.
Profit Sharing Plan
In 2006, the Company adopted a 401(k) Plan (the Plan) covering substantially all employees 21 years of age or
older with three months of service. Eligible employees may elect to make tax deferred contributions up to the
maximum amount allowed by law. The Plan is a Safe Harbor Plan and currently matches employee contributions
up to four percent of compensation. In addition, the Company may make an annual discretionary profit-sharing
contribution. Employee contributions, Company matching contributions, and related earnings are always
100 percent vested. Company profit-sharing contributions and related earnings vest 20 percent a year, with
100 percent vesting after five years of service. The Company's expense for matching contributions was $160,000
and $157,000 for the years ended December 31, 2015 and 2014, respectively. The Company did not make a
discretionary profit-sharing contribution for the years ended December 31, 2015 or 2014.
NOTE 17 - OTHER EXPENSES
Other expenses for the years ended December 31 consists of the following:
Professional fees
Data processing
Regulatory assessments
Telephone and postage
Office supplies
Amortization of intangible assets
Advertising and promotion
OREO
Other
$
$
F-60
2015
769,000
724,000
234,000
154,000
120,000
101,000
89,000
36,000
408,000
2,635,000
$
$
2014
761,000
835,000
234,000
153,000
106,000
240,000
109,000
45,000
702,000
3,185,000
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated carrying fair values of the Company's financial instruments at December 31, 2015, are as follows:
Fair Value Measurements at
December 31, 2015 Using:
December 31, 2015
Carrying
Fair
Amount
Value
Assets
Cash and due from banks
Available-for-sale investment
securities
Loans, net
Federal Reserve Bank stock
Federal Home Loan Bank stock
Accrued interest
Liabilities
Deposits
Other borrowings
Junior subordinated debentures
Accrued interest
Level 1
Level 2
$
Level 3
$ 15,271,000
$ 15,271,000
$ 15,271,000
-
77,006,000
222,230,000
1,588,000
1,646,000
1,047,000
77,006,000
224,225,000
1,588,000
1,646,000
1,047,000
1,047,000
77,006,000
1,588,000
1,646,000
-
$ 262,433,000
20,000,000
5,531,000
40,000
$ 262,457,000
20,000,000
5,531,000
40,000
$ 240,394,000
20,000,000
40,000
$ 22,063,000
5,531,000
-
$
-
224,225,000
-
$
-
December 31, 2014
Assets
Cash and due from banks
Interest-bearing deposits
in banks
Available-for-sale investment
securities
Loans, net
Federal Reserve Bank stock
Federal Home Loan Bank stock
Accrued interest
Liabilities
Deposits
Other borrowings
Junior subordinated debentures
Accrued interest
$
3,274,000
$
3,274,000
$
3,274,000
$
-
$
-
980,000
980,000
980,000
-
-
84,532,000
222,534,000
1,322,000
1,607,000
1,177,000
84,532,000
222,532,000
1,322,000
1,607,000
1,177,000
1,177,000
84,532,000
1,322,000
1,607,000
-
222,532,000
-
$ 262,511,000
20,555,000
5,423,000
41,000
$ 262,384,000
20,555,000
5,423,000
41,000
$ 212,057,000
20,555,000
41,000
$ 50,297,000
5,423,000
-
F-61
$
-
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED)
These estimates do not reflect any premium or discount that could result from offering the Company's entire
holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in
any of these estimates.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Financial Assets
The carrying amounts of cash, short-term investments, due from customers on acceptance and Bank acceptances
outstanding are considered to approximate fair value. Short-term investments include federal funds sold,
securities purchased under agreements to resell, and interest-bearing deposits with banks. The determination of
the fair value of investment securities is discussed below. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and quoted market prices of similar
instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, and other borrowed funds are considered to
approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is
based on rates currently available to the Bank for debt with similar terms and remaining maturities. The fair
values of subordinated debentures are determined based on the current market value for like instruments of a
similar maturity and structure.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently
charged to enter into similar agreements. The fair value of these financial instruments is not material.
F-62
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 19 - FAIR VALUE MEASUREMENTS
The following description of valuation methodologies used for assets recorded at fair value:
Securities
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized
securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on
the securities relationship to other benchmark quoted securities resulting in a Level 2 classification.
Collateral-Dependent Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value
adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve
allowances, that are based on the current appraised or market-quoted value of the underlying collateral. The fair
value estimated for collateral-dependent impaired loans are generally based on recent real estate appraisals or
broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect
current conditions (Level 3).
Other Real Estate Owned
Other real estate owned represents real estate that has been foreclosed and adjusted to fair value, less selling costs.
At the time of foreclosure, these assets are recorded at fair value less costs to sell, which becomes the asset's new
basis. Any write-downs based on the asset's fair value at the date of foreclosure are charged to the allowance for
loan losses. The fair value of other real estate owned is generally based on recent real estate appraisals or broker
opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current
conditions and estimated selling costs (Level 2).
F-63
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 19 - FAIR VALUE MEASUREMENTS (CONTINUED)
Assets Recorded at Fair Value
The following table's present information about the Company's assets and liabilities measured at fair value on a
recurring and nonrecurring basis:
December 31, 2015
Assets Measured at Fair Value
on a Recurring Basis
Assets:
Securities available-for-sale
Assets Measured at Fair Value
on a Non-Recurring Basis
Collateral-Dependent Impaired Loans,
Net of Specific Reserves:
Real estate - commercial
Other real estate owned
December 31, 2014
Assets Measured at Fair Value
on a Recurring Basis
Assets:
Securities available-for-sale
Assets Measured at Fair Value
on a Non-Recurring Basis
Collateral-Dependent Impaired Loans,
Net of Specific Reserves:
Real estate - commercial
Other real estate owned
Fair Value Measurements
Level 1
Level 2
Level 3
$
-
$ 77,006,000
$
-
Total
Losses
$
-
$
448,000
$
449,000
-
$
-
$ 84,532,000
$
-
$
-
Total
Losses
$
-
$
448,000
$ 3,644,000
-
$
-
As of December 31, 2015, collateral-dependent impaired loans, which are measured for impairment using the fair
value of the collateral, had a carrying value of approximately $449,000, with a specific reserve of $-0-. At
December 31, 2014, collateral-dependent impaired loans, which are measured for impairment using the fair value
of the collateral, had a carrying value of approximately $3,884,000, with a specific reserve of $240,000.
The Company did not incur any losses recognized for write-down of other real estate owned for the years ended
December 31, 2015 and 2014.
The Company had no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2015
and 2014.
F-64
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 20 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital
The Company and Bank are subject to certain regulatory capital requirements administered by the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Failure to meet
these minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial
statements. As a small bank holding company, the Company is not subject to specific regulatory capital
requirements. The risk-based capital guidelines described below apply on a consolidated basis to bank holding
companies with consolidated assets of $1 billion or more. For bank holding companies with less than $1 billion in
consolidated assets, the guidelines will be applied on a bank-only basis unless: (a) the parent bank holding
company is engaged in nonbank activity involving significant leverage; or (b) the parent company has a
significant amount of outstanding debt that is held by the general public. Because neither (a) nor (b) apply to the
Company, regulators look to the Bank's capital ratios when assessing the adequacy of the Company's capital.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting
practices. These quantitative measures are established by regulation and require that minimum amounts and
ratios of total, Tier 1 capital, and Common Equity Tier 1 to risk-weighted assets and of Tier 1 capital to average
assets be maintained as set forth in the table below. The Company's and Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel
III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirements
being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or
loss on available-for-sale securities is not included in computing regulatory capital. Capital amounts and ratios
for December 31, 2014, are calculated using Basel I rules. Management believes the Company and Bank met all
of their capital adequacy requirements as of December 31, 2015 and 2014.
The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum ratios of total and Tier 1 capital
to risk-weighted assets and Tier 1 capital to average assets as set forth in the table on the following page. The
most recent notification from the FRB categorized the Bank as well capitalized under these guidelines. There are
no conditions or events since that notification that management believes have changed the Bank's category.
F-65
ALTAPACIFIC BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 20 - MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's actual capital amounts and notations of December 31, 2015 and 2014 are as follows:
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To Be WellCapitalized
Under Prompt
Corrective
Provisions
Amount
Ratio
As of December 31, 2015
Common equity tier 1 capital
(to risk-weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$ 51,946,000
55,298,000
51,946,000
51,946,000
18.1%
19.3%
18.1%
15.0%
$ 12,885,000
22,907,000
17,180,000
13,855,000
4.5% $ 18,612,000
8.0%
28,634,000
6.0%
22,907,000
4.0%
17,319,000
6.5%
10.0%
8.0%
5.0%
As of December 31, 2014
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$ 50,260,000
47,397,000
47,397,000
16.8%
15.8%
13.8%
$ 23,931,000
11,966,000
13,714,000
8.0% $ 29,914,000
4.0%
17,948,000
4.0%
17,143,000
10.0%
6.0%
5.0%
F-66
Appendix A
EXECUTION COPY
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
DATED AS OF SEPTEMBER 1, 2016
BETWEEN
ALTAPACIFIC BANCORP
AND
COMMERCE BANK OF TEMECULA VALLEY
4439.011/1041316.12
TABLE OF CONTENTS
Page
RECITALS ................................................................................................................................... 1
ARTICLE 1 CERTAIN DEFINITIONS ....................................................................................... 2
ARTICLE 2 THE MERGERS AND RELATED MATTERS .................................................... 12
2.1.
The Merger; Surviving Corporation. ................................................................... 12
2.2.
Filing of Agreement of Merger. ........................................................................... 12
2.3.
Conversion of CBTV Stock. ................................................................................ 12
2.4.
Election and Proration Procedures. ...................................................................... 13
2.5.
Exchange Procedures; Dissenting Shares. ........................................................... 16
ARTICLE 3 ACTIONS PENDING THE MERGER .................................................................. 18
3.1.
Covenants of CBTV. ............................................................................................ 18
3.2.
Covenants of APB and AP Bank. ........................................................................ 21
3.3.
Advice of Changes; Government Filings............................................................. 23
3.4.
No Control of Other Party’s Business. ................................................................ 23
ARTICLE 4 REPRESENTATIONS AND WARRANTIES ....................................................... 24
4.1.
Disclosure Schedules. .......................................................................................... 24
4.2.
Representations and Warranties of CBTV. .......................................................... 24
4.3.
Representations and Warranties of APB.............................................................. 44
ARTICLE 5 ADDITIONAL AGREEMENTS ............................................................................ 53
5.1.
California Permit; Shareholder Meeting. ............................................................. 53
5.2.
Access to Information. ......................................................................................... 55
5.3.
Reasonable Best Efforts. ...................................................................................... 56
5.4.
Acquisition Proposals of CBTV. ......................................................................... 57
5.5.
Termination of Employee Benefit Plans and Employee Matters......................... 58
5.6.
Fees and Expenses. .............................................................................................. 59
5.7.
Indemnification; Directors’ and Officers’ Insurance. .......................................... 59
5.8.
Public Announcements. ....................................................................................... 60
5.9.
Post-Merger Boards. ............................................................................................ 60
5.10.
Untrue Representations. ....................................................................................... 60
5.11.
Litigation and Claims........................................................................................... 61
5.12.
Additional Agreements. ....................................................................................... 61
4439.011/1041316.12
i
5.13.
CBTV Support Agreements. ................................................................................ 61
5.14.
Transaction Expenses........................................................................................... 61
5.15.
Disclosure Schedules. .......................................................................................... 61
5.16.
Acquisition Proposals of AP Bank and/or APB. ................................................. 61
5.17.
Certain Policies. ................................................................................................... 62
5.18.
Notice to CBTV Customers. ................................................................................ 62
ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE TRANSACTION .................... 62
6.1.
Conditions to Each Party’s Obligation. ............................................................... 62
6.2.
Conditions to Obligations of CBTV. ................................................................... 63
6.3.
Conditions to Obligation of APB......................................................................... 64
ARTICLE 7 TERMINATION ..................................................................................................... 65
7.1.
Termination. ......................................................................................................... 65
7.2.
Effect of Termination. .......................................................................................... 67
ARTICLE 8 MISCELLANEOUS ............................................................................................... 69
8.1.
Nonsurvival of Representations, Warranties and Agreements. ........................... 69
8.2.
Amendment, Extension, Waiver. ......................................................................... 69
8.3.
Counterparts. ........................................................................................................ 70
8.4.
Governing Law; Submission to Jurisdiction; Interpretation. ............................... 70
8.5.
WAIVER OF JURY TRIAL. ............................................................................... 71
8.6.
Expenses. ............................................................................................................. 71
8.7.
Notices. ................................................................................................................ 71
8.8.
Entire Agreement; No Third Party Beneficiaries................................................. 72
8.9.
Severability. ......................................................................................................... 73
8.10.
Enforcement of the Agreement. ........................................................................... 73
8.11.
Waiver of Conditions. .......................................................................................... 73
8.12.
Interpretation. ....................................................................................................... 74
8.13.
Assignment. ......................................................................................................... 74
8.14.
Alternative Structure. ........................................................................................... 74
4439.011/1041316.12
ii
EXHIBIT A
EXHIBIT A-1
EXHIBIT B
EXHIBIT B-1
EXHIBIT C
EXHIBIT D
EXHIBIT E
4439.011/1041316.12
Form of CBTV Non-Competition and Voting Agreement
CBTV Directors Executing CBTV Non-Competition
and Voting Agreement
Form of Executive Voting and Non-Solicitation Agreement
Executives executing Executive Voting and Non-Solicitation Agreements
Form of Merger Agreement
Form of Option Cancellation Agreement
Form of Indemnity Agreement
iii
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER,
dated as of September 1, 2016 (the “Agreement Date”), by and between AltaPacific Bancorp, a
California corporation (“APB”), and Commerce Bank of Temecula Valley, a California
corporation (“CBTV”).
RECITALS
WHEREAS, APB owns all of the issued and outstanding capital stock of
AltaPacific Bank, a California corporation (“AP Bank”);
WHEREAS, the parties hereto wish to provide for the terms and conditions of a
strategic business combination in which, in exchange for the merger consideration as set forth
herein, CBTV would be merged with and into AP Bank (the “Merger”), with AP Bank being the
surviving entity in the Merger;
WHEREAS, each of the Boards of Directors of APB, AP Bank, and CBTV has
(i) approved and declared advisable this Agreement and the transactions contemplated by this
Agreement, including the Merger, and (ii) determined that this Agreement and such transactions
are fair to, and in the best interests of, APB, AP Bank, and CBTV, respectively, and the
shareholders of APB, AP Bank, and CBTV, respectively;
WHEREAS, the parties intend that the Merger be treated for federal income tax
purposes as a reorganization described in Section 368(a) of the Internal Revenue Code, as
amended (the “Code”);
WHEREAS, as a material inducement to APB and AP Bank to enter into this
Agreement, and simultaneous with the execution of this Agreement, each of the directors of
CBTV listed on Exhibit A-1 is entering into an agreement, in the form of Exhibit A hereto (the
“Non-Competition and Voting Agreements”), pursuant to which each such director shall agree,
among other things, to vote all shares of capital stock of CBTV owned by such person, in favor
of the approval and adoption of this Agreement;
WHEREAS, as a material inducement to APB and AP Bank to enter into this
Agreement, and simultaneously with the execution of this Agreement, each of the executive
officers of CBTV listed in Exhibit B-1 is entering into an agreement, in the form of Exhibit B
hereto (the “Voting and Non-Solicitation Agreements”), pursuant to which each such executive
officer shall agree, among other things, to restrict his or her activities after the Effective Time
other than for the benefit of APB and AP Bank.
WHEREAS, the parties hereto desire to make certain representations, warranties
and agreements in connection with the Merger and also to prescribe certain conditions to the
Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Agreement, the parties hereto agree as follows:
4439.011/1041316.12
1
ARTICLE 1
CERTAIN DEFINITIONS
“Acceptable Confidentiality Agreement” shall mean a confidentiality agreement
having confidentiality and standstill provisions that are no less favorable to CBTV, than the
terms and provisions of the Confidentiality Agreement.
“Acquisition Proposal” has the meaning set forth in Section 5.4(a).
“Affiliate” means, with respect to a Person, any Person that, directly or indirectly,
controls, is controlled by or is under common control with such Person; for purposes of this
definition, “control” (including, with correlative meanings, the terms “controlled by” or “under
common control with”), as applied to any Person, means the possession, directly or indirectly, of
(i) ownership, control or power to vote ten percent (10%) or more of the outstanding shares of
any class of voting securities of such Person, (ii) control, in any manner, over the election of a
majority of the directors, trustees or general partners (or individuals exercising similar functions)
of such Person or (iii) the power to exercise a controlling influence over the management or
policies of such Person; provided, however, neither CBTV nor any of its Affiliates shall be
deemed an Affiliate of APB, AP Bank or any of their respective Subsidiaries for purposes of this
Agreement prior to the Effective Time and neither APB, AP Bank nor any of their respective
Affiliates shall be deemed an Affiliate of CBTV or any of its Subsidiaries for purposes of this
Agreement prior to the Effective Time.
“After Consultation” shall mean, with respect to the CBTV Board, after
consultation with a financial advisor to CBTV and with outside legal counsel to CBTV;
provided, however, that if such consultation relates solely to determinations of the CBTV Board
regarding interpretations and other matters of Applicable Legal Requirements, “After
Consultation” means, in such context, after consultation by the CBTV Board solely with such
applicable outside legal counsel (and not also with such financial advisor).
“Aggregate Cash Consideration” means (a) $7,935,205, plus (b) the product of the
number of shares of CBTV Common Stock issued between the date of this Agreement and the
Effective Time pursuant to the exercise of CBTV Stock Options prior to the Closing Date, and
$5.00.
“Aggregate Merger Consideration” the sum of the Aggregate Cash Consideration
and the Aggregate Stock Consideration.
“Aggregate Stock Consideration” means (a) 902,789 shares of APB Common
Stock, plus (b) the product of 50% of the number of shares of CBTV Common Stock issued
between the date of this agreement and the Effective Time pursuant to the exercise of CBTV
Stock Options prior to the Closing Date, and 1.1377, subject to adjustment as provided in Section
2.5(j).
“Agreement” means this Agreement and Plan of Reorganization and Merger, as
amended or modified from time to time in accordance with Section 8.2.
4439.011/1041316.12
2
"ALLL" means the allowance for loan and lease losses maintained by CBTV.
“APB” has the meaning set forth in the preamble to this Agreement.
“AP Bank” has the meaning set forth in the recitals to this Agreement.
"AP Bank Plan" has the meaning set forth in Section 5.5(c).
“APB Common Stock” means shares of the common stock of APB, no par value.
"APB Contracts" has the meaning set forth in Section 4.3(aa).
"APB Disclosure Schedule" has the meaning set forth in Section 4.1.
"APB Financial Statement" has the meaning set forth in Section 4.3(d)(i).
"APB Permits" has the meaning set forth in Section 4.3(e).
"APB Termination Fee" means $200,000.
“Applicable Legal Requirements” shall mean any federal, state, foreign, or local
law, statute, ordinance, rule, order, regulation, writ, injunction, directive, judgment,
administrative interpretation, treaty, decree, administrative, judicial or arbitration decision and
any other executive, legislative, regulatory or administrative proclamation or other requirement
of any Governmental Entity applicable, in the case of any Person, to such Person or its
properties, assets, officers, directors, employees or agents (in connection with such officers’,
directors’, employees’ or agents’ activities on behalf of such Person).
“Bank Secrecy Act” means the Bank Secrecy Act of 1970, as amended.
“BHCA” means the Bank Holding Act of 1956, as amended.
“Business Day” means any day, other than Saturday, Sunday or a federal or state
holiday, and shall consist of the time period from 12:01 a.m. through 12:00 midnight Pacific
Time.
“Cash Designated Shares” has the meaning set forth in Section 2.4(e)(ii)(C).
“Cash Election Shares” has the meaning set forth in Section 2.4(b).
“Cash Percentage” shall mean the amount derived by dividing the Aggregate
Cash Consideration by the Aggregate Merger Consideration.
“CBTV” has the meaning set forth in the preamble to this Agreement.
“CBTV Articles” means the Articles of Incorporation of CBTV, as amended.
“CBTV Benefit Plan” has the meaning set forth in Section 4.2(j).
4439.011/1041316.12
3
“CBTV Board Recommendation” has the meaning set forth in Section 4.2(c).
“CBTV Board” means the Board of Directors of CBTV.
“CBTV Bylaws” means the Bylaws of CBTV, as amended.
“CBTV Change in Recommendation” has the meaning set forth in Section 5.1(c).
“CBTV Common Stock” means the common stock of CBTV.
“CBTV Contracts” has the meaning set forth in Section 4.2(i).
“CBTV Financial Statements” has the meaning set forth in Section 4.2(d)(i).
“CBTV Equity Plans” means the CBTV 2007 Stock Option Plan.
“CBTV Intellectual Property” has the meaning set forth in Section 4.2(p).
“CBTV Permits” has the meaning set forth in Section 4.2(e)(i).
“CBTV Professional Expenses” shall mean any amount paid, payable or
reasonably expected to become payable (whether before or after the Closing) by CBTV for
services rendered or being rendered to CBTV by any attorney, investment banker or other
financial advisor, accountant, auditor or other professional services provider, with the exception
of any proxy solicitation firm, in connection with the transactions contemplated by this
Agreement, including reasonable costs incurred by such professional services provider on behalf
of CBTV.
“CBTV Shareholders Meeting” has the meaning set forth in Section 5.1(b).
“CBTV Stock Options” means issued and outstanding options to acquire CBTV
Common Stock granted under the CBTV Equity Plans.
“CBTV Support Agreements” means the Voting and Non-Solicitation
Agreements and the Non-Competition and Voting Agreements.”
“CBTV Termination Fee” has the meaning set forth in Section 7.2(b).
“CDBO” means the Department of Business Oversight of the State of California,
successor to the California Department of Financial Institutions.
“Certificate” has the meaning set forth in Section 2.5(b).
“CFC” means the California Financial Code.
“CGCL” means the California General Corporation Law.
“Closing Date” means the date on which the Effective Time occurs.
4439.011/1041316.12
4
“Closing” has the meaning set forth in Section 6.1.
“Code” means the Internal Revenue Code of 1986, as amended.
“Confidentiality Agreement” has the meaning set forth in Section 5.2(b).
“Customer Information” has the meaning set forth in Section 4.2(p).
“CRA” means the Community Reinvestment Act of 1977, as amended.
“DBO Permit” has the meaning set forth in Section 5.1(a).
“Derivatives Contracts” means any swap transaction, option, warrant, forward
purchase or sale transaction, futures transaction, cap transaction, floor transaction or collar
transaction relating to one or more currencies, commodities, bonds, equity securities, loans,
interest rates, credit-related events or conditions or any indexes, or any other similar transaction
or combination of any of these transactions, including collateralized mortgage obligations or
other similar instruments or any debt or equity instruments evidencing or embedding any such
types of transactions, and any related credit support, collateral or other similar arrangements
related to such transactions.
“CBTV Disclosure Schedule” has the meaning set forth in Section 4.1.
“Dissenting Shares” has the meaning set forth in Section 2.5(f).
“Effective Time” has the meaning set forth in Section 2.2.
“EGTRRA” shall mean the Economic Growth and Tax Relief Reconciliation Act
of 2001.
“Election Deadline” has the meaning set forth in Section 2.4(b).
“Election Form Record Date” has the meaning set forth in Section 2.4(a).
“Election Form” has the meaning set forth in Section 2.4(a).
“End Date” means March 31, 2017.
“Environmental Laws” means the common law and all federal, state, local and
foreign laws or regulations, codes, orders, decrees, judgments or injunctions issued,
promulgated, approved or entered thereunder, now or hereafter in effect, relating to pollution or
protection of public or employee health or safety or the environment, including laws relating to
(i) emissions, discharges, releases or threatened releases of Hazardous Materials, into the
environment (including ambient air, indoor air, surface water, ground water, land surface or
subsurface strata), (ii) the manufacture, processing, distribution, use, generation, treatment,
storage, disposal, transport or handling of Hazardous Materials, and (iii) underground and above
ground storage tanks, and related piping, and emissions, discharges, releases or threatened
releases therefrom.
4439.011/1041316.12
5
“Equal Credit Opportunity Act” means the Equal Credit Opportunity Act, as
amended.
“Equity Investment” means (i) an Equity Security and (ii) an ownership interest in
any company or other entity, any membership interest that includes a voting right in any
company or other entity, any interest in real estate, and any investment or transaction which in
substance falls into any of these categories even though it may be structured as some other form
of investment or transaction.
“Equity Security” means any stock, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, or voting-trust certificate; any security convertible into
such a security; any security carrying any warrant or right to subscribe to or purchase any such
security; and any certificate of interest or participation in, temporary or interim certificate for, or
receipt for any of the foregoing.
“ERISA” means the Employee Retirement Income Security Act of 1974, as
amended.
“ERISA Affiliate” shall mean, with respect to any Person, any corporation, trade
or business which, together with such Person, is a member of a controlled group of corporations
or a group of trades or businesses under common control within the meaning of Section 414 of
the Code.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exchange Agent” has the meaning set forth in Section 2.5(a).
“Exchange Fund” has the meaning set forth in Section 2.5(c).
“Fair Housing Act” means the Fair Housing Act, as amended.
“FDIC” means the Federal Deposit Insurance Corporation.
“Federal Reserve Act” means the Federal Reserve Act, as amended.
“Federal Reserve Bank” means the Federal Reserve Bank of San Francisco.
“Federal Reserve Board” means the Board of Governors of the Federal Reserve
System.
“FHLB” means the Federal Home Loan Bank of San Francisco.
“GAAP” means generally accepted accounting principles and practices as in
effect from time to time in the United States.
4439.011/1041316.12
6
“Governmental Entity” shall mean any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or foreign, or industry
self-regulatory organization.
“Hazardous Material” means any pollutant, contaminant, chemical, or toxic or
hazardous substance, constituent, material or waste, or any other chemical, substances,
constituent or waste including petroleum, crude oil or any fraction thereof or any petroleum
product, but does not include normal quantities of any chemical used in the ordinary course of
business as office or cleaning supplies.
“Home Mortgage Disclosure Act” means the Home Mortgage Disclosure Act, as
amended.
"Indemnified Liabilities" has the meaning set forth in Section 5.7(a)
"Indemnified Parties" has the meaning set forth in Section 5.7(a).
“IRS” shall mean the United States Internal Revenue Service.
“Knowledge” means, (A) with respect to CBTV, (i) the actual knowledge upon
due inquiry of any officer of CBTV or CBTV Bank holding the title of executive vice president
and above, or otherwise performing the function of a chief credit officer, chief financial officer,
or chief operating officer, or (ii) the actual knowledge without inquiry of any member of CBTV
Board, and (B) with respect to APB, (i) the actual knowledge upon due inquiry of any officer of
APB or AP Bank holding the title of executive vice president and above, or otherwise
performing the function of a chief credit officer, chief financial officer, or chief operating officer,
or (ii) the actual knowledge without inquiry of any member of the board of directors of APB.
“Letter of Transmittal” has the meaning set forth in Section 2.5(b).
“Liens” has the meaning set forth in Section 4.2(n).
“Loans” shall mean loans, extensions of credit (including guaranties),
commitments to extend credit and other similar assets, including leases intended as financing
arrangements, in each case required to be reflected in the financial statements of a Person
pursuant to applicable regulatory or accounting principles, including generally accepted
accounting principles.
“Mailing Date” has the meaning set forth in Section 2.4(a).
“Material Adverse Effect” shall mean, with respect to any Person, any material
adverse effect on, or any change, event, effect, development, occurrence or state of facts that,
individually or in the aggregate, has had a material adverse effect on, the business, condition
(financial or otherwise), properties, assets, liabilities or results of operations of such Person,
taken as a whole, or the ability of such Person to perform its obligations hereunder or under this
Agreement on a timely basis, or on the ability of such Person to consummate the Merger as
contemplated hereby; provided, however, that none of the following shall be taken into account
in determining whether there has been or would more likely than not be expected to be a
4439.011/1041316.12
7
“Material Adverse Effect”: any change or event occurring after the date of this Agreement that is
caused by or results from (A) changes in prevailing interest rates, currency exchange rates, credit
or capital markets conditions, or other financial, economic, monetary or political conditions in
the United States or elsewhere, (B) changes in United States or foreign securities markets,
including changes in price levels or trading volumes, (C) changes or events affecting the
financial services industry generally, unless such changes or events have a materially
disproportionate adverse effect on such Person relative to similarly situated California-based
banks, (D) changes in generally accepted accounting principles or regulatory accounting
requirements applicable to banks and their holding companies generally, (E) actions required
hereunder, (F) any outbreak of major hostilities in which the United States is involved or any act
of terrorism within the United States or directed against its facilities or citizens wherever located,
unless such change has a materially disproportionate adverse effect on such Person relative to
similarly situated California-based banks, (G) Transaction Expenses that do not exceed the
Expense Cap, (H) any failure by the Person to meet internal or published projections, forecasts,
performance measures, operating statistics or revenue or earnings predictions for any period (it
being understood that the underlying facts and circumstances giving rise to such failure may be
deemed to constitute, and may be taken into account in determining whether there has been or
would more likely than not be expected to be, a Material Adverse Effect if such facts and
circumstances are not otherwise described in clauses (A)-(H) of this definition), or (I) charges,
expenses, accruals, provisions or other items taken by CBTV upon the written request of APB.
“Merger” has the meaning set forth in the Recitals
“Merger Consideration” has the meaning set forth in Section 2.3(a).
“Mixed Cash Shares” has the meaning set forth in Section 2.4(b).
“Mixed Stock Shares” has the meaning set forth in Section 2.4(b).
“National Labor Relations Act” means the National Labor Relations Act, as
amended.
“No Election Shares” has the meaning set forth in Section 2.4(b).
“Non-Competition and Voting Agreements” has the meaning set forth in the
Recitals.
“Option Cancellation Agreements” means an agreement in substantially the form
of Exhibit D executed by each holder of a CBTV Stock Option.
“OREO” means other real estate owned.
"Party" shall mean APB and/or CBTV.
“Permitted Liens” with respect to any Person, shall mean (i) liens for current taxes
and assessments not yet delinquent or as to which such Person is diligently contesting in good
faith and by appropriate proceeding either the amount thereof or the liability therefor or both if
the payment of which adequate reserves for the payment of such taxes and assessments have
4439.011/1041316.12
8
been established on the books of such Person in accordance with generally accepted accounting
principles and regulatory accounting principles; (ii) liens of landlords, carriers, mechanics,
materialmen and repairmen incurred in the ordinary course of business consistent with customary
and prudent practices for similarly situated financial institutions for sums not yet past due, to the
extent reflected on such Person’s books, or which are being contested in good faith by
appropriate proceedings and for the payment of which adequate reserves for the payment of such
liens have been established on the books of such Person in accordance with generally accepted
accounting principles and regulatory accounting principles, or the defense of which has been
accepted by a title insurer, bonding company, other surety or other Person; (iii) any recorded lien
(other than for funded indebtedness) relating to any leased premises that shall not have a
Material Adverse Effect on such Person and which does not materially impair the use of such
property or the merchantability or the value of such property or interest therein; (iv) zoning
restrictions, easements, licenses and other restrictions on the use of real property or any interest
therein, or minor irregularities in title thereto, which do not materially impair the use of such
property or the merchantability or the value of such property or interest therein; (v) liens
encumbering the interest of the landlord under any real property lease the existence of which
does not result in a default by landlord under such real property lease or materially interfere with
the use of the related leased premises in the manner it is currently operated; (vi) deposits, liens or
pledges to secure payments of worker’s compensation, unemployment insurance, pensions or
other social security obligations, public or statutory obligations, surety, stay or appeal bonds, or
similar obligations arising in the ordinary course of business; (vii) liens on assets of Subsidiaries
of such Person which are banks incurred in the ordinary course of their banking business,
including liens on risk assets given to secure deposits and other liabilities of such Subsidiaries
arising in the ordinary course of business (including those given to secure borrowings, advances,
or discount window availability from any private or governmental banking entity or any
clearinghouse); and (viii) pledges of securities to secure fed funds borrowings from other banks
or public deposits.
“Per Share Cash Consideration” has the meaning set forth in Section 2.3(a)(i).
“Per Share Stock Consideration” has the meaning set forth in Section 2.3(a)(ii).
“Person” shall mean any individual, corporation, partnership, limited liability
company, limited partnership, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, person (as defined in Section 13(d)(3) of the Exchange Act),
Governmental Entity or other entity.
“Previously Disclosed” by a party shall mean information set forth in a section of
its Disclosure Schedule corresponding to the section of this Agreement where such term is used.
“Privacy Policy” has the meaning set forth in Section 4.2(p).
“Properties” means all real property leased or owned by CBTV or APB, either
currently or in the past (as the context requires).
“Proxy Statement” has the meaning set forth in Section 5.1(a).
“RAP” has the meaning set forth in Section 4.2(d).
4439.011/1041316.12
9
“Representatives” has the meaning set forth in Section 5.4(a).
“Required CBTV Vote” has the meaning set forth in Section 4.2(c).
“Requisite Regulatory Approvals” has the meaning set forth in Section 4.2(c)(iii).
“Rights” means, with respect to any Person, warrants, options, rights, convertible
securities and other arrangements or commitments of any character that obligate the Person to
sell, purchase, issue or dispose of any of its capital stock or other ownership interests or other
securities representing the right to purchase or otherwise receive any of its capital stock or other
ownership interests.
“SEC” shall mean the United States Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
“Shareholder” has the meaning set forth in Section 2.5(b).
“Stock Designated Shares” has the meaning set forth in Section 2.4(e)(i)(C).
“Stock Election Shares” has the meaning set forth in Section 2.4(b).
“Subsidiary” shall mean, when used with respect to any Party, any corporation,
business trust or other organization, whether incorporated or unincorporated, (i) of which such
Party or any other Subsidiary of such Party is a general partner (excluding partnerships, the
general partnership interests of which held by such Party or any Subsidiary of such Party do not
have a majority of the voting interests in such partnership), or (ii) at least a majority of the
securities or other interests of which that have by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled by such Party or by
any one or more of its Subsidiaries, or by such Party and one or more of its Subsidiaries.
“Superior Proposal” shall mean an unsolicited, bona fide written Acquisition
Proposal which the CBTV Board concludes in good faith, After Consultation, taking into
account all legal, financial, regulatory and other aspects of such Acquisition Proposal and the
Person making such Acquisition Proposal (including any break-up fees, expense reimbursement
provisions and conditions to consummation), (i) is more favorable to the shareholders of CBTV,
from a financial point of view, than the transactions contemplated by this Agreement, and (ii) in
the case of any Acquisition Proposal contemplating cash consideration, is not subject to any
financing contingencies, and (iii) is reasonably likely to receive all required governmental
approvals on a timely basis and otherwise reasonably capable of being completed on the terms
proposed without unreasonable delay in relation to what is customary for a transaction of the
nature so proposed; provided that, for purposes of this definition of “Superior Proposal,” the term
“Acquisition Proposal” shall have the meaning assigned to such term in Section 5.4(a), except
that the reference to “10% or more” in the definition of “Acquisition Proposal” shall be deemed
to be a reference to “100%” of all CBTV Common Stock, subject to dissenters’ rights as
provided by law.
4439.011/1041316.12
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“Surviving Bank” has the meaning set forth in Section 2.1(a).
“Tax Returns” means any return (including any amended return), declaration or
other report (including elections, declarations, claims for refund, schedules, estimates and
information returns) with respect to any Taxes (including estimated taxes).
“Tax” and “Taxes” mean all federal, state, local, foreign and other taxes, levies,
imposts, assessments, duties, customs, impositions or other similar government charges,
including income, estimated income, business, occupation, franchise, real property, payroll,
alternative or add-on minimum, social security (or similar), unemployment, personal property,
sales, transfer, stamp, use, escheat, employment-related, commercial rent or withholding, net
worth, occupancy, premium, gross receipts, profits, windfall profits, deemed profits, license,
lease, severance, capital, production, corporation, ad valorem, excise, duty, utility,
environmental, value-added, recapture, unclaimed property or other taxes, including any interest,
penalties, fines and additions (to the extent applicable) thereto, whether disputed or not; and the
term “tax return” shall mean tax returns, declarations, statements, reports, schedules, forms and
information returns and any amended tax return relating to taxes.
“Transaction Expenses” means the amount paid or accrued by CBTV, or to be
paid by APB or AP Bank for (i) all severance benefits under any CBTV employment, severance
or change in control or similar agreement (including change of control payments) that will occur
as a result of the transactions contemplated herein that were in existence as of the Effective Time
as shown on the CBTV Disclosure Schedule; (ii) benefits under any CBTV Benefit Plan that will
accelerate or terminate as a result of the transactions contemplated herein that were in existence
as of the Effective Date as shown on CBTV Disclosure Schedule; (iii) all CBTV Professional
Expenses; (iv) the cost of purchasing the tail coverage as provided for in Section 5.7(b); (v) the
amount to be paid to holders of CBTV Stock Options under Option Cancellation Agreements
(without duplicating any expense that would also be included in clause (ii) above by virtue of the
acceleration of the vesting of any CBTV Stock Options); and (vi) any contract termination fees
payable to vendors, including data processing and other information technology providers, or
lessors as to which contracts or leases APB has elected to terminate as of the Effective Time (or
such other time as may be appropriate); and (vii) the costs of printing, mailing or other fees
related to the Merger, including but not limited to the cost of printing and mailing the Proxy
Statement to the shareholders of CBTV.
"Transaction Expense Cap" shall mean $2.4 million minus the amount, if any, by
which total data processing contract and other information technology termination costs are less
than $1.0 million.
“USA PATRIOT Act” means the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as
amended.
"Violation" shall have the meaning set forth in Section 4.2(c)(ii).
“Voting and Non-Solicitation Agreements” has the meaning set forth in the
Recitals.
4439.011/1041316.12
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“Voting Debt” shall mean all bonds, debentures, notes or other indebtedness
having the right to vote on any matters on which shareholders may vote.
ARTICLE 2
THE MERGERS AND RELATED MATTERS
2.1.
The Merger; Surviving Corporation.
(a)
The Merger. Subject to the terms and conditions of this Agreement, and
pursuant to the applicable provisions of the CGCL and the CFC, and to the extent applicable, the
rules and regulations promulgated by the CDBO and Federal Reserve Board, at the Effective
Time, CBTV shall be merged with and into AP Bank, with AP Bank as the surviving bank (the
“Surviving Bank”).
(b)
Surviving Entity. Upon the consummation of the Merger, the separate
corporate existence of CBTV shall cease and AP Bank shall continue as the surviving entity
under the laws of the State of California. The name of “AltaPacific Bank” as the surviving entity
of the Merger shall remain “AltaPacific Bank." From and after the Effective Time, AP Bank, as
the surviving entity of the Merger, shall possess all of the properties and rights and be subject to
all of the liabilities and obligations of CBTV.
(c)
Articles of Incorporation and Bylaws of the Surviving Entity. The
Articles of Incorporation and Bylaws of AP Bank, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation and Bylaws of AP Bank, as the surviving corporation
of the Merger, until either is thereafter amended in accordance with applicable law.
(d)
Directors and Officers of the Surviving Entity and APB. The directors
and officers of AP Bank immediately prior to the Effective Time shall be the directors and
officers of AP Bank, as the surviving corporation of the Merger, until their respective successors
shall be duly elected and qualified or otherwise duly selected.
2.2.
Filing of Agreement of Merger. As soon as practicable, but in no event later than
the tenth (10th) calendar day after which each of the conditions set forth in Article 6 hereof has
been satisfied or waived (other than those conditions that by their nature are to be satisfied at
Closing) or such other time as the parties may agree, CBTV and APB will file, or cause to be
filed, with the California Secretary of State and the CDBO an agreement of merger in
substantially the form of Exhibit C to this Agreement, effecting the Merger, and the Merger shall
become effective upon filing of the agreement of merger with the CDBO (the “Effective Time”).
2.3.
Conversion of CBTV Stock.
(a)
CBTV Common Stock. Subject to the provisions of this Agreement, at the
Effective Time, automatically by virtue of the Merger, and without any action on the part of any
Person, each share of CBTV Common Stock, issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares) shall be converted into the right to receive the
following consideration (the “Merger Consideration”):
4439.011/1041316.12
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(i)
Cash Consideration. Each outstanding share of CBTV Common
Stock with respect to which an election to receive cash has been effectively made and not
revoked or lost pursuant to Section 2.4, shall be converted into the right to receive a cash
payment, without interest, equal to the number which is obtained by dividing the Aggregate Cash
Consideration by the number of shares of CBTV Common Stock outstanding immediately prior
to the Effective Time rounded up or down to the nearest cent (such amount, the “Per Share Cash
Consideration”); or
(ii)
Stock Consideration. Each outstanding share of CBTV Common
Stock with respect to which an election to receive APB Common Stock has been effectively
made and not revoked or lost pursuant to Section 2.4, shall be converted into the right to receive
from APB shares of APB Common Stock equal to the number obtained by dividing the
Aggregate Stock Consideration by the number of shares of CBTV Common Stock outstanding
immediately prior to the Effective Time (such amount, the “Per Share Stock Consideration”).
(b)
No Effect on Stock of APB. The Merger shall have no effect on the
outstanding capital stock of APB.
(c)
CBTV Stock Options. Each holder of CBTV Stock Options who does not
exercise such options prior to the Closing Date, and who executes an Option Cancellation
Agreement in substantially the form of Exhibit D, shall be entitled to receive an amount in cash
equal to (i) for holders of in-the-money CBTV Stock Options, in lieu of each share of CBTV
Common Stock that would otherwise have been issuable upon exercise thereof, (A) $10.00 less
(B) the exercise price per share with respect to the corresponding CBTV Stock Option in
question. Any payments pursuant to this Section 2.3(c) shall take place only after the
satisfaction or fulfillment or waiver of the conditions of Closing contained in Article 6. CBTV
shall collect in cash (and timely pay) all applicable withholding and payroll taxes with respect to
such options and shall comply with all payroll reporting requirements with respect thereto.
Immediately prior to the Effective Time, each CBTV Stock Option that has not previously been
exercised nor subject to an Option Cancellation Agreement, whether or not then vested and
whether or not then exercisable, shall terminate and be of no further effect and any rights
thereunder to purchase shares of CBTV Common Stock shall also terminate and be of no further
force or effect and CBTV shall provide notice to this effect to all CBTV Option Holders in
accordance with the terms of the plan pursuant to which the CBTV Options were issued.
2.4.
Election and Proration Procedures.
(a)
An election form and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of loss and title to the
Certificates theretofore representing CBTV Common Stock shall pass only upon delivery of such
Certificates to the Exchange Agent) in such form as APB and CBTV shall mutually agree
(“Election Form”) shall be mailed no less than 35 days prior to the anticipated Effective Time or
on such other date as CBTV and APB shall mutually agree (“Mailing Date”) to each holder of
record of CBTV Common Stock as of five (5) Business Days prior to the Mailing Date
(“Election Form Record Date”).
4439.011/1041316.12
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(b)
Each Election Form shall permit the holder to elect to receive (i) the Per
Share Stock Consideration in respect of all of such holder’s CBTV Common Stock (“Stock
Election Shares”); (ii) the Per Share Cash Consideration in respect of all of such holder’s CBTV
Common Stock (“Cash Election Shares”); or (iii) the Per Share Stock Consideration in respect of
a portion of such holder’s CBTV Common Stock, rounded to the nearest whole share (the
“Mixed Stock Shares”), and the Per Share Cash Consideration in respect of a portion of such
holder’s CBTV Common Stock, rounded to the nearest whole share (the “Mixed Cash Shares,”
and together with the Mixed Stock Shares, the “Mixed Election Shares”). If a holder makes no
election with respect to such holder’s shares of CBTV Common Stock, or if there are any shares
of CBTV Common Stock with respect to which the Exchange Agent has not otherwise received
an effective, properly completed Election Form on or before 5:00 p.m., Pacific Time, on or
before the 30th day following the Mailing Date, or such later time and date as APB and CBTV
may mutually agree prior to the Effective Time (the “Election Deadline”), such shares shall be
deemed to be “No Election Shares”.
(c)
APB shall make available one or more Election Forms as may reasonably
be requested from time to time by all persons who become holders (or beneficial owners) of
CBTV Common Stock between the Election Form Record Date and the close of business on the
Business Day prior to the Election Deadline, and CBTV shall provide to the Exchange Agent all
information reasonably necessary for it to perform its obligations as specified herein.
(d)
Any such election shall have been properly made only if the Exchange
Agent shall have actually received a properly completed Election Form by the Election Deadline,
and such election is not revoked or changed prior to the Election Deadline. Any Election Form
may be revoked or changed by the person submitting such Election Form at or prior to the
Election Deadline. Subject to the terms of this Agreement and of the Election Form, the
Exchange Agent shall have reasonable discretion to determine whether any election, revocation
or change has been properly or timely made and to disregard immaterial defects in the Election
Forms, and any good faith decisions of APB regarding such matters shall be binding and
conclusive. Neither APB nor the Exchange Agent shall be under any obligation to notify any
person of any defect in an Election Form. To the extent the holder of Dissenting Shares submits
an Election Form, such holder’s election shall have no effect, the Exchange Agent will disregard
such Election Form, and the Dissenting Shares shall be converted in accordance with
Section 2.5(f).
(e)
Within ten (10) Business Days after the Election Deadline, unless the
Effective Time has not yet occurred, in which case as soon thereafter as practicable, APB shall
cause the Exchange Agent to effect the allocation among the holders of CBTV Common Stock
of rights to receive APB Common Stock and/or cash in the Merger in accordance with the
Election Forms as follows:
(i)
Cash Election Shares, Dissenting Shares and Mixed Cash Shares
More Than Aggregate Cash Consideration. If the aggregate cash amount that would be paid
upon the conversion in the Merger of the Cash Election Shares, Dissenting Shares and the Mixed
Cash Shares is greater than the Aggregate Cash Consideration, then:
4439.011/1041316.12
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(A)
all Mixed Stock Shares, Stock Election Shares and No
Election Shares shall be converted into the right to receive the Per Share Stock Consideration;
(B)
all Dissenting Shares shall be deemed, for the purposes of
this Section 2.4(e)(i), to be converted into the right to receive the Per Share Cash Consideration;
(C)
the Exchange Agent shall then select from among the Cash
Election Shares, by a pro rata selection process, a sufficient number of shares (“Stock Designated
Shares”) such that the aggregate cash amount that will be paid in the Merger does not exceed the
Aggregate Cash Consideration, and all Stock Designated Shares shall be converted into the right
to receive the Per Share Stock Consideration; and
(D)
the Cash Election Shares that are not Stock Designated
Shares and all Mixed Cash Shares will be converted into the right to receive the Per Share Cash
Consideration.
(ii)
Cash Election Shares, Dissenting Shares and Mixed Cash Shares
Less Than Aggregate Cash Consideration. If the aggregate cash amount that would be paid upon
conversion in the Merger of the Cash Election Shares, Dissenting Shares and the Mixed Cash
Shares is less than the Aggregate Cash Consideration, then:
(A)
all Cash Election Shares and Mixed Cash Shares shall be
converted into the right to receive the Per Share Cash Consideration;
(B)
all Dissenting Shares shall be deemed, for the purposes of
this Section 2.4(e)(ii), to be converted into the right to receive the Per Share Cash Consideration;
(C)
the Exchange Agent shall then select first from among the
No Election Shares and then (if necessary) from among the Stock Election Shares, by a pro rata
selection process, a sufficient number of shares (“Cash Designated Shares”) such that the
aggregate cash amount that will be paid in the Merger does not exceed Aggregate Cash
Consideration, and all Cash Designated Shares shall be converted into the right to receive the Per
Share Cash Consideration; and
(D)
the Stock Election Shares and the No Election Shares that
are not Cash Designated Shares and all Mixed Stock Shares shall be converted into the right to
receive the Per Share Stock Consideration.
(f)
Cash Election Shares, Dissenting Shares and Mixed Cash Shares Equal to
Aggregate Cash Consideration. If the aggregate cash amount that would be paid upon conversion
in the Merger of the Cash Election Shares, Dissenting Shares and the Mixed Cash Shares is equal
or nearly equal (as determined by the Exchange Agent) to the Aggregate Cash Consideration,
then subparagraphs (e)(i) and (e)(ii) above shall not apply, and all Cash Election Shares and
Mixed Cash Shares shall be converted into the right to receive the Per Share Cash Consideration,
and all Stock Election Shares, Mixed Stock Shares and No Election Shares shall be converted
into the right to receive the Per Share Stock Consideration, and all Dissenting Shares shall be
converted in accordance with Section 2.5(f).
4439.011/1041316.12
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(g)
The pro rata selection process to be used by the Exchange Agent shall
consist of such equitable proration processes consistent with the foregoing and as shall be
determined in good faith by APB and reasonably satisfactory to CBTV.
2.5.
Exchange Procedures; Dissenting Shares.
(a)
Exchange Agent. Prior to the Effective Time, APB shall designate
Computershare Investor Services, Inc., or another Person reasonably acceptable to CBTV to act
as Exchange Agent (the “Exchange Agent”) in the Merger.
(b)
Exchange Procedures. No later than five (5) Business Days after the
Effective Time, APB shall cause to be mailed to each holder of record (a “Shareholder”) of a
certificate or certificates which immediately prior to the Effective Time represented outstanding
shares of CBTV Common Stock (“Certificate”) who has not previously surrendered his or her
Certificates in connection with an Election Form, (A) a letter of transmittal form (the “Letter of
Transmittal”), and (B) instructions for use in effecting the surrender of the Certificates in
exchange for the amount of the Merger Consideration payable in exchange therefor. Following
the Effective Time and upon delivery to the Exchange Agent of a duly completed and validly
executed Letter of Transmittal, together with surrender of a Certificate (or Certificates) for
cancellation, each Shareholder shall be entitled to receive in exchange therefor the Merger
Consideration to which such Shareholder is entitled pursuant to Section 2.3(a) at the times set
forth in this Article 2 and the Certificate(s) so surrendered shall be canceled.
(c)
APB to Provide Aggregate Cash Consideration and Aggregate Stock
Consideration to Exchange Agent. As of the Effective Time, APB shall have deposited with the
Exchange Agent for the benefit of the holders of shares of CBTV Common Stock, for exchange
in accordance with this Section 2.5 through the Exchange Agent, shares of APB Common Stock
equal to the Aggregate Stock Consideration and funds in an amount equal to the Aggregate Cash
Consideration (collectively, the “Exchange Fund”). All shares of APB Common Stock are
issued in book entry form pursuant to a direct registration system, and shareholders of CBTV
exchanging physical Certificates representing CBTV Common Stock will receive direct
registration advice from APB's transfer agent confirming the number of shares of APB Common
Stock issued to them. No physical certificate representing APB Common Stock will be issued.
(d)
No Further Rights. At the Effective Time, holders of Certificates shall
cease to have rights with respect to CBTV Common Stock previously represented by such
Certificates, and their sole rights (other than the holders of Certificates representing Dissenting
Shares) shall be to exchange such Certificates for the Merger Consideration in respect of the
shares represented thereby. After the Effective Time, there shall be no further transfer of
Certificates on the records of CBTV, and if such Certificates are presented to CBTV for transfer,
they shall be canceled against delivery of the Merger Consideration in respect of the shares
represented thereby. No dividends or other distributions with respect to APB Common Stock
with a record date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of APB Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder, and all such dividends,
other distributions and cash in lieu of fractional shares of APB Common Stock shall be paid by
4439.011/1041316.12
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APB to the Exchange Agent and shall be included in the Exchange Fund, in each case until the
surrender of such Certificate in accordance with the procedures set forth herein.
(e)
Lost, Stolen or Destroyed Certificates. In the event any Certificates shall
have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder
thereof, and, if required by APB or the Exchange Agent, the posting of a bond in such sum as
APB may reasonably direct as indemnity against any claim that may be made against it or the
Surviving Corporation with respect to such Certificates, the Merger Consideration in respect of
the shares represented by those Certificates required pursuant to Section 2.5 at the times set forth
in Article 2.
(f)
Dissenting Shares. Any shares of CBTV Common Stock held by a Person
who dissents from the Merger in accordance with the provisions of Chapter 13 of the CGCL
shall be herein called “Dissenting Shares.” Notwithstanding any other provision of this
Agreement, any Dissenting Shares shall not, after the Effective Time, be entitled to vote for any
purpose or receive any dividends or other distributions and shall be entitled only to such rights as
are afforded in respect of Dissenting Shares pursuant to applicable law. The Merger
Consideration for any Dissenting Share shall be paid over to APB pending the determination as
to the rights of any Dissenting Share to consideration under applicable laws. CBTV shall give
APB prompt notice of any written demands for dissenters’ rights, withdrawal of such demands,
and any other instruments received by CBTV relating to dissenters’ rights. APB hereby agrees
to pay from its own funds all payments to which dissenters may become entitled under Chapter
13 of the CGCL, and assumes and agrees to discharge all obligations of CBTV respecting
Dissenting Shares. CBTV shall not, except with the prior written consent of APB, or as required
by applicable law, offer to settle or settle any such demands or approve any withdrawal of any
such demands.
(g)
Fractional Shares.
Notwithstanding any other provision of this
Agreement, no fractional shares of APB Common Stock will be issued and any holder of Shares
entitled to receive a fractional share of APB Common Stock but for this Section 2.5(g) shall be
entitled to receive a cash payment in lieu thereof, which payment shall be calculated by the
Exchange Agent and shall represent such holder’s proportionate interest in their aggregate shares
of APB Common Stock to which they are entitled based on multiplying (i) the fractional share
interest to which such holder would otherwise be entitled by (ii) $10.00.
(h)
Withholding Rights. Each of APB and Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of shares of CBTV Common Stock such amounts as it is required to deduct and
withhold with respect to the making of such payment under the Code, or any other applicable
state, local or foreign Tax law. To the extent that amounts are so withheld by APB or Exchange
Agent, such withheld amounts (i) shall be timely remitted by APB to the applicable
Governmental Entity, and (ii) shall be treated for all purposes of this Agreement as having been
paid to the holder of shares of CBTV Common Stock in respect of which such deduction and
withholding was made by APB or Exchange Agent, as the case may be.
4439.011/1041316.12
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(i)
Termination of Exchange Fund. At any time following the six-month
anniversary of the Effective Time, APB shall be entitled to require the Exchange Agent to
deliver to it any remaining portion of the Exchange Fund not distributed to holders of shares of
CBTV Common Stock, together with any interest received with respect thereto and other income
resulting from investments by the Exchange Agent as directed by APB, and holders of CBTV
Common Stock shall be entitled to look only to APB (subject to abandoned property, escheat or
other similar laws) with respect to the Merger Consideration, any cash in lieu of fractional shares
of CBTV Common Stock and any dividends or other distributions with respect to APB Common
Stock payable upon due surrender of Certificates, without any interest thereon. Notwithstanding
the foregoing, neither APB nor the Exchange Agent shall be liable to any holder of a Certificate
for Merger Consideration (or dividends or distributions with respect thereto) or cash from the
Exchange Fund in each case delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(j)
Adjustments. Notwithstanding anything in this Agreement to the contrary,
if, after the date hereof, and prior to the Effective Time, the issued and outstanding shares of
CBTV Common Stock or securities convertible or exchangeable into or exercisable for shares of
CBTV Common Stock, or the issued and outstanding shares of APB Common Stock or securities
convertible or exchangeable into or exercisable for shares of APB Common Stock, shall have
been changed into a different number of shares or a different class by reason of any
reclassification, split (including a reverse stock split) merger, issuer tender or exchange offer, or
other similar transaction, then the Merger Consideration shall be equitably adjusted, and as so
adjusted shall, from and after the date of such event, be the Merger Consideration for purposes of
this Agreement.
ARTICLE 3
ACTIONS PENDING THE MERGER
3.1.
Covenants of CBTV. During the period from the date of this Agreement and
continuing until the Effective Time, CBTV agrees that, except as expressly permitted by this
Agreement or to the extent that APB shall otherwise consent in writing which consents shall not
be unreasonably withheld, conditioned or delayed:
(a)
Ordinary Course. CBTV shall carry on its business in the usual, regular
and ordinary course consistent with past practice and use all commercially reasonable efforts to
preserve intact its present business organization, maintain its rights, franchises, licenses and
other authorizations issued by Governmental Entities, preserve its relationships with directors,
officers, employees, customers, suppliers and others having business dealings with it and
maintain its properties and assets in their present state of repair, order and condition, reasonable
wear and tear excepted, to the end that its goodwill and ongoing business shall not be impaired in
any material respect as of the Effective Time. CBTV shall not (i) enter into any new material
line of business, (ii) change its lending, investment, underwriting, risk and asset-liability
management or other material banking or operating policies in any respect which is material to
CBTV, except as required by Applicable Legal Requirements or by policies imposed by a
Governmental Entity, (iii) incur or commit to any capital expenditures or any obligations or
liabilities in connection therewith other than capital expenditures and obligations or liabilities
4439.011/1041316.12
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incurred or committed to in the ordinary course of business consistent with past practice, (iv)
enter into or terminate any material lease, contract or agreement, or make any change to any
existing material leases, contracts or agreements, except in the ordinary course of business
consistent with past practice or (v) take any action or fail to take any action, which action or
failure causes a material breach of any material lease, contract or agreement.
(b)
Dividends; Changes in Stock. CBTV shall not (i) declare or pay any
dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine,
exchange, adjust or reclassify any of its capital stock or issue or authorize or propose the
issuance or authorization of any other securities in respect of, in lieu of or in substitution for,
shares of its capital stock, or (iii) purchase, redeem or otherwise acquire, any shares of its capital
stock or any securities convertible into or exercisable for any shares of its capital stock (except
pursuant to CBTV stock option agreements in effect on the date hereof and disclosed in CBTV
Disclosure Schedule 4.2(b)(i).
(c)
Issuance of Securities. CBTV shall not issue, deliver or sell, or authorize
or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any
Voting Debt, any stock appreciation rights or any securities convertible into or exercisable or
exchangeable for, or any rights, warrants or options to acquire, any such shares or Voting Debt,
or enter into any agreement with respect to any of the foregoing.
(d)
Governing Documents. CBTV shall not amend or propose to amend its
articles of incorporation, bylaws or similar organizational documents, as applicable, or, except to
the extent permitted by Section 4.2(e) or 4.2(f), enter into a plan of consolidation, merger or
reorganization with any Person.
(e)
No Acquisitions. CBTV shall not acquire or agree to acquire, by merging
or consolidating with, by purchasing an equity interest in any assets of, by forming a partnership
or joint venture with, or in any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise acquire or agree to
acquire any material assets not in the ordinary course of business; provided, however, that the
foregoing shall not prohibit foreclosures, repossessions or other acquisitions in the ordinary
course of business.
(f)
No Dispositions. Except as requested in writing by APB, and other than
sales of OREO and nonperforming assets in the ordinary course of business consistent with past
practice, and other than sales of OREO and non-performing assets at a price that equals or
exceeds the book value of such assets (net of allocated reserves), and other than sales of
performing loans and investment securities in the ordinary course of business consistent with
past practice, CBTV shall not sell, lease, assign, encumber or otherwise dispose of, or agree to
sell, lease, assign, encumber or otherwise dispose of, any of its assets (including indebtedness of
others held by CBTV) which are material, individually or in the aggregate, to CBTV.
(g)
Indebtedness. CBTV shall not (i) incur, create or assume any long-term
indebtedness for borrowed money (or without the written consent of APB modify any of the
material terms of any such outstanding long-term indebtedness), guarantee any such long-term
indebtedness or issue or sell any long-term debt securities or warrants or rights to acquire any
4439.011/1041316.12
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long-term debt securities of CBTV or guarantee any long-term debt securities of others, other
than in the ordinary course of business consistent with past practice (including advances under
existing lines of credit with the FHLB of San Francisco or the Federal Reserve Bank Discount
Window) or (ii) prepay or voluntarily repay any subordinated indebtedness or trust preferred
securities.
(h)
Loans. CBTV shall submit a complete loan write-up to the chief credit
officer of AP Bank at least two (2) Business Days prior to taking action to make, commit to
make, renew, extend the maturity of, or alter any of the material terms of (i) any loan or group of
loans to any one borrower or related group of borrowers that, individually or collectively, would
be in excess of $250,000 ($500,000 in the case of renewals), or (ii) a loan in any amount that is
rated below “pass.”
(i)
Other Actions. CBTV shall not intentionally take any action that would,
or reasonably might be expected to, result in any of its representations and warranties set forth in
this Agreement being or becoming untrue, or in any of the conditions to the Merger set forth in
Article 4 not being satisfied or in a Violation of any provision of this Agreement, or (unless such
action is required by Applicable Legal Requirements) which would adversely affect the ability of
the Parties to obtain any of the Requisite Regulatory Approvals without imposition of a condition
or restriction of the type referred to in Section 6.3(d).
(j)
Accounting Methods. CBTV shall not make any material change to its
methods of accounting in effect at June 30, 2016, except as required by changes in GAAP as
concurred in by CBTV’s independent auditors or required by any Governmental Entity or at the
specific written request of APB.
(k)
Tax Matters. CBTV shall not make or rescind any tax election, make any
amendments to tax returns previously filed, or settle or compromise any tax liability or refund,
without the prior written consent of APB, which consent shall not be unreasonably withheld,
conditioned or delayed.
(l)
Compensation and Benefit Plans. Except as disclosed on Schedule 3.1(l),
CBTV shall not (i) enter into, adopt, amend (except for such amendments as may be required by
Applicable Legal Requirements) or terminate any CBTV Benefit Plan, or any agreement,
arrangement, plan or policy between CBTV and one or more of its directors or officers, (ii)
except for normal payments, awards and increases in the ordinary course of business or as
required by any plan or arrangement as in effect as of the date hereof, increase in any manner the
compensation or benefits of any director, officer or employee or pay any benefit not required by
any plan or arrangement as in effect as of the date hereof or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing, provided further that, any retention
bonuses payable shall not be paid to the employees until satisfactory completion of such
employees’ duties under the retention bonus arrangements, (iii) enter into or renew any contract,
agreement, commitment or arrangement (other than a renewal occurring in accordance with the
terms thereof) providing for the payment to any director, officer or employee of compensation or
benefits contingent, or the terms of which are materially altered, upon the occurrence of any of
the transactions contemplated by this Agreement or (iv) provide that, with respect to the right to
any bonus or incentive compensation and the grant of any stock option, restricted stock,
4439.011/1041316.12
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restricted stock unit or other equity-related award pursuant to CBTV Plans or otherwise granted
on or after the date hereof, the vesting of any such bonus, incentive compensation, or stock
option, restricted stock, restricted stock unit or other equity-related award shall accelerate or
otherwise be affected by the occurrence of any of the transactions contemplated by this
Agreement, either alone or in combination with some other event.
(m)
Investment Portfolio; Interest Rate Risk; Other Risk. CBTV shall not
materially restructure or materially change (on a consolidated basis) its investment securities
portfolio, its hedging strategy or its interest rate risk position, through purchases, sales or
otherwise, or the manner in which its investment securities portfolio is classified or reported or
materially increase the credit or other risk concentrations associated with its investment
securities portfolio; provided, however, that the foregoing shall not restrict the purchase or sale
of investment securities by CBTV in the ordinary course of business consistent with past
practice.
(n)
No Liquidation. CBTV shall not adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such a liquidation or a dissolution,
restructuring, recapitalization or reorganization.
(o)
Other Agreements. CBTV shall not agree to, or make any commitment to,
take, or authorize, any of the actions prohibited by this Section 3.1.
3.2.
Covenants of APB and AP Bank. During the period from the date of this
Agreement and continuing until the Effective Time, APB and AP Bank agree that, except as
expressly permitted by this Agreement or to the extent that CBTV shall otherwise consent in
writing which consent shall not be unreasonably withheld, conditioned or delayed:
(a)
Ordinary Course. APB and AP Bank shall carry on their businesses in the
usual, regular and ordinary course consistent with past practice and use all commercially
reasonable efforts to preserve intact their present business organization, maintain their rights,
franchises, licenses and other authorizations issued by Governmental Entities, preserve their
relationships with directors, officers, employees, customers, suppliers and others having business
dealings with them and maintain their properties and assets in their present state of repair, order
and condition, reasonable wear and tear excepted, to the end that their goodwill and ongoing
business shall not be impaired in any material respect as of the Effective Time.
(b)
Dividends; Changes in Stock. APB shall not (i) declare or pay any
dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine,
exchange, adjust or reclassify any of its capital stock or issue or authorize or propose the
issuance or authorization of any other securities in respect of, in lieu of or in substitution for,
shares of its capital stock, or (iii) purchase, redeem or otherwise acquire, any shares of its capital
stock or any securities convertible into or exercisable for any shares of its capital stock (except
pursuant to any stock purchase plan in effect on the date hereof and disclosed in APB Disclosure
Schedule 3.2(b)).
(c)
Issuance of Securities. APB shall not issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any shares of its capital stock of any class, any Voting
4439.011/1041316.12
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Debt, any stock appreciation rights or any securities convertible into or exercisable or
exchangeable for, or any rights, warrants or options to acquire, any such shares or Voting Debt,
or enter into any agreement with respect to any of the foregoing, except options or other stock
awards made to employees and other eligible recipients pursuant to the 2016 Equity Incentive
Plan and shares of APB Common Stock issued with respect thereto.
(d)
Governing Documents. APB and AP Bank shall not amend or propose to
amend their respective articles of incorporation, bylaws or similar organizational documents, as
applicable, except as may be required to effectuate the Merger or other transactions permitted by
this Agreement.
(e)
Other Actions. APB and AP Bank shall not intentionally take any action
that would, or reasonably might be expected to, result in any of its representations and warranties
set forth in this Agreement being or becoming untrue, or in any of the conditions to the Merger
set forth in Article 4 not being satisfied or in a Violation of any provision of this Agreement, or
(unless such action is required by Applicable Legal Requirements) which would adversely affect
the ability of the Parties to obtain any of the Requisite Regulatory Approvals without imposition
of a condition or restriction of the type referred to in Section 6.3(d).
(f)
Accounting Methods. APB shall not make any material change to its
methods of accounting in effect at June 30, 2016, except as required by changes in GAAP as
concurred in by APB’s independent auditors or required by any Governmental Entity.
(g)
Tax Matters. APB shall not make or rescind any tax election, make any
amendments to tax returns previously filed, or settle or compromise any tax liability or refund,
without the prior written consent of CBTV, which consent shall not be unreasonably withheld,
conditioned or delayed.
(h)
Investment Portfolio; Interest Rate Risk; Other Risk. APB or AP Bank
shall not materially restructure or materially change (on a consolidated basis) its investment
securities portfolio, its hedging strategy or its interest rate risk position, through purchases, sales
or otherwise, or the manner in which its investment securities portfolio is classified or reported
or materially increase the credit or other risk concentrations associated with its investment
securities portfolio; provided, however, that the foregoing shall not restrict the purchase or sale
of investment securities by APB and AP Bank in the ordinary course of business consistent with
past practice.
(i)
No Liquidation. APB shall not adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such a liquidation or a dissolution,
restructuring, recapitalization or reorganization.
(j)
No Acquisitions. Neither APB nor AP Bank shall enter into a binding
agreement to acquire , by merging or consolidating with, or by purchasing an equity interest in
any assets of, any bank or other depository institution or division thereof or otherwise acquire or
agree to acquire any material assets of any business not in the ordinary course of business;
provided, however, that the foregoing shall not prohibit foreclosures, repossessions or other
acquisitions in the ordinary course of business.
4439.011/1041316.12
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(k)
No Dispositions. Other than sales of OREO and nonperforming assets in
the ordinary course of business consistent with past practice, and other than sales of OREO and
non-performing assets at a price that equals or exceeds the book value of such assets (net of
allocated reserves), and other than sales of performing loans and investment securities in the
ordinary course of business consistent with past practice, neither APB nor AP Bank shall sell,
lease, assign, encumber or otherwise dispose of, or agree to sell, lease, assign, encumber or
otherwise dispose of, any of its assets (including indebtedness of others held by APB or AP
Bank) which are material, individually or in the aggregate, to APB.
(l)
Indebtedness. Neither APB nor AP Bank shall (i) incur, create or assume
any long-term indebtedness for borrowed money (or without the written consent of CBTV
modify any of the material terms of any such outstanding long-term indebtedness), guarantee any
such long-term indebtedness or issue or sell any long-term debt securities or warrants or rights to
acquire any long-term debt securities of APB or guarantee any long-term debt securities of
others, other than (i) in the ordinary course of business consistent with past practice (including
advances under existing lines of credit with the FHLB of San Francisco or the Federal Reserve
Bank Discount Window) or (ii) prepay or voluntarily repay any subordinated indebtedness or
trust preferred securities, or (iii) long-term indebtedness incurred by APB on commercially
reasonable terms in an aggregate principal amount not exceeding $10.0 million.
(m)
Other Agreements. APB shall not agree to, or make any commitment to,
take, or authorize, any of the actions prohibited by this Section 3.2.
3.3.
Advice of Changes; Government Filings.
(a)
CBTV and APB, respectively, shall confer on a regular and frequent basis
with the other party, report on its operational matters and promptly advise the other party orally
and in writing of any change or event having, or which would, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on CBTV or on APB and/or AP Bank
as the Surviving Bank, following the Merger.
(b)
CBTV, APB and AP Bank shall file all Call Reports with the appropriate
Governmental Entity and all other reports, applications and other documents required to be filed
with the applicable Governmental Entities between the date hereof and the Effective Time and,
to the fullest extent permitted by Applicable Legal Requirements, shall make available to CBTV
or APB and AP Bank, respectively, copies of all such reports promptly after the same are filed.
3.4.
No Control of Other Party’s Business. Nothing contained in this Agreement shall
give AP Bank or APB, directly or indirectly, the right to control or direct the operations of
CBTV or shall give CBTV, directly or indirectly, the right to control or direct the operations of
AP Bank or APB prior to the Effective Time. Prior to the Effective Time, each of CBTV and
APB shall exercise, consistent with the terms and conditions of this Agreement, complete control
and supervision over its respective operations.
4439.011/1041316.12
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1.
Disclosure Schedules. On or prior to the date hereof, CBTV has delivered to
APB, a confidential schedule (the “CBTV Disclosure Schedule”) and APB has delivered to
CBTV, a confidential schedule (the "APB Disclosure Schedule") setting forth, among other
things, items the disclosure of which is necessary or appropriate either in response to an express
disclosure requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in Article 4 or to one or more of its covenants or
agreements contained in Article 3 or Article 5. Any information set forth in the CBTV or APB
Disclosure Schedules shall be deemed to apply to each other applicable section or subsection of
such Disclosure Schedule if its relevance to the information called for in such section or
subsection is reasonably apparent on its face notwithstanding the omission of any cross-reference
to such other section.
4.2.
Representations and Warranties of CBTV.
Except as set forth in the
correspondingly identified subsection of the CBTV Disclosure Schedules delivered by CBTV to
APB concurrently herewith, CBTV represents and warrants to APB as follows:
(a)
Organization, Standing and Power. CBTV is a California state-chartered
commercial bank duly organized, validly existing and in good standing under the laws of the
State of California and holds a currently valid license issued by the CDBO to engage in the
commercial banking business in California, with deposits insured by the FDIC up to the
applicable legal limits. CBTV has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its business or the ownership
or leasing of its properties makes such qualification necessary, other than in such jurisdictions
where the failure so to qualify would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on CBTV. The copies of CBTV Articles and CBTV
Bylaws which have been previously furnished to APB, are true, correct and complete copies of
such documents as in effect on the date of this Agreement.
(b)
Capital Structure.
(i)
The authorized capital stock of CBTV consists of 10,000,000
shares of CBTV Common Stock and 10,000,000 shares of preferred stock. As of the Agreement
Date, (A) 1,587,041 shares of CBTV Common Stock were issued and outstanding, and 216,381
shares of CBTV Common Stock are reserved for issuance upon the exercise of options granted
under the CBTV Plans and outstanding as of the date hereof, and (B) no shares of CBTV
preferred stock were issued and outstanding. All outstanding shares of CBTV Common Stock
have been duly authorized and validly issued and are fully paid and non-assessable and the
issuance of such shares was not subject to any preemptive or similar rights. Except for the
CBTV Support Agreements, there are no voting trusts, shareholder agreements, proxies or other
agreements in effect with respect to the voting or transfer of CBTV Common Stock or other
equity interests of CBTV. CBTV Disclosure Schedule 4.2(b)(i) sets forth a true, correct and
complete list of the aggregate number of shares of CBTV Common Stock issuable upon the
4439.011/1041316.12
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exercise of each CBTV Stock Option outstanding at the date of this Agreement, and the holder,
exercise price and vesting schedule, as applicable, for each CBTV Stock Option. CBTV has no
shares of its capital stock which are subject to vesting, repurchase, or other lapse restrictions.
(ii)
Set forth in CBTV Disclosure Schedule 4.2(b)(ii) is a true, correct
and complete list of all outstanding bonds, debentures, notes, trust preferred securities or other
similar obligations that CBTV has issued. Except as set forth in CBTV Disclosure Schedule
4.2(b)(ii), no Voting Debt of CBTV is issued or outstanding. All outstanding bonds, debentures,
notes, trust preferred securities or other similar obligations of CBTV or any of its Subsidiaries
were issued in compliance with all Applicable Legal Requirements.
(iii) Except for (A) this Agreement and the (B) CBTV Stock Options,
there are no options, warrants, calls, Rights, commitments or agreements of any character to
which CBTV is a party or by which it is bound obligating CBTV to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock or any Voting Debt or
stock appreciation rights of CBTV or obligating CBTV to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement. There are no outstanding contractual
obligations of CBTV (A) to repurchase, redeem or otherwise acquire any shares of capital stock
of CBTV or (B) pursuant to which CBTV is or could be required to register shares of CBTV
Common Stock or other securities under the Securities Act.
(iv)
Since December 31, 2015, except as set forth in CBTV Disclosure
Schedule 4.2(b)(iv), CBTV has not (A) issued any shares of capital stock, stock appreciation
Rights or securities exercisable or exchangeable for or convertible into shares of capital stock of
CBTV, other than pursuant to and as required by the terms of CBTV Equity Plans and any
employee stock options and other awards issued under CBTV Equity Plans prior to the date
hereof); (B) repurchased, redeemed or otherwise acquired, directly or indirectly, any shares of
capital stock of CBTV; or (C) declared, set aside, made or paid to the shareholders of CBTV
dividends or other distributions on the outstanding shares of capital stock of CBTV.
(v)
Set forth in CBTV Disclosure Schedule 4.2(b)(v) is a true, correct
and complete list of all equity securities that CBTV owns, controls or holds for its own account,
and CBTV does not own more than 4.9% of a class of voting securities of, or otherwise controls,
any Person.
(c)
Authority.
(i)
CBTV has all requisite corporate power and authority to execute
and deliver this Agreement and subject, in the case of the consummation of the Merger, to the
adoption of the principal terms of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of CBTV Common Stock entitled to vote thereon (the
“Required CBTV Vote”), to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by CBTV and the consummation by CBTV of the transactions
contemplated hereby have been duly authorized by all necessary corporate action on the part of
CBTV subject, in the case of the consummation of the Merger, to receipt of the Required CBTV
Vote. The CBTV Board has adopted resolutions as of the date of this Agreement, (x) approving
this Agreement, (y) resolving to submit this Agreement to the shareholders of CBTV, and (z)
4439.011/1041316.12
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recommending to the shareholders of CBTV that they vote at the CBTV Shareholders Meeting to
adopt this Agreement and Merger (the “CBTV Board Recommendation”). This Agreement has
been duly executed and delivered by CBTV and constitutes a valid and binding obligation of
CBTV, enforceable against CBTV in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer or conveyance, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors’ rights and remedies and to general
equitable principles, forthright negotiation, commercial reasonableness, good faith and fair
dealing.
(ii)
Except as set forth in CBTV Disclosure Schedule 4.2(c)(ii), to the
Knowledge of CBTV, the execution and delivery by CBTV of this Agreement does not, and the
consummation by CBTV of the transactions contemplated hereby shall not, (A) conflict with, or
result in any violation of, or constitute a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of any obligation or the
loss of a material benefit under, or the creation of a lien, pledge, security interest, charge or other
encumbrance on any assets (any such conflict, violation, default, right of termination,
cancellation or acceleration, loss or creation, a “Violation”) pursuant to, any provision of the
articles of incorporation or bylaws of CBTV or (B) except as set forth in CBTV Disclosure
Schedule 4.2(c)(ii) and subject to obtaining or making the consents, approvals, orders,
authorizations, registrations, declarations and filings referred to therein or in clause (iii) below,
result in any Violation of any loan or credit agreement, note, mortgage, indenture, lease, CBTV
Contract, CBTV Benefit Plan or other agreement, obligation, instrument, permit, concession,
franchise or license, or any Applicable Legal Requirements applicable to CBTV or its properties
or assets.
(iii) No consent, approval, waiver, non-objection, order or
authorization of, or registration, declaration or filing with, any Governmental Entity (acting in
any capacity) is required by or with respect to CBTV in connection with the execution and
delivery of this Agreement by CBTV or the consummation by CBTV of the transactions
contemplated hereby, except for (A) the filing of appropriate notices with the Federal Reserve
Bank under the BHC Act and approval or waiver of the same, (B) the filing of an appropriate
application with the Federal Reserve Bank and approval, waiver, or non-objection of the same
under the Bank Merger Act of 1960, as amended (the “Bank Merger Act”), and (C) the filing of
an appropriate application with the CDBO and approval of the same (the “Requisite Regulatory
Approvals”). For purposes of this Agreement, the term “Bank Regulatory Authorities” means,
the Federal Reserve Bank, FDIC, and CDBO.
(d)
Financial Statements; Regulatory Reports; Undisclosed Liabilities;
Absence of Change.
(i)
CBTV has previously furnished APB with copies of (a) the
statements of financial condition of CBTV as of December 31, 2015, 2014 and 2013, and the
related statements of income, changes in shareholders’ equity and cash flows for the fiscal years
ended December 31, 2015, 2014 and 2013, in each case accompanied by the audit report of
McGladrey, LLP or RSM US LLP, independent public accountants with respect to CBTV, (b)
the notes related thereto, and (c) the unaudited statements of financial condition of CBTV as of
March 31, 2016 and the related unaudited statement of income for the three months ended
4439.011/1041316.12
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March 31, 2016 (collectively, the “CBTV Financial Statements”). The books and records of
CBTV have been, and are being, maintained in accordance with GAAP and/or with regulatory
accounting principles (“RAP”), as applicable, and any other applicable legal and accounting
requirements, and reflect only actual transactions.
(ii)
Except as and to the extent reflected, disclosed or reserved against
in the Financial Statements (including the notes thereto), CBTV has no liabilities, whether
absolute, accrued, contingent or otherwise, material to the consolidated financial condition of
CBTV which were required to be so disclosed under GAAP. Since December 31, 2015, CBTV
has not incurred any liabilities except in the ordinary course of business, other than as
specifically contemplated by this Agreement.
(iii) CBTV has furnished APB with true and complete copies of the
Reports of Condition and Income of CBTV as of December 31, 2015, 2014 and 2013 and as of
March 31, 2016 (the “Call Reports”). The Call Reports fairly present, in all material respects,
the financial position of CBTV and the results of its operations as of the date and for the period
indicated in that Call Report in conformity with the then-applicable instructions to the Reports of
Condition and Income as promulgated by the Federal Financial Institutions Examination Council
Call Report. The Call Reports do not contain any items of special or nonrecurring income or any
other income not earned in the ordinary course of the business except as expressly specified
therein. CBTV has calculated its allowance for loan losses in accordance with RAP as applied to
banking institutions and in accordance with all applicable rules and regulations. To CBTV’s
Knowledge, the allowance for loan losses account for CBTV is and as of the Closing Date will
be, adequate in all material respects to provide for all losses, net of recoveries relating to loans
previously charged off, on all outstanding loans of CBTV.
(iv)
Since December 31, 2012, CBTV has timely filed all reports, and
statements, together with any amendments required to be made with respect thereto, that were
required to be filed by them under any Applicable Legal Requirements with the Federal Reserve,
the FDIC, and with any other applicable Governmental Entity, and have paid all fees and
assessments due and payable in connection therewith. As of their respective dates (and without
giving effect to any amendments or modifications filed after the date of this Agreement with
respect to reports and documents filed before the date of this Agreement), to CBTV’s
Knowledge, each of such reports, registrations and statements (including the financial
statements, exhibits and schedules therein) complied in all material respects with the applicable
statutes, rules, regulations and orders enforced or promulgated by the Governmental Entity with
which they were filed.
(v)
Except as disclosed on CBTV Disclosure Schedule 4.2(d)(v),
CBTV has since December 31, 2015, conducted its business only in the ordinary course and has
not:
(A)
Incurred any obligation or liability, whether absolute,
accrued, contingent or otherwise, whether due or to become due, except deposits taken, federal
funds purchased and FHLB, Federal Reserve Bank and correspondent bank borrowings and
current liabilities for trade or business obligations, none of which, individually or in the
aggregate, resulted in a Material Adverse Effect;
4439.011/1041316.12
27
(B)
Declared or made any payment of dividends or other
distribution to its shareholders, or purchased, retired or redeemed, or obligated itself to purchase,
retire or redeem, any of its shares of capital stock or other securities;
(C)
Issued, reserved for issuance, granted, sold or authorized
the issuance of any shares of its capital stock or other securities or subscriptions, options,
warrants, calls, rights or commitments of any kind relating to the issuance thereof;
(D)
Acquired any capital stock or other equity securities or
acquired any ownership interest in any bank, corporation, partnership or other entity (except (i)
through settlement of indebtedness, foreclosure, or the exercise of creditors’ remedies or (ii) in a
fiduciary capacity, the ownership of which does not expose it to any liability from the business,
operations or liabilities of such Person);
(E)
Mortgaged, pledged or subjected to Lien or restriction any
of its property, business or assets, tangible or intangible, except for Permitted Liens;
(F)
Sold, transferred, leased to others or otherwise disposed of
any of its assets or canceled or compromised any debt or claim, or waived or released any right
or claim outside the ordinary course of business;
(G)
Terminated, canceled or surrendered, or received any
notice of or threat of termination or cancellation of any contract, lease or other agreement or
suffered any damage, destruction or loss to property which, individually or in the aggregate,
would constitute a Material Adverse Effect;
(H)
Made any change in the rate of compensation, commission,
bonus, vesting or other direct or indirect remuneration payable, paid or agreed or orally promised
to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or
vacation pay, to or for the benefit of any of their directors, officers, employees or agents, or
entered into any employment or consulting contract or other agreement with any director, officer
or employee or adopted, amended or terminated any pension, employee welfare, retirement,
stock purchase, stock option, stock appreciation rights, termination, severance, income
protection, golden parachute, savings or profit-sharing plan (including trust agreements and
insurance contracts embodying such plans), any deferred compensation, or collective bargaining
agreement, any group insurance contract or any other incentive, welfare or employee benefit plan
or agreement maintained by CBTV for the benefit of its directors, employees or former
employees, except (i) periodic increases consistent with past practices, or (ii) as specifically
permitted by this Agreement;
(I)
Made any capital expenditures or capital additions or
betterments in excess of an aggregate of $25,000;
(J)
Instituted, had instituted against it, settled or agreed to
settle any litigation, action or proceeding before any court or Governmental body relating to its
property other than routine collection suits instituted by it to collect amounts owed;
4439.011/1041316.12
28
(K)
Suffered any change, event or condition that, individually
or in the aggregate, has caused or is likely to result in a Material Adverse Effect or any material
adverse change in earnings or costs or relations with its employees (exclusive of the termination
of any employees in accordance with their existing policies and procedures), agents, depositors,
loan customers, correspondent banks or suppliers;
(L)
Except for the transactions contemplated by this Agreement
or as otherwise permitted hereunder, entered into any transaction, or entered into, modified or
amended any contract or commitment which is required to be disclosed in CBTV Disclosure
Schedule 4.2(i) hereto;
(M) Made any, or acquiesced with any, change in any
accounting methods, principles or material practices except as required by GAAP or RAP; or
(N)
Entered into any agreement or made any commitment
whether in writing or otherwise to take any of the types of action described in subsections (A)
through (M) above.
(e)
Compliance with Applicable Legal and Reporting Requirements.
(i)
CBTV holds all permits, authorizations, licenses, variances,
exemptions, orders and approvals of all Governmental Entities which are material to the
operation of the businesses of CBTV, taken as a whole (the “CBTV Permits”). The CBTV
Permits are in full force and effect and CBTV is in compliance with the terms of CBTV Permits.
(ii)
Since December 31, 2012, CBTV and each of its Subsidiaries has
conducted its business in compliance in all material respects with all Applicable Legal
Requirements including the USA PATRIOT Act of 2001, any other applicable anti-money
laundering statute, rule or regulation or any rule or regulation issued by the U.S. Department of
the Treasury’s Office of Foreign Assets Control, and the privacy and customer information
requirements contained in Applicable Legal Requirements). To the Knowledge of CBTV, no
investigation by any Governmental Entity with respect to CBTV is pending or threatened nor is
there any unresolved violation, criticism or exception by any regulatory authority with respect to
any report or statement relating to any examinations of CBTV.
(f)
Accounting and Internal Controls.
(i)
The records, systems, controls, data and information of CBTV are
recorded, stored, maintained and operated under means (including any electronic, mechanical or
photographic process, whether computerized or not) that are under the exclusive ownership and
direct control of CBTV (including all means of access thereto and therefrom), except for any
non-exclusive ownership and non-direct control which would not, individually or in the
aggregate, reasonably be expected to have a Materially Adverse Effect on the system of internal
accounting controls described in the following clause.
(ii)
CBTV has devised and maintains a system of internal accounting
controls sufficient to provide reasonable assurances regarding the reliability of its financial
reporting and the preparation of their respective financial statements for external purposes in
4439.011/1041316.12
29
accordance with GAAP. Management of CBTV has disclosed, based on its most recent
evaluation prior to the date hereof, to CBTV’s auditors and the audit committee of CBTV Board
(1) any significant deficiencies in the design or operation of internal controls which could
adversely affect in any material respect CBTV’s ability to record, process, summarize and report
financial data and have identified for CBTV’s auditors any material weaknesses in internal
controls and (2) any fraud, whether or not material, that involves management or other
employees who have a significant role in CBTV’s internal controls, and all of such items in (1)
and (2) are described in CBTV Disclosure Schedule 4.2(f)(ii).
(iii) Since December 31, 2012, neither CBTV nor, to the Knowledge of
CBTV, any director, officer, employee, auditor, accountant or representative of CBTV, has
received or has otherwise had or obtained (other than audit comments received in the ordinary
course of business of CBTV) any complaint, allegation, assertion or claim, whether written or
oral, regarding the accounting or auditing practices, procedures, methodologies or methods
(including with respect to loan loss reserves, write-downs, charge-offs and accruals) of CBTV or
its internal control over financial reporting, including any complaint, allegation, assertion or
claim that CBTV has engaged in questionable accounting or auditing practices.
(g)
Legal Proceedings. Except as set forth in CBTV Disclosure Schedule
4.2(g), there is no suit, action, investigation or proceeding (whether judicial, arbitral,
administrative or other) pending or, to the Knowledge of CBTV, threatened, against or, other
than routine collection matters instituted by CBTV, affecting CBTV, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator issued and in effect
against CBTV. No legal action, suit or proceeding or judicial, administrative or governmental
investigation is pending or, to the Knowledge of CBTV, threatened against CBTV that questions
or might question the validity of this Agreement or the agreements contemplated hereby or any
actions taken or to be taken by CBTV pursuant hereto or thereto or seeks to enjoin or otherwise
restrain the transactions contemplated hereby or thereby.
(h)
Taxes. Except as set forth in CBTV Disclosure Schedule 4.2(h):
(i)
CBTV has timely filed, or has caused to be timely filed on its
behalf (taking into account any extension of time within which to file), all material tax returns
required to be filed by it, and all such filed tax returns were correct and complete in all material
respects. All taxes of CBTV (whether or not shown on any tax return) have been timely paid
except for taxes that are both being contested in good faith and adequately reserved against and
included as an identifiable tax liability (in accordance with GAAP) on the CBTV Financial
Statements. CBTV has no liability for taxes in excess of the amount reserved or provided for in
the CBTV Financial Statements (but excluding, for this purpose only, any liability reflected
thereon for deferred taxes to reflect timing differences between tax and financial accounting
methods). There are no liens for taxes (other than taxes not yet due and payable upon any of the
assets of CBTV and CBTV Subsidiaries).
(ii)
No written or, to the Knowledge of CBTV, unwritten notice of any
deficiency with respect to taxes that has been proposed, asserted or assessed against CBTV and
has not previously been paid has been received by CBTV.
4439.011/1041316.12
30
(iii) There are no disputes pending with respect to, or claims or
assessments asserted in writing for, any amount of taxes upon CBTV, nor has CBTV given or
been requested in writing to give any currently effective waivers extending the statutory period
of limitation applicable to any tax return for any period.
(iv)
To the Knowledge of CBTV, no tax return of CBTV is under audit
or examination by any Governmental Entity. No written or, to the Knowledge of CBTV,
unwritten notice of such an audit or examination by any Governmental Entity has been received
by CBTV. Any assessments for taxes due with respect to any completed and settled
examinations or any concluded litigation have been fully paid.
(v)
CBTV has not constituted either a “distributing corporation” or a
“controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of stock under Section 355 of the Code (i) within the two-year period ending prior to
the date of this Agreement; or (ii) in a distribution which could otherwise constitute part of a
“plan” or “series of transactions” (within the meaning of Section 355(e) of the Code) in
conjunction with the transactions contemplated by this Agreement.
(vi)
CBTV has (A) not been a member of a group filing a consolidated
federal income tax return or a consolidated, combined, or unitary state income tax return except
any such income tax return where CBTV has been the common parent; or (B) no liability for any
tax under Treasury Regulations Section 1.1502-6 or any similar provision of any other tax law
(except for taxes of the affiliated group of which CBTV is the common parent, within the
meaning of Section 1504(a)(1) of the Code or any similar provision of any other tax law), as a
transferee or successor, by contract or otherwise.
(vii) CBTV has not been a party to any “listed transaction” as such term
is defined in Section 6707A(c)(2) of the Code and Treasury Regulations Section § 1.60114(b)(2). To the Knowledge of CBTV, CBTV has properly reported all “reportable transactions”
as defined in Code § 6707A(c)(1) and Treasury Regulations Section 1.6011-4(b) on its United
States federal income tax returns.
(viii) CBTV has withheld (or shall withhold) from payments to or on
behalf of its employees, independent contractors, creditors, shareholders or other third parties,
and have timely paid (or shall timely pay) to the appropriate Governmental Entity, all amounts
required to be withheld from such persons in accordance with applicable tax law; provided,
however, that the foregoing withholding representation shall apply only with respect to payments
made before the Closing Date and that the foregoing timely payment representation shall apply
only with respect to payments which, to be timely, must be made to the appropriate
Governmental Entity before the Closing Date.
(ix)
CBTV has made available to APB true and complete copies of all
federal, state, local, and foreign income tax returns (including any such tax returns where the tax
is calculated based on net or gross income) filed with respect to CBTV for taxable periods ended
on or after December 31, 2010, and CBTV Disclosure Schedule 4.2(h) (viii) indicates such tax
returns that have been audited, and indicates those tax returns that currently are the subject of
4439.011/1041316.12
31
audit. There is no agreement or other document extending, or having the effect of extending, the
period of assessment or collection of any taxes.
(x)
Except as disclosed in CBTV Disclosure Schedule 4.2(h)(x),
CBTV is not a party to or bound by any tax sharing agreement, tax indemnity obligation or
agreement or arrangement principally related to taxes (including any advance pricing agreement,
closing agreement or other agreement relating to taxes with any Governmental Entity).
(xi)
CBTV is not required to include any item of income in, or exclude
any item of deduction from, taxable income for any taxable period (or portion thereof) ending
after the Closing Date as a result of any (A) change in method of accounting for a taxable period
ending on or before the Closing Date; (B) “closing agreement” as described in Section 7121 of
the Code (or any corresponding or similar provision of state, local, or foreign Tax law) executed
on or before the Closing Date; (C) intercompany transactions or any excess loss account
described in Treasury Regulations under Section 1502 of the Code (or any corresponding or
similar provision of state, local, or foreign Tax law); (D) installment sale or open transaction
disposition made on or before the Closing Date; (E) prepaid amount received on or before the
Closing Date, or (F) election under Section 108(i) of the Code.
(xii) CBTV has not been a United States real property holding
corporation within the meaning of the Code §897(c)(2) during the applicable period specified in
Code §897(c)(1)(A)(ii).
(xiii) To the Knowledge of CBTV, no claim has been made in writing
within the last three (3) years by an authority in a jurisdiction where CBTV does not file tax
returns that CBTV may be subject to taxation by that jurisdiction.
(xiv) CBTV Disclosure Schedule 4.2(i)(xiv) lists and contains an
accurate and complete description as to any United States federal and state net operating and
capital loss carryforwards for CBTV (including any limitations of such net operating or capital
loss carryforwards under Code Sections 382, 383 or 384 or the Treasury Regulations), if any, as
of December 31, 2015, and the expiration dates thereof; such entries are true, accurate and
correct as of such date and have been prepared by CBTV in accordance with GAAP applied on a
consistent basis.
(xv) Since December 31, 2012, the IRS has not challenged the interest
deduction on any of CBTV’s debt on the basis that such debt constitutes equity for federal
income tax purposes.
(xvi) CBTV is not a party to any agreement, contract, arrangement or
plan that has resulted or would result, separately or in the aggregate, in the payment of any
amount that will not be fully deductible as a result of Code §162(m) (or any similar or
corresponding provision of state tax law).
(xvii) CBTV has disclosed on its federal income tax returns and state
income tax returns all positions taken therein that would give rise to substantial understatement
of federal income tax within the meaning of Section 6662 of the Code or any similar provision
under state tax law.
4439.011/1041316.12
32
(xviii) The representations and warranties in this Section 4.1(h) and those
representations and warranties that otherwise specifically reference sections of the Code or
Treasury Regulations thereunder are the sole and exclusive representations and warranties of
CBTV concerning tax matters.
(i)
Certain Agreements.
(i)
CBTV Disclosure Schedule 4.2(i) sets forth an accurate and
complete description of the following leases, subleases, licenses, contracts and agreements to
which CBTV is a party or by which any of them is bound: (a) any agreement that obligates or
may obligate CBTV in the aggregate for an amount in excess of $25,000 in any calendar year (as
determined on an annualized basis with respect to multi-year contracts) or related contracts of a
similar nature that in the aggregate obligate or may obligate CBTV for an amount in excess of
$25,000 in any calendar year (as determined on an annualized basis with respect to multi-year
contracts); (b) any non-competition agreement or any other agreement or obligation which limits
in any material respect (i) the ability of CBTV to manage or operate any business or solicit any
current, former or potential customers, borrowers or lessees that shall, in either case, be binding
on APB, AP Bank, or the Surviving Bank after Closing, or (ii) the manner in which, or the
localities in which, any portion of the business of any of them or, following consummation of the
transactions contemplated by this Agreement, the Surviving Bank or its affiliates businesses, is
or would be conducted; (c) any agreement providing for the indemnification by CBTV of any
Person, other than customary agreements relating to the indemnification of directors, officers and
employees of CBTV or indemnification pursuant to routine agreements entered into in the
ordinary course (such as office equipment leases and the like); (d) any joint venture, strategic
alliance or partnership agreement or other similar agreement; (e) any agreement that grants any
right of first refusal or right of first offer or similar right or that limits or purports to limit the
ability of CBTV to own, operate, sell, transfer, pledge or otherwise dispose of any material
amount of assets or business (other than in connection with securitization or financing
transactions or contracts entered into in the ordinary course of business that require that the
particular transactions that are the subject thereof to be conducted with the counterparty or
counterparties to the contract); (f) any contract or agreement providing for any payments that are
conditioned, in whole or in part, on, or requiring the consent, notice or approval of or to any
Person upon, a change of control of CBTV; (g) any employment agreement, change in control
agreement, or any agreement or arrangement that contains any material severance pay or postemployment liabilities to any current or former employee of CBTV; (h) any agreement regarding
any agent bank or other similar relationships with respect to lines of business; (i) any agreement
that contains a “most favored nation” clause, which clause provides for the automatic adjustment
of terms and/or conditions of an agreement, including but not limited to, pricing and rates, in
order to provide parties with equal agreement rights, advantages or protections as those of
subsequent agreements; (j) any lease for real property or a material amount of personal property;
(k) any contract or agreement with an Affiliate of CBTV; (l) any agreement which would be
terminable other than by CBTV or any agreement under which a material payment obligation
would arise or be accelerated, in each case as a result of the consummation of the transactions
contemplated by this Agreement; and (m) any contract or other agreement not made in the
ordinary course of business which is material to CBTV taken as a whole (the agreements,
contracts and obligations of the type described in clauses (a) through (m) being referred to herein
as the “CBTV Contracts”). CBTV has made available to APB true and correct copies of all
4439.011/1041316.12
33
CBTV Contracts. For the purposes of this Agreement, CBTV Contracts shall be deemed not to
include loans made by, repurchase agreements made by, bankers acceptances of or deposits by
CBTV, in each case in the ordinary course of business consistent with past practices, but shall
include unfunded loan commitments and letters of credit issued by CBTV. Except as set forth in
CBTV Disclosure Schedule 4.2(i)(i), there are no provisions in any CBTV Contract relating to
the incurring of indebtedness for borrowed money (other than FHLB indebtedness, repurchase
agreements, deposits (brokered or otherwise) entered into in the ordinary course of business) by
CBTV (including sale and leaseback transactions and including capitalized lease transactions and
other similar financing transactions), including any such CBTV Contract which contains
provisions which restrict, or may restrict, the conduct of business of the issuer thereof as
currently conducted or any securitization agreements to which CBTV is a party, that provide any
restrictions on, or that require that any financial payment (other than payment of outstanding
principal and accrued principal) be made in the event of, the repayment of the outstanding
indebtedness thereunder prior to its term.
(ii)
All of CBTV Contracts are legal, valid and binding obligations of
CBTV and, to the Knowledge of CBTV, each other party thereto, enforceable in accordance with
their terms except as enforceability may be limited by bankruptcy, conservatorship, insolvency,
moratorium, reorganization, receivership or similar laws and judicial decisions affecting the
rights of creditors generally and by general principles of equity (whether applied in a proceeding
at law or equity) and are in full force and effect. To the Knowledge of CBTV, except as
described in CBTV Disclosure Schedule 4.2(i)(ii), all rent and other payments by CBTV under
CBTV Contracts are current, there are no existing violations or defaults by CBTV and, to the
Knowledge of CBTV, there are no Violations or defaults on the part of any other party to CBTV
Contracts and no termination, condition or other event has occurred which (with or without
notice, lapse of time and/or the happening or occurrence of any other event) would constitute a
default or material breach under CBTV Contracts, other than defaults or material breaches that
have been cured in the ordinary course of business.
(j)
Benefit Plans.
(i)
CBTV Disclosure Schedule 4.2(j)(i) sets forth a true and complete
list of all “employee benefit plans”, as defined in Section 3(3) of ERISA, whether or not subject
to ERISA and all stock purchase, stock option, severance, employment, change-in-control,
educational assistance, adoption assistance, fringe benefit, collective bargaining, bonus,
incentive, deferred compensation and other employee benefit plans, agreements, programs,
policies or other arrangements, whether or not subject to ERISA, whether formal or informal,
oral or written, legally binding or not (all the foregoing being herein called “Benefit Plans”),
under which any employee, director, independent contractor or former employee, director or
independent contractor of CBTV, or any spouse or dependent of any such employee or director,
has any present or future right to benefits, and which is (or was prior to its termination)
sponsored, maintained or contributed to by CBTV or under which CBTV has any present or
future liability (the “CBTV Benefit Plans”), CBTV has provided or made available to APB a
true, correct and complete copy of (A) such CBTV Benefit Plan and all related amendments
thereto, (B) all trust agreements, summaries, employee booklets or handbooks, annuity contracts,
insurance policies or any other funding instruments (“Funding Arrangements”) relating to such
CBTV Benefit Plan and all related amendments thereto, (C) the most recent summary plan
4439.011/1041316.12
34
description for each CBTV Benefit Plan for which a summary plan description is required by
ERISA, for Benefit Plans not subject to ERISA or that are unwritten, any relevant summaries,
(D) the most recent annual report (Form 5500) filed with the IRS and, where applicable, the
related audited financial statements thereof, (E) any contracts with independent contractors
(including actuaries, investment managers, etc.) that relate to any CBTV Benefit Plan, and (F)
the most recent determination letter (or equivalent) issued by the IRS with respect to any CBTV
Benefit Plan qualified under Section 401(a) of the Code. There are no unwritten amendments to
any CBTV Benefit Plan.
(ii)
Each CBTV Benefit Plan that is represented to be qualified under
Code Section 401(a) either has a favorable determination letter that covers all existing
amendments up to and including EGTRRA or is an adoption of a prototype or volume submitter
plan for which a favorable opinion letter has been issued up to and including EGTRRA, on
which CBTV is entitled to reliance equivalent to a determination letter, and, in either case,
CBTV has no obligation to adopt any amendments for which the remedial amendment period
under Code Section 401(b) has expired, and CBTV is not aware of any circumstances likely to
result in revocation of any such favorable determination or inability to rely on any opinion letter
except as disclosed on CBTV Disclosure Schedule 4.2(j)(ii). To the Knowledge of CBTV, each
CBTV Benefit Plan has been operated in compliance, in all material respects, with applicable
law or in accordance with its terms and any related trust is exempt from federal income tax under
Section 501(a) of the Code and, except as disclosed on CBTV Disclosure Schedule 4.2(j)(ii), all
reports, descriptions and filings required by the Code, ERISA or any government agency with
respect to each CBTV Benefit Plan have been timely and completely filed or distributed.
(iii) To the Knowledge of CBTV, no CBTV Benefit Plan is subject to
Title IV of ERISA or is a defined benefit plan within the meaning of Section 3(35) of ERISA or,
without limitation, either a multiple employer plan (including plans sponsored by an employee
leasing or professional employer organization), or “multi-employer plan” (as either such term is
defined in the Code or ERISA) and CBTV has not at any time during the last six (6) years,
sponsored, maintained, contributed to or been obligated to contribute to any plan subject to Title
IV of ERISA. No CBTV Benefit Plan is subject to the funding standards of Code Section 412 or
436 of the Code or Section 302 of ERISA.
(iv)
To the Knowledge of CBTV, all contributions (including, without
limitations, all employer contributions, employee salary reduction contributions and all
premiums or other payments (other than claims)) that are due and payable on or before the
Closing Date have been timely paid to or made with respect to each CBTV Benefit Plan and, to
the extent not presently payable, appropriate reserves have been established for the payment and
properly accrued in accordance with customary accounting practices.
(v)
To the Knowledge of CBTV, all obligations required to be
performed by CBTV under any CBTV Benefit Plan have been performed by them in all material
respects and they are not in default under or in violation of any material provision of any CBTV
Benefit Plan. There have been no prohibited transactions (described under Section 406 of
ERISA or Section 4975(c) of the Code), breaches of fiduciary duty or any other breaches or
violations of any law applicable to CBTV Benefit Plans that would directly or indirectly subject
4439.011/1041316.12
35
APB, AP Bank or CBTV to any taxes, penalties or other liabilities, including any liability arising
through indemnification.
(vi)
Except as disclosed in CBTV Disclosure Schedule 4.2(j)(vi), no
CBTV Benefit Plan is invested in or provides the opportunity for the purchase of any employer
security or employer real property (within the meaning of Section 407(d) of ERISA), other than
CBTV Plans.
(vii) With respect to CBTV Plans, CBTV has provided APB or AP
Bank a true, correct and complete copy of each form of award agreement, including
amendments, under which the grant, sale or issuance of CBTV Common Stock, or the payment
of cash based on the value of CBTV Common Stock have been granted, and a schedule showing
the name of each grantee, the date of grant and all other material terms of each grant. No stock
option or other right to acquire CBTV Common Stock or other equity of CBTV, or the payment
of cash based on the value of CBTV Common Stock (A) has an exercise price that was less than
the fair market value of the underlying equity as of the date such stock option or right was
granted, as determined by CBTV in good faith and in compliance with the relevant IRS guidance
in effect on the date of grant (including, IRS Notice 2005-1 and Section 1.409A-1(b)(5)(iv) of
the Treasury regulations), (B) has any feature for the deferral of compensation other than the
deferral of recognition of income until the later of exercise or disposition of such option or right,
or (C) has been granted after December 31, 2004, with respect to any class of stock of CBTV
that is not “service recipient stock” (within the meaning of applicable regulations under
Section 409A).
(viii) There are no pending claims, lawsuits or actions relating to any
CBTV Benefit Plan (other than ordinary course claims for benefits) and, to the Knowledge of
CBTV none are threatened. Except as disclosed on CBTV Disclosure Schedule 4.2(j)(viii),
neither the Merger, nor subsequent events where consequences result solely as a result of both
the occurrence of the subsequent event and the occurrence of the Merger, shall accelerate the
time of payment or vesting, or increase the amount, of compensation due to any employee,
officer, former employee or former officer of CBTV.
(ix)
Except as set forth in CBTV Disclosure Schedule 4.2(j)(ix), and
except as required by the continuation coverage requirements of Section 601 et seq. of ERISA
and Section 4980B of the Code or comparable state law, to the Knowledge of CBTV, CBTV has
no liability to provide post-retirement health or life benefits to any employee or former
employee. Except as set forth in CBTV Disclosure Schedule 4.2(j)(ix), to the Knowledge of
CBTV, no written or oral representations have been made to any employee or former employee
of CBTV promising or guaranteeing any employer payment or funding for the continuation of
medical, dental, life or disability coverage for such individual, their dependents, or any
beneficiaries for any period of time beyond the end of the current plan year or beyond
termination of employment, except as required by law and at no expense to CBTV.
(x)
Except as set forth in CBTV Disclosure Schedule 4.2(j)(x), no
CBTV Benefit Plan, CBTV Stock Plan or other contract or arrangement exists that could result
in the payment to any present or former employee or director of CBTV of any money or other
property or accelerate or provide any other rights or benefits to any present or former employee
4439.011/1041316.12
36
of CBTV or any Subsidiary of CBTV as a result of the transactions contemplated by this
Agreement. Unless specifically disclosed on such schedule, no such payment will be
nondeductible or subject to excise tax under Code Section 4999 or 280G, nor will APB or AP
Bank be required to “gross up” or otherwise compensate any Person because of the limits
contained in such Code sections.
(xi)
Except as set forth in CBTV Disclosure Schedule 4.2(j)(xi), there
are no surrender charges, penalties, or other costs or fees that would be imposed by any Person
against CBTV, any CBTV Benefit Plan, or any other Person, including without limitation, any
CBTV Benefit Plan participant or beneficiary as a result of the consummation of the transactions
contemplated by this Agreement with respect to any insurance, annuity or investment contracts
or other similar investment held by any CBTV Benefit Plan.
(xii) To the Knowledge of CBTV, each CBTV Benefit Plan which is a
“group health plan” (as defined in the Code and ERISA) has been operated in compliance, in all
material respects, with Part 6 of Subtitle B of Title 1 of ERISA and Sections 4980B and 4980D
of the Code and any analogous state law. To the Knowledge of CBTV, no failure has occurred
that would subject APB or any of its Subsidiaries to tax under Code § 4980B or 4980D. To the
Knowledge of CBTV, each such plan is in compliance, in all material respects, with, and the
operation of each such plan will not result in the incurrence of any material penalty to CBTV or
the Surviving Bank under, the Patient Protection and Affordable Care Act and its companion bill,
the Health Care and Education Reconciliation Act of 2010, to the extent applicable.
(xiii) Except as described in CBTV Disclosure Schedule 4.2(j)(xiii),
CBTV is insured by one or more insurance company(ies) for all health, dental, vision, life
disability or similar claims relating to any CBTV Benefit Plan and CBTV does not self-insure
against such claims.
(xiv) Except as set forth in CBTV Disclosure Schedule 4.2(j)(xiv),
CBTV may, at any time, amend or terminate any CBTV Benefit Plan that it sponsors or
maintains and may withdraw from any CBTV Benefit Plan to which it contributes (but does not
sponsor or maintain), without obtaining the consent of any third party, other than an insurance
company in the case of any benefit underwritten by an insurance company, and without incurring
liability except for unpaid premiums or contributions due for the pay period that includes the
effective date of such amendment, withdrawal or termination.
(xv) To the Knowledge of CBTV, each CBTV Benefit Plan that is a
“nonqualified deferred compensation plan” within the meaning of Code § 409A(d)(1) subject to
Code § 409A has (i) been maintained and operated since January 1, 2005 (or, if later, from its
inception) in good faith compliance with Section 409A of the Code and all applicable IRS
regulations promulgated thereunder and, as to any such plan in existence prior to January 1,
2005, has not been “materially modified” (within the meaning of IRS Notice 2005-1) at any time
after October 3, 2004, or has been amended in a manner that conforms with the requirements of
Section 409A of the Code, and (ii) since January 1, 2009, been in documentary and operational
compliance with Section 409A of the Code and all applicable IRS guidance promulgated
thereunder. No additional tax under Section 409A(a)(1)(B) of the Code has been or is
reasonably expected to be incurred by a participant in any such CBTV Benefit Plan or other
4439.011/1041316.12
37
contract, plan, program, agreement, or arrangement. Neither CBTV nor any Subsidiary is a party
to, or otherwise obligated under, any contract, agreement, plan or arrangement that provides for
the gross-up of taxes imposed by Section 409A(a)(1)(B) of the Code.
(k)
Agreements with Regulators. Except as set forth in CBTV Disclosure
Schedule 4.2(k), CBTV is not a party or subject to any written agreement, consent decree or
memorandum of understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any cease-and-desist or other order or directive by, or is a recipient of any
extraordinary supervisory letter currently in effect, or has adopted any policies, procedures or
board resolutions at the request of, any Governmental Entity which restricts the conduct of its
business, imposes any requirements or procedures or in any manner relates to its capital
adequacy, its credit or risk management policies or its management, nor has CBTV been advised
by any Governmental Entity that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such agreement, decree, memorandum of
understanding, extraordinary supervisory letter, commitment letter, order, directive or similar
submission, or any such policy, procedure or board resolutions. CBTV is in compliance with all
of the foregoing so listed in CBTV Disclosure Schedule 4.2(k). To the Knowledge of CBTV,
there are no formal or informal investigations, relating to any regulatory matters pending before
any Governmental Entity with respect to CBTV. Neither of CBTV nor any of its executive
officers or, to the Knowledge of CBTV, any of its directors or employees has been the subject of
any disciplinary proceedings or orders of any Governmental Entity arising under applicable laws
which would be required to be disclosed in any regulatory filing, and no such disciplinary
proceeding or order is pending, nor, to the Knowledge of CBTV, threatened.
(l)
Takeover Statutes. To the Knowledge of CBTV, and except as set forth in
CBTV Disclosure Schedule 4.2(l), there are no anti-takeover, control share, fair price, business
combination, moratorium or other similar statutes, charter provisions or bylaws applicable to this
Agreement, the Merger, or the other transactions contemplated hereby, except as to those
provisions of applicable law arising in connection with the acquiring control of a bank including,
without limitation, the Bank Holding Company Act of 1956, as amended, the change in Bank
Control Act, Section 1250 et. seq. of the California Financial Code and the National Bank Act,
including the implementing regulations thereto.
(m)
Vote Required. The Required CBTV Vote is the only vote of the holders
of any class or series of CBTV capital stock necessary to approve and adopt this Agreement and
the transactions contemplated hereby (including the Merger).
(n)
Properties. CBTV (i) has good and marketable title to all the properties
and assets reflected in the latest balance sheet included in the Financial Statements as being
owned by CBTV or acquired after the date thereof which are material to CBTV’s business
(except properties sold or otherwise disposed of since the date thereof in the ordinary course of
business), free and clear of all claims, liens, charges, security interests or encumbrances of any
nature whatsoever (“Liens”), except for Permitted Liens, and (ii) is the lessee of all leasehold
estates reflected in the latest balance sheet included in the Financial Statements or acquired after
the date thereof which are material to its business on a consolidated basis (except for leases that
have expired by their terms since the date thereof) and is in possession of the properties
4439.011/1041316.12
38
purported to be leased thereunder, and each such lease is valid without default thereunder by the
lessee or, to CBTV’s Knowledge, the lessor.
(o)
Condition of Assets. Except as set forth on CBTV Disclosure Schedule
4.2(o), all tangible assets, including furniture, fixtures and equipment, used by CBTV are in good
operating condition, ordinary wear and tear excepted, and conform with all material ordinances,
regulations, zoning and other laws, whether federal, state or local. CBTV owns or leases all of
the assets and leases all Properties necessary to carry on its business in the manner in which it is
presently conducted. The premises or equipment of CBTV is not in need of maintenance or
repairs other than ordinary routine maintenance and repairs that are not material in nature or cost.
Except as set forth on CBTV Disclosure Schedule 4.2(o), CBTV does not own any Properties
(other than OREO).
(p)
Intellectual Property. CBTV has not received any notice of infringement
of or conflict with and, to CBTV’s Knowledge, there are no infringements of or conflicts with,
the rights of others with respect to the use of any CBTV Intellectual Property which would
materially impact CBTV. CBTV has a privacy policy (a “Privacy Policy”) regarding the
collection and use of personally-identifiable information (“Customer Information”) or does not
collect Customer Information and has written agreements with each third party with which it
shares any Customer Information requiring that such information be kept confidential and used
only as permitted by CBTV or the customer (“Privacy Agreement”), copies of which have been
provided or have been made available to APB. To the Knowledge of CBTV, CBTV has not
collected any Customer Information in an unlawful manner or is in violation of its Privacy
Policy; nor has CBTV used any of the Customer Information in an unlawful manner or in a
manner that in any way violates its Privacy Policy, a Privacy Agreement or the privacy rights of
its customers or third parties. CBTV has posted its Privacy Policy in a clear and conspicuous
location on its web site (if any) and regularly distributes copies to its customers. CBTV has
adequate security measures in place to protect the Customer Information it receives from illegal
or unauthorized use by its personnel or third parties in a manner violative of the rights of privacy
of its customers.
(q)
Derivatives. Set forth on CBTV Disclosure Schedule 4.2(q) is a list of all
swaps, caps, floors, option agreements, futures and forward contracts and other similar derivative
transactions (each, a “Derivative Contract”), entered into for CBTV’s own account, and each
such Derivative Contract was entered into (i) in accordance with all Applicable Legal
Requirements and (ii) with counterparties which CBTV believes to be financially responsible.
Each Derivative Contract of CBTV constitutes the valid and legally binding obligation of CBTV,
as the case may be, that is enforceable in accordance with its terms (except as enforceability may
be limited by applicable bankruptcy, insolvency, fraudulent transfer or conveyance,
reorganization, moratorium and similar laws of general applicability relating to or affecting
creditors’ rights and to general equitable principles, including good faith, commercial
reasonableness, forthright negotiation and fair dealing), and is in full force and effect. CBTV is
not in breach of any of its obligations under any Derivative Contract of CBTV. The financial
position of CBTV on a consolidated basis under or with respect to each such Derivative Contract
has been reflected in the books and records of CBTV in accordance with GAAP applied on a
consistent basis.
4439.011/1041316.12
39
(r)
Loan Portfolio.
(i)
Except as set forth on CBTV Disclosure Schedule 4.2(r)(i), CBTV
is not a party to any written or oral (A) Loans under the terms of which the obligor was, as of
June 30, 2016, 90 days or more delinquent in payment of principal or interest or, to the
Knowledge of CBTV, in default of any other provision, or (B) Loans with any director,
executive officer or 5% or greater shareholder of CBTV, or to the Knowledge of CBTV, any
Affiliate of any of the foregoing. Set forth in CBTV Disclosure Schedule 4.2(r)(i) is a true,
correct and complete list of (A) all of the Loans of CBTV that, as of June 30, 2016, were
classified by CBTV as “Other Loans Specially Mentioned,” “Special Mention,” “Substandard,”
“Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans,”
“Watch List” or words of similar import, together with the principal amount of and accrued and
unpaid interest on each such Loan and the identity of the borrower thereunder, (B) by category of
Loan (i.e., commercial real estate, commercial and industrial, consumer, other), all of the other
Loans of CBTV that, as of June 30, 2016, were classified as such, together with the aggregate
principal amount of and accrued and unpaid interest on such Loans by category, and (C) each
asset of CBTV that, as of June 30, 2016, was classified as “Other Real Estate Owned” (“OREO”)
and the book value thereof; it being understood and agreed that the Loans referenced in clauses
(A) and (B) of this sentence include any Loans so classified by CBTV or by any Governmental
Entity. CBTV shall provide to APB, on a monthly basis, (1) a schedule of Loans of CBTV that
become classified in the manner described in the previous sentence, or any Loan of CBTV the
classification of which is changed to a lower classification or to OREO, and (2) a schedule of
Loans of CBTV in which the obligor is delinquent in payment by 30 days or more, in each case
after the date of this Agreement.
(ii)
Each Loan of CBTV (A) is evidenced by notes, agreements or
other evidences of indebtedness that are true, genuine and what they purport to be, (B) to the
extent carried on the books and records of CBTV as secured Loans, has been secured by valid
charges, mortgages, pledges, security interests, restriction, claims, liens or encumbrances, as
applicable, which have been perfected and (C) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent transfer or conveyance, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors’ rights and to general
equitable principles, including good faith, commercial reasonableness, forthright negotiation and
fair dealing.
(iii) Except as set forth in CBTV Disclosure Schedule 4.2(r)(iii), each
outstanding Loan of CBTV (including Loans held for resale to investors) was solicited and
originated, and is and has been administered and, where applicable, serviced, and the relevant
Loan files are being maintained, in all material respects in accordance with the relevant notes or
other credit or security documents, the written underwriting standards of CBTV except for
documented exceptions (and, in the case of Loans held for resale to investors, the underwriting
standards, if any, of the applicable investors) and with all Applicable Legal Requirements.
(iv)
Except as set forth in CBTV Disclosure Schedule 4.2(r)(iv), none
of the agreements pursuant to which CBTV has sold Loans or pools of Loans or participations in
4439.011/1041316.12
40
Loans or pools of Loans contains any obligation to repurchase such Loans or interests therein
solely on account of a payment default by the obligor on any such Loan.
(v)
There are no outstanding Loans made by CBTV to any “executive
officer” or other “insider” (as each such term is defined in Regulation O promulgated by the
Federal Reserve) of CBTV, other than Loans that are subject to and that were made and continue
to be in compliance with Regulation O or that are exempt therefrom.
(s)
Insurance. Set forth in CBTV Disclosure Schedule 4.2(s) is a true, correct
and complete list of all insurance policies maintained by CBTV. All such insurance policies and
bonds are in full force and effect and, to the Knowledge of CBTV, CBTV is not in default under
any such policy or bond. Except as set forth in CBTV Disclosure Schedule 4.2(s), as of the date
hereof, there are no claims in excess of $25,000 under any of such insurance policies or bonds,
which claims are pending or as to which coverage has been denied or disputed by the
underwriters of such insurance policies or bonds.
(t)
Transactions with Affiliates. Except as set forth in CBTV Disclosure
Schedule 4.2(t), there are no agreements, contracts, plans, arrangements or other transactions
between CBTV, on the one hand, and any (i) officer or director of CBTV, (ii) record or
beneficial owner of 5% or more of the voting securities of CBTV, (iii) Affiliate or family
member of any such officer, director or record or beneficial owner or (iv) any other Affiliate of
CBTV, on the other hand, except those of a type available to employees of CBTV generally.
Except as set forth in CBTV Disclosure Schedule 4.2(t), there are no “covered transactions,”
including any Loans engaged in by CBTV, with any “affiliate” (as such terms are defined in
Section 23A of the Federal Reserve Act and Regulation W promulgated thereunder) other than
those covered transactions which were engaged in and continue to be in compliance with Section
23A and Regulation W.
(u)
Absence of Certain Business Practices. Neither CBTV nor any of its
executive officers, nor to the Knowledge of CBTV, any of its employees or agents, nor any other
Person acting on their behalf, has, directly or indirectly, within the past five (5) years, given or
agreed to give any gift or similar benefit to any customer, supplier, governmental employee or
other Person who is or may be in a position to help or hinder the business of CBTV (or assist
CBTV in connection with any actual or proposed transaction) that violates any Applicable Legal
Requirement to CBTV.
(v)
Schedule 4.2(v):
Environmental Compliance. Except as set forth on CBTV Disclosure
(i)
To the Knowledge of CBTV, CBTV and its respective Properties
are in material compliance with all Environmental Laws. CBTV has no Knowledge, nor has it
received notice of, any past, present, or future conditions, events, activities, practices or incidents
that may interfere with or prevent the material compliance of CBTV with all Environmental
Laws.
(ii)
CBTV has obtained all material
authorizations that are required under all Environmental Laws.
4439.011/1041316.12
41
permits,
licenses
and
(iii) To the Knowledge of CBTV, no Hazardous Materials exist on,
about or within any of the Properties, nor to CBTV’s Knowledge have any Hazardous Materials
previously existed on, about or within or been used, generated, stored, transported, disposed of,
on or released from any of the Properties. The use that CBTV makes and intends to make of the
Properties shall not result in the use, generation, storage, transportation, accumulation, disposal
or release of any Hazardous Material on, in or from any of the Properties.
(iv)
There is no action, suit, proceeding, investigation, or inquiry
before any court, administrative agency or other governmental authority pending or to CBTV’s
Knowledge threatened against CBTV relating in any way to any Environmental Law. CBTV has
no liability for remedial action under any Environmental Law. CBTV has not received any
request for information by any governmental authority with respect to the condition, use or
operation of any of the Properties nor has CBTV received any notice of any kind from any
governmental authority or other person with respect to any violation of or claimed or potential
liability of any kind under any Environmental Law.
(w)
Community Reinvestment Act. To the Knowledge of CBTV, except as set
forth on CBTV Disclosure Schedule 4.2(w), CBTV is in material compliance with the CRA and
all regulations promulgated thereunder, and CBTV has supplied APB with copies of its current
CRA Statement, all letters and written comments received by CBTV since December 31, 2012
pertaining thereto and any responses by CBTV to such comments. CBTV has a rating of at least
“satisfactory” as of its most recent CRA compliance examination and to CBTV’s Knowledge,
there is no reason why it would not receive a rating of “satisfactory” or better pursuant to its next
CRA compliance examination or why any Governmental Entity may seek to restrain, delay or
prohibit the transactions contemplated hereby as a result of any act or omission of CBTV under
the CRA.
(x)
Fair Housing Act, Home Mortgage Disclosure Act, Real Estate Settlement
Procedures Act and Equal Credit Opportunity Act. Except as set forth on CBTV Disclosure
Schedule 4.2(x), to the Knowledge of CBTV, CBTV is in material compliance with the Fair
Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act,
and the Equal Credit Opportunity Act and all regulations promulgated thereunder. Since
December 31, 2012, CBTV has not received any notices of any Violation of said acts or any of
the regulations promulgated thereunder, and CBTV has no notice of, or Knowledge of, any
threatened administrative inquiry, proceeding or investigation with respect to CBTV’s
compliance with such acts.
(y)
Usury Laws and Other Consumer Compliance Laws. To the Knowledge
of CBTV, except as set forth on CBTV Disclosure Schedule 4.2(y), outstanding loans of CBTV
have been made substantially in accordance with all applicable statutes and regulatory
requirements at the time of such loan or any renewal thereof, including without limitation, the
California usury statutes as they are currently interpreted, Regulation Z issued by the Federal
Reserve, the Federal Consumer Credit Protection Act and all statutes and regulations governing
the operation of banks chartered under the laws of the State of California. Each loan on the
books of CBTV was made in the ordinary course of business.
4439.011/1041316.12
42
(z)
Unfair, Deceptive or Abusive Acts or Practices. To the Knowledge of
CBTV, CBTV has not engaged in any unfair, deceptive or abusive acts or practices in Violation
of the rules promulgated by the Consumer Financial Protection Bureau, as such terms are used in
Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”), to the extent such rules apply to CBTV. There are no allegations, claims or
disputes to which CBTV is a party that allege, or to the knowledge of CBTV, no person has
threatened or threatens to allege, that CBTV has engaged in any unfair, deceptive or abusive acts
or practices in Violation of the rules promulgated by the Consumer Financial Protection Bureau.
(aa) Consumer Complaints. CBTV has made available to APB copies of all
unresolved consumer complaints as of June 30, 2016 and any complaints received thereafter, as
well as any reports to the senior management, the board of directors or audit committee of CBTV
of plans for remediation of such complaints, trends in its compliant data and analysis of such
complaints.
(bb) Bank Secrecy Act, Foreign Corrupt Practices Act and U.S.A. Patriot Act.
To the Knowledge of CBTV, CBTV is in substantial compliance with the Bank Secrecy Act of
1979, as amended, the United States Foreign Corrupt Practices Act and the International Money
Laundering Abatement and Anti-Terrorist Financing Act, codified at Title III of the U.S.A.
Patriot Act of 2001 otherwise known as the U.S.A. Patriot Act and all regulations promulgated
thereunder, and CBTV has properly certified all foreign deposit accounts and has made all
necessary tax withholdings on all of its deposit accounts; furthermore, CBTV has timely and
properly filed, in all material respects, and maintained all requisite Currency Transaction Reports
and other related forms, including, but not limited to, any requisite Custom Reports required by
any agency of the United States Treasury Department, including but not limited to the IRS.
(cc) Books and Records. The minute books, stock certificate books and stock
transfer ledgers of CBTV have been kept in the ordinary course of business and, to the
Knowledge of CBTV, are complete and correct in all material respects. The transactions entered
therein represent bona fide transactions, and there have been no material transactions involving
the business of CBTV that properly should have been set forth therein and that have not been
accurately so set forth.
(dd) Employee Relationships. To the Knowledge of CBTV, CBTV has
complied in all material respects with all applicable material laws relating to its relationships
with its employees, and CBTV believes that the relationships between CBTV and its employees
are good. To the Knowledge of CBTV, no senior executive officer or manager of any material
operations of CBTV or any group of employees of CBTV has or have any present plans as of the
Agreement Date to terminate their employment with CBTV.
(ee) Brokers or Finders. CBTV has not employed any agent, broker,
investment banker, financial advisor or other firm or Person that is or shall be entitled to any
broker’s or finder’s fee or any other similar commission or fee in connection with any of the
transactions contemplated by this Agreement, and, if the Merger is not consummated, CBTV
agrees to indemnify APB and to hold APB harmless from and against any and all claims,
liabilities or obligations with respect to any other fees, commissions or expenses asserted by any
Person on the basis of any act or statement alleged to have been made by CBTV or its affiliates.
4439.011/1041316.12
43
(ff)
Transaction Expenses. CBTV Disclosure Schedule 4.2(ff) sets forth, to
CBTV’s Knowledge, a true, accurate and complete list of all reasonably anticipated Transaction
Expenses.
(gg) Opinion of Financial Advisor of CBTV. CBTV has received the oral
opinion of its financial advisor, The Findley Group, subsequently confirmed in writing on the
date hereof to the effect that, subject to the limitations and qualifications expressed therein, as of
the date hereof, the Merger Consideration is fair, from a financial point of view, to the
shareholders of CBTV.
(hh) Completion of Transaction. To the Knowledge of CBTV, there is no fact
or circumstance relating to or affecting CBTV that it reasonably believes would prevent CBTV
from fulfilling its material obligations under this Agreement and completing the transactions
contemplated hereby or thereby or that would, without the incurrence of undue expense or time,
prevent CBTV from obtaining the Requisite Regulatory Approvals from any Governmental
Entity.
4.3.
Representations and Warranties of APB.
Except as set forth in the
correspondingly identified subsection of the disclosure schedules delivered by APB to CBTV
concurrently herewith, APB represents and warrants to CBTV as follows:
(a)
Organization, Standing and Power. APB is a bank holding company
registered under the BHC Act. AP Bank is a California state banking corporation and member of
the Federal Reserve Bank, with deposits insured by the FDIC up to the applicable legal limits.
Each of APB and AP Bank are corporations duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation, has all requisite power
and authority to own, lease and operate its properties and to carry on its respective business as
now being conducted, and each is duly qualified and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of its properties makes
such qualification necessary, other than in such jurisdictions where the failure so to qualify
would not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect on AP Bank or APB. The copies of the Articles of Incorporation and Bylaws of each of
AP Bank and APB which have been previously furnished to CBTV are true, correct, and
complete copies of such documents as in effect on the date of this Agreement.
(b)
Capital Structure. The authorized capital stock of APB consists of
40,000,000 shares of APB Common Stock and $10,000,000 shares of preferred stock. As of the
Agreement Date, 5,866,725 shares of APB Common Stock were issued and outstanding, and
590,491 shares of APB Common Stock had been reserved for issuance upon the exercise of
options to purchase APB Common Stock outstanding at the date hereof, and no shares of
preferred stock were issued and outstanding. All outstanding shares of APB Common Stock
have been duly authorized and validly issued and are fully paid and non-assessable and the
issuance of such shares was not subject to any preemptive or similar rights. There are no voting
trusts, shareholder agreements, proxies or other agreements in effect with respect to the voting or
transfer of APB Common Stock or other equity interests of APB.
4439.011/1041316.12
44
(c)
Authority.
(i)
APB has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by APB and the consummation by APB of the transactions
contemplated hereby have been duly authorized by all necessary corporate action on the part of
APB. The board of directors of APB has adopted resolutions, dated as of the date of this
Agreement, approving and declaring advisable and in the best interests of their shareholders, this
Agreement and the Merger. This Agreement has been duly executed on behalf of APB and
constitutes a valid and binding obligation of APB, enforceable against APB in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer or conveyance, reorganization,
moratorium and similar laws of general applicability relating to or affecting creditors’ rights and
remedies and to general equitable principles, forthright negotiation, commercial reasonableness,
good faith and fair dealing.
(ii)
The execution and delivery by APB of this Agreement does not,
and the consummation by APB of the transactions contemplated hereby shall not, (A) result in
any Violation pursuant to any provision of the articles of incorporation or the bylaws of APB or
AP Bank, or (B) except as set forth in APB Disclosure Schedule 4.3(c)(ii) and subject to
obtaining or making the consents, approval, orders, authorizations, registrations, declarations and
filings referred to therein or in clause (iii) below, result in any Violation of any loan or credit
agreement, note, mortgage, indenture, lease or other agreement, obligation, instrument, permit,
concession, franchise or license, or any Applicable Legal Requirement applicable to APB, AP
Bank or any Subsidiary of APB or their respective properties or assets.
(iii) No consent, approval, order, waiver, non-disapproval, or
authorization of, or registration, declaration or filing with, any Governmental Entity (acting in
any capacity) is required by or with respect to APB, AP Bank or any Subsidiary of AP Bank in
connection with the execution and delivery of this Agreement by APB or the consummation by
APB of the transactions contemplated hereby, the failure to make or obtain which would,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on AP
Bank or APB, except for (A) the Requisite Regulatory Approvals, (B) the filing of an application
for, and the issuance of a permit as contemplated by Section 5.1 herein, (C) the filing of the
Merger Agreement with the CDBO and the Secretary of State of the State of California, as the
case may be, and (D) filings of applications and notices with certain states and receipt of all
necessary state securities and “Blue Sky” permits and approvals.
(d)
Financial Statements; Undisclosed Liabilities.
(i)
APB has previously furnished CBTV with copies of (a) the
statements of financial condition of APB as of December 31, 2015, 2014 and 2013, and the
related statements of income, changes in shareholders’ equity and cash flows for the fiscal years
ended December 31, 2015, 2014 and 2013, in each case accompanied by the audit report of
Vavrinek, Trine, Day & Co., independent public accountants with respect to APB, (b) the notes
related thereto, and (c) the unaudited statements of financial condition of APB as of March 31,
2016 and the related unaudited statement of income for the three months ended March 31, 2016
(collectively, the “APB Financial Statements”). The books and records of APB have been, and
4439.011/1041316.12
45
are being, maintained in accordance with GAAP and/or RAP, as applicable, and any other
applicable legal and accounting requirements, and reflect only actual transactions.
(ii)
Except as and to the extent reflected, disclosed or reserved against
in the Financial Statements (including the notes thereto), APB has no liabilities, whether
absolute, accrued, contingent or otherwise, material to the consolidated financial condition of
APB which were required to be so disclosed under GAAP. Since December 31, 2015, APB has
not incurred any liabilities except in the ordinary course of business, other than as specifically
contemplated by this Agreement.
(iii) APB has furnished CBTV with true and complete copies of the
Call Reports of AP Bank as of December 31, 2015, 2014 and 2013 and as of March 31, 2016.
The Call Reports fairly present, in all material respects, the financial position of AP Bank and the
results of its operations as of the date and for the period indicated in that Call Report in
conformity with the then-applicable instructions to the Reports of Condition and Income as
promulgated by the Federal Financial Institutions Examination Council. The Call Reports do not
contain any items of special or nonrecurring income or any other income not earned in the
ordinary course of the business except as expressly specified therein. AP Bank has calculated its
allowance for loan losses in accordance with RAP as applied to banking institutions and in
accordance with all applicable rules and regulations. To APB's Knowledge, the allowance for
loan losses account for AP Bank is and as of the Closing Date will be, adequate in all material
respects to provide for all losses, net of recoveries relating to loans previously charged off, on all
outstanding loans of AP Bank.
(iv)
Since December 31, 2012, APB and AP Bank have timely filed all
reports, and statements, together with any amendments required to be made with respect thereto,
that were required to be filed by them under any Applicable Legal Requirements with the
Federal Reserve, the FDIC, and with any other applicable Governmental Entity, and have paid
all fees and assessments due and payable in connection therewith. As of their respective dates
(and without giving effect to any amendments or modifications filed after the date of this
Agreement with respect to reports and documents filed before the date of this Agreement), to
APB's Knowledge, each of such reports, registrations and statements (including the financial
statements, exhibits and schedules therein) complied in all material respects with the applicable
statutes, rules, regulations and orders enforced or promulgated by the Governmental Entity with
which they were filed.
(e)
Compliance with Applicable Legal and Reporting Requirements.
(i)
APB and AP Bank hold all permits, authorizations, licenses,
variances, exemptions, orders and approvals of all Governmental Entities which are material to
the operation of the businesses of APB and AP Bank, taken as a whole (the “APB Permits”). All
such Permits are in full force and effect and are in compliance with the terms of APB Permits.
(ii)
Since December 31, 2012, AP Bank and each of its Subsidiaries
has conducted its business in compliance in all material respects with all Applicable Legal
Requirements including the USA PATRIOT Act of 2001, any other applicable anti-money
laundering statute, rule or regulation or any rule or regulation issued by the U.S. Department of
4439.011/1041316.12
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the Treasury’s Office of Foreign Assets Control, and the privacy and customer information
requirements contained in Applicable Legal Requirements. To the Knowledge of APB, no
investigation by any Governmental Entity with respect to APB is pending or threatened nor is
there any unresolved violation, criticism or exception by any regulatory authority with respect to
any report or statement relating to any examinations of APB or AP Bank.
(f)
Accounting and Internal Controls.
(i)
The records, systems, controls, data and information of APB are
recorded, stored, maintained and operated under means (including any electronic, mechanical or
photographic process, whether computerized or not) that are under the exclusive ownership and
direct control of APB (including all means of access thereto and therefrom), except for any nonexclusive ownership and non-direct control which would not, individually or in the aggregate,
reasonably be expected to have a Materially Adverse Effect on the system of internal accounting
controls described in the following clause.
(ii)
APB has devised and maintains a system of internal accounting
controls sufficient to provide reasonable assurances regarding the reliability of its financial
reporting and the preparation of their respective financial statements for external purposes in
accordance with GAAP. Management of APB has disclosed, based on its most recent evaluation
prior to the date hereof, to APB's auditors and the audit committee of APB Board (A) any
significant deficiencies in the design or operation of internal controls which could adversely
affect in any material respect APB's ability to record, process, summarize and report financial
data and have identified for APB's auditors any material weaknesses in internal controls and (B)
any fraud, whether or not material, that involves management or other employees who have a
significant role in APB's internal controls, and all of such items in (A) and (B) are described in
APB Disclosure Schedule 4.3(f)(ii).
(iii) Since December 31, 2012, neither APB nor, to the Knowledge of
APB, any director, officer, employee, auditor, accountant or representative of APB, has received
or has otherwise had or obtained (other than audit comments received in the ordinary course of
business of APB) any complaint, allegation, assertion or claim, whether written or oral,
regarding the accounting or auditing practices, procedures, methodologies or methods (including
with respect to loan loss reserves, write-downs, charge-offs and accruals) of APB or its internal
control over financial reporting, including any complaint, allegation, assertion or claim that APB
has engaged in questionable accounting or auditing practices.
(g)
Taxes. Except as set forth in APB Disclosure Schedule 4.3(g): APB has
timely filed, or has caused to be timely filed on its behalf (taking into account any extension of
time within which to file), all material tax returns required to be filed by it, and all such filed tax
returns were correct and complete in all material respects. All taxes of APB (whether or not
shown on any tax return) have been timely paid except for taxes that are both being contested in
good faith and adequately reserved against and included as an identifiable tax liability (in
accordance with GAAP) on the APB Financial Statements. APB has no liability for taxes in
excess of the amount reserved or provided for in the APB Financial Statements (but excluding,
for this purpose only, any liability reflected thereon for deferred taxes to reflect timing
4439.011/1041316.12
47
differences between tax and financial accounting methods). There are no liens for taxes (other
than taxes not yet due and payable upon any of the assets of APB and APB Subsidiaries).
(h)
Vote Required. No holders of any class or series of APB capital stock are
required to approve and adopt this Agreement and the transactions contemplated hereby
(including the Merger).
(i)
Loan Portfolio.
(i)
Except as set forth on APB Disclosure Schedule 4.3(i)(i), APB is
not a party to any written or oral (A) Loans under the terms of which the obligor was, as of June
30, 2016, 90 days or more delinquent in payment of principal or interest or, to the Knowledge of
APB, in default of any other provision, or (B) Loans with any director, executive officer or 5%
or greater shareholder of APB, or to the Knowledge of APB, any Affiliate of any of the
foregoing. Set forth in APB Disclosure Schedule 4.3(i)(i) is a true, correct and complete list of
(A) all of the Loans of APB that, as of June 30, 2016, were classified by APB or AP Bank as
“Other Loans Specially Mentioned,” “Special Mention,” “Substandard,” “Doubtful,” “Loss,”
“Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans,” “Watch List” or words of
similar import, together with the principal amount of and accrued and unpaid interest on each
such Loan and the identity of the borrower thereunder, (B) by category of Loan (i.e., commercial
real estate, commercial and industrial, consumer, other), all of the other Loans of APB that, as of
June 30, 2016, were classified as such, together with the aggregate principal amount of and
accrued and unpaid interest on such Loans by category, and (C) each asset of APB that, as of
June 30, 2016, was classified as OREO and the book value thereof; it being understood and
agreed that the Loans referenced in clauses (A) and (B) of this sentence include any Loans so
classified by APB or by any Governmental Entity. APB shall provide to CBTV, on a monthly
basis, (1) a schedule of Loans of APB that become classified in the manner described in the
previous sentence, or any Loan of APB the classification of which is changed to a lower
classification or to OREO, and (2) a schedule of Loans of APB in which the obligor is delinquent
in payment by 30 days or more, in each case after the date of this Agreement.
(ii)
Each Loan of APB (A) is evidenced by notes, agreements or other
evidences of indebtedness that are true, genuine and what they purport to be, (B) to the extent
carried on the books and records of APB as secured Loans, has been secured by valid charges,
mortgages, pledges, security interests, restriction, claims, liens or encumbrances, as applicable,
which have been perfected and (C) is the legal, valid and binding obligation of the obligor named
therein, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent transfer or conveyance, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors’ rights and to general equitable principles,
including good faith, commercial reasonableness, forthright negotiation and fair dealing.
(iii) Except as set forth in APB Disclosure Schedule 4.3(i)(iii), each
outstanding Loan of APB (including Loans held for resale to investors) was solicited and
originated, and is and has been administered and, where applicable, serviced, and the relevant
Loan files are being maintained, in all material respects in accordance with the relevant notes or
other credit or security documents, the written underwriting standards of APB except for
4439.011/1041316.12
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documented exceptions (and, in the case of Loans held for resale to investors, the underwriting
standards, if any, of the applicable investors) and with all Applicable Legal Requirements.
(iv)
Except as set forth in APB Disclosure Schedule 4.3(i)(iv), none of
the agreements pursuant to which APB has sold Loans or pools of Loans or participations in
Loans or pools of Loans contains any obligation to repurchase such Loans or interests therein
solely on account of a payment default by the obligor on any such Loan.
(v)
There are no outstanding Loans made by APB to any “executive
officer” or other “insider” (as each such term is defined in Regulation O promulgated by the
Federal Reserve) of APB, other than Loans that are subject to and that were made and continue
to be in compliance with Regulation O or that are exempt therefrom.
(j)
Absence of Certain Business Practices. Neither APB or AP Bank nor any
of its executive officers, nor to the Knowledge of APB, any of their employees or agents, nor any
other Person acting on their behalf, has, directly or indirectly, within the past five (5) years,
given or agreed to give any gift or similar benefit to any customer, supplier, governmental
employee or other Person who is or may be in a position to help or hinder the business of APB
(or assist APB in connection with any actual or proposed transaction) that violates any
Applicable Legal Requirement to APB.
(k)
Schedule 4.3(k):
Environmental Compliance.
Except as set forth on APB Disclosure
(i)
To the Knowledge of APB, APB and its respective Properties are
in material compliance with all Environmental Laws. APB has no Knowledge, nor has it
received notice of, any past, present, or future conditions, events, activities, practices or incidents
that may interfere with or prevent the material compliance of APB with all Environmental Laws.
(ii)
APB has obtained all material permits, licenses and authorizations
that are required under all Environmental Laws.
(iii) To the Knowledge of APB, no Hazardous Materials exist on, about
or within any of the Properties, nor to APB’s Knowledge have any Hazardous Materials
previously existed on, about or within or been used, generated, stored, transported, disposed of,
on or released from any of the Properties. The use that APB makes and intends to make of the
Properties shall not result in the use, generation, storage, transportation, accumulation, disposal
or release of any Hazardous Material on, in or from any of the Properties.
(iv)
There is no action, suit, proceeding, investigation, or inquiry
before any court, administrative agency or other governmental authority pending or to APB’s
Knowledge threatened against APB relating in any way to any Environmental Law. APB has no
liability for remedial action under any Environmental Law. APB has not received any request
for information by any governmental authority with respect to the condition, use or operation of
any of the Properties nor has APB received any notice of any kind from any governmental
authority or other person with respect to any violation of or claimed or potential liability of any
kind under any Environmental Law.
4439.011/1041316.12
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(l)
Brokers or Finders. APB has not employed any agent, broker, investment
banker, financial advisor or other firm or Person that is or shall be entitled to any broker’s or
finder’s fee or any other similar commission or fee in connection with any of the transactions
contemplated by this Agreement, and, if the Merger is not consummated, APB, jointly and
severally, agree to indemnify CBTV and to hold CBTV harmless from and against any and all
claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted
by any Person on the basis of any act or statement alleged to have been made by APB or its
affiliates.
(m)
Legal Proceedings. No legal action, suit or proceeding or judicial,
administrative or governmental investigation is pending or, to the knowledge of APB or AP
Bank, threatened against APB or AP Bank that questions or might question the validity of this
Agreement or the agreements contemplated hereby or any actions taken or to be taken by APB or
AP Bank pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions
contemplated hereby or thereby.
(n)
Agreements with Regulators. Except as set forth in APB Disclosure
Schedule 4.3(n), neither APB nor AP Bank is a party or subject to any written agreement,
consent decree or memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any cease-and-desist or other order or directive by, or is a
recipient of any extraordinary supervisory letter currently in effect, or has adopted any policies,
procedures or board resolutions at the request of, any Governmental Entity which restricts the
conduct of its business, imposes any requirements or procedures or in any manner relates to its
capital adequacy, its credit or risk management policies or its management, nor has APB been
advised by any Governmental Entity that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such agreement, decree,
memorandum of understanding, extraordinary supervisory letter, commitment letter, order,
directive or similar submission, or any such policy, procedure or board resolutions. APB, AP
Bank and their Subsidiaries are in compliance with all of the foregoing so listed in APB
Disclosure Schedule 4.3(n). There are no formal or informal investigations, known to APB,
relating to any regulatory matters pending before any Governmental Entity with respect to APB
or any of its Subsidiaries, that could reasonably be expected to prevent or delay the completion
of this Agreement. Neither of APB, AP Bank, nor any of its executive officers or, to the
knowledge of APB, any of its directors or employees has been the subject of any disciplinary
proceedings or orders of any Governmental Entity arising under applicable laws which would be
required to be disclosed in any regulatory filing, and no such disciplinary proceeding or order is
pending, nor, to the knowledge of APB, threatened.
(o)
Financing. As of the Agreement Date and the date immediately preceding
the Closing Date, APB will have sufficient liquid assets available to deposit sufficient cash with
the Exchange Agent to allow payment of the Merger Consideration.
(p)
Community Reinvestment Act. Except as set forth on APB Disclosure
Schedule 4.3(p), APB and AP Bank are in material compliance with the CRA and all regulations
promulgated thereunder, and a rating of at least “satisfactory” as of its most recent CRA
compliance examination and to AP Bank’s and APB’s knowledge, there is no reason why it
would not receive a rating of “satisfactory” or better pursuant to its next CRA compliance
4439.011/1041316.12
50
examination or why the FDIC or any other Governmental Entity may seek to restrain, delay or
prohibit the transactions contemplated hereby as a result of any act or omission of APB or AP
Bank under the CRA.
(q)
Fair Housing Act, Home Mortgage Disclosure Act, Real Estate Settlement
Procedures Act and Equal Credit Opportunity Act. Except as set forth on APB Disclosure
Schedule 4.3(q), to the Knowledge of APB and AP Bank, they are in material compliance with
the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures
Act, and the Equal Credit Opportunity Act and all regulations promulgated thereunder. Since
December 31, 2012, neither APB nor AP Bank has received any notices of any Violation of said
acts or any of the regulations promulgated thereunder, and neither APB nor AP Bank has notice
of, or knowledge of, any threatened administrative inquiry, proceeding or investigation with
respect to APB’s or AP Bank’s compliance with such acts, in each case that could reasonably be
expected to delay or prevent the receipt of any Requisite Regulatory Approvals from any
Governmental Entity or of the transaction contemplated by this Agreement.
(r)
Unfair, Deceptive or Abusive Acts or Practices. Except as set forth in
APB Disclosure Schedule 4.3(r), to the Knowledge of APB, neither APB nor AP Bank has
engaged in any unfair, deceptive or abusive acts or practices in Violation of the rules
promulgated by the Consumer Financial Protection Bureau, as such terms are used in
Section 1031 of the Dodd-Frank Act, to the extent such rules apply to APB or AP Bank. There
are no allegations, claims or disputes to which APB or AP Bank is a party that allege, or to the
knowledge of APB or AP Bank, no person has threatened or threatens to allege, that APB or AP
Bank has engaged in any unfair, deceptive or abusive acts or practices in Violation of the rules
promulgated by the Consumer Financial Protection Bureau.
(s)
Bank Secrecy Act, Foreign Corrupt Practices Act and U.S.A. Patriot Act.
To the Knowledge of APB, each of APB and AP Bank is in substantial compliance with the
Bank Secrecy Act of 1979, as amended, the United States Foreign Corrupt Practices Act and the
International Money Laundering Abatement and Anti-Terrorist Financing Act, codified at Title
III of the U.S.A. Patriot Act of 2001 otherwise known as the U.S.A. Patriot Act and all
regulations promulgated thereunder, and AP Bank has properly certified all foreign deposit
accounts and has made all necessary tax withholdings on all of its deposit accounts; furthermore,
AP Bank has timely and properly filed, in all material respects, and maintained all requisite
Currency Transaction Reports and other related forms, including, but not limited to, any requisite
Custom Reports required by any agency of the United States Treasury Department, including but
not limited to the IRS.
(t)
Completion of Transaction. To APB’s knowledge, there is no fact or
circumstance relating to or affecting APB or AP Bank that it reasonably believes would prevent
APB from fulfilling its material obligations under this Agreement and completing the
transactions contemplated hereby or thereby or that would, without the incurrence of undue
expense or time, prevent APB or AP Bank from obtaining all necessary regulatory approvals
including the Requisite Regulatory Approvals from any Governmental Entity or of the
transactions contemplated by this Agreement.
4439.011/1041316.12
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(u)
Regulatory Capital. As of the Agreement Date and the date immediately
preceding and following the Closing Date, APB, AP Bank and Surviving Bank are and will be
Well Capitalized under the Prompt Corrective Action Guidelines.
(v)
There are no outstanding Loans made by APB to any “executive officer”
or other “insider” (as each such term is defined in Regulation O promulgated by the Federal
Reserve) of APB, other than Loans that are subject to and that were made and continue to be in
compliance with Regulation O or that are exempt therefrom.
(w)
Insurance. Set forth in APB Disclosure Schedule 4.3(w) is a true, correct
and complete list of all insurance policies maintained by APB. All such insurance policies and
bonds are in full force and effect and, to the Knowledge of APB, APB is not in default under any
such policy or bond. Except as set forth in APB Disclosure Schedule 4.3(w), as of the date
hereof, there are no claims in excess of $25,000 under any of such insurance policies or bonds,
which claims are pending or as to which coverage has been denied or disputed by the
underwriters of such insurance policies or bonds.
(x)
Transactions with Affiliates. Except as set forth in APB Disclosure
Schedule 4.3(x), there are no agreements, contracts, plans, arrangements or other transactions
between APB or AP Bank, on the one hand, and any (i) officer or director of APB or AP Bank,
(ii) record or beneficial owner of 5% or more of the voting securities of APB, (iii) Affiliate or
family member of any such officer, director or record or beneficial owner or (iv) any other
Affiliate of APB, on the other hand, except those of a type available to employees of APB or AP
Bank generally. Except as set forth in APB Disclosure Schedule 4.3(x), there are no “covered
transactions,” including any Loans engaged in by APB or AP Bank, with any “affiliate” (as such
terms are defined in Section 23A of the Federal Reserve Act and Regulation W promulgated
thereunder) other than those covered transactions which were engaged in and continue to be in
compliance with Section 23A and Regulation W.
(y)
Usury Laws and Other Consumer Compliance Laws. To the Knowledge
of APB, except as set forth on Disclosure Schedule 4.3(y), outstanding loans of APB have been
made substantially in accordance with all applicable statutes and regulatory requirements at the
time of such loan or any renewal thereof, including without limitation, the California usury
statutes as they are currently interpreted, Regulation Z issued by the Federal Reserve, the Federal
Consumer Credit Protection Act and all statutes and regulations governing the operation of banks
chartered under the laws of the State of California. Each loan on the books of APB was made in
the ordinary course of business.
(z)
Books and Records. The minute books, stock certificate books and stock
transfer ledgers of APB have been kept in the ordinary course of business and are complete and
correct in all material respects. The transactions entered therein represent bona fide transactions,
and there have been no material transactions involving the business of APB that properly should
have been set forth therein and that have not been accurately so set forth.
(aa) Certain Agreements. All of the leases, subleases, licenses, contracts and
agreements which are material to the business of APB or AP Bank (the "APB Contracts") are
legal, valid and binding obligations of APB and, to the Knowledge of APB, each other party
4439.011/1041316.12
52
thereto, enforceable in accordance with their terms except as enforceability may be limited by
bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership or similar
laws and judicial decisions affecting the rights of creditors generally and by general principles of
equity (whether applied in a proceeding at law or equity) and are in full force and effect. To the
Knowledge of APB, except as described in APB Disclosure Schedule 4.3(a), all rent and other
payments by APB under APB Contracts are current, there are no existing violations or defaults
by APB and, to the Knowledge of APB, there are no Violations or defaults on the part of any
other party to APB Contracts and no termination, condition or other event has occurred which
(with or without notice, lapse of time and/or the happening or occurrence of any other event)
would constitute a default or material breach under APB Contracts, other than defaults or
material breaches that have been cured in the ordinary course of business.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1.
California Permit; Shareholder Meeting.
(a)
APB and CBTV contemplate that all shares of APB Common Stock
exchanged for shares of CBTV Common Stock in the Merger shall be exempt from the
Securities Act under the provisions of Section 3(a)(10) of such act. APB shall promptly prepare
and file an appropriate application with the CDBO for a permit to issue and exchange securities
as described in Section 25142 of the CGCL and as will be in compliance with the California
Corporate Securities Law of 1968 (the “DBO Permit”). The DBO Permit shall approve the
issuance of a sufficient number of shares of APB Common Stock to complete the exchange of
shares of CBTV Common Stock for shares of APB Common Stock pursuant to Article II of this
Agreement. APB and CBTV shall cooperate in all reasonable respects with regard to the
preparation of the related Proxy Statement in preliminary form so it can be filed with the
Commissioner for purposes of a permit application under Section 25142 of the CGCL (the
“Proxy Statement”). The Proxy Statement shall constitute a disclosure document for the offer
and issuance of the shares of APB Common Stock to be received by holders of CBTV Common
Stock in the Merger and, a proxy statement with respect to the solicitation of the shareholders of
CBTV (and, if required, APB) with respect to approval of the Agreement and the transactions
contemplated hereby (including the Merger), and shall include (i) a statement to the effect that
the CBTV Board has recommended that holders of CBTV Common Stock vote in favor of the
approval of the Agreement and the transactions contemplated hereby (including the Merger), and
(ii) such other information as CBTV and APB may agree is required or advisable to be included
therein. APB and CBTV shall each provide promptly to the other such information concerning
its business and financial condition and affairs as may be required or appropriate for including in
the permit application or in the Proxy Statement (or other proxy or solicitation materials), and
shall cause its legal counsel, financial advisors and independent auditors to cooperate with the
other party’s legal counsel, financial advisors and independent auditors in the preparation of the
permit application and the Proxy Statement (and any other proxy or solicitation materials). APB
and CBTV shall use their best efforts to have the permit described in Section 25142 of the CGCL
(and any necessary or appropriate amendments or supplements thereto) issued by the
Commissioner under the California Corporate Securities Law of 1968 as soon as practicable.
APB shall not be required to prepare or file with the SEC any registration statement under the
4439.011/1041316.12
53
Securities Act, or to prepare or file with the Commissioner any permit application under the
California Corporate Securities Law of 1968, for the purpose of the sale or resale of the APB
shares by any Person. Notwithstanding any other provision contained in this Agreement, APB
and AP Bank shall prepare and pay for all of the costs and expenses of all regulatory applications
to effect the Merger and all other transactions contemplated by this Agreement.
(b)
CBTV shall duly take all lawful action to establish a record date for, call,
give notice of, convene and hold a meeting of its shareholders as promptly as reasonably
practicable following the date of this Agreement (the “CBTV Shareholders Meeting”) for the
purpose of submitting this Agreement to the holders of CBTV Common Stock for their
consideration and vote and obtaining the Required CBTV Vote. Subject to Section 5.1(d), and as
promptly as possible, the CBTV Board shall use its reasonable commercially best efforts to
solicit or cause to be solicited from CBTV shareholders the Required CBTV Vote, and CBTV
shall take all other lawful action necessary or advisable (including, subject to CBTV Board’s
exercise of its fiduciary duties, postponing or adjourning the CBTV Shareholders’ Meeting to
make any communication permitted by this Agreement or to obtain a quorum or to solicit
additional proxies in favor of the adoption of this Agreement) to obtain the Required CBTV
Vote.
Subject to Section 5.1(d), the Proxy Statement shall include CBTV Board
Recommendation. Notwithstanding any other provision contained in this Agreement, APB and
AP Bank shall prepare and pay for the overall format of the Proxy Statement and the information
to be provided by APB and AP Bank, and CBTV shall provide information related to CBTV for
inclusion in such Proxy Statement.
(c)
Subject to Section 5.1(d), neither the CBTV Board nor any committee
thereof shall (u) withdraw, modify, amend or qualify the CBTV Board Recommendation in a
manner adverse to APB (v) adopt a resolution to withdraw, modify, amend or qualify the CBTV
Board Recommendation in a manner adverse to APB, (w) publicly announce its intention to
withdraw, modify, amend or qualify the CBTV Board Recommendation in a manner adverse to
APB, (x) approve, endorse or recommend any Acquisition Proposal with respect to CBTV,
(y) cause, authorize or permit CBTV to enter into any letter of intent, memorandum of
understanding, agreement-in-principle, merger agreement, asset purchase or share exchange
agreement, acquisition agreement or other similar agreement relating to any Acquisition
Proposal, other than (1) an Acceptable Confidentiality Agreement as provided in Section 5.4(b)
or (2) a definitive agreement providing for a Superior Proposal pursuant to Section 5.4, or
(z) publicly propose or announce an intention to take any of the foregoing actions described in
the foregoing clauses (u) through (y) (a “CBTV Change in Recommendation”).
(d)
Notwithstanding anything to the contrary contained in this Section 5.1, but
subject to the provisions of this Section 5.1(d), at any time prior to receipt of the Required CBTV
Vote, the CBTV Board may effect or cause CBTV to effect, a CBTV Change in
Recommendation, if the CBTV Board reasonably determines in good faith, After Consultation,
that the failure to make a CBTV Change in Recommendation would result in a breach of its
fiduciary duties of the CBTV Board to the shareholders of CBTV under Applicable Legal
Requirements. Notwithstanding the preceding sentence, the CBTV Board shall not make a
CBTV Change in Recommendation, and, in the case of a Superior Proposal, terminate this
Agreement in accordance with Section 7.1(e), unless: (A) after the date of this Agreement, an
unsolicited, bona fide written offer to effect an Acquisition Proposal is made to CBTV; (B) such
4439.011/1041316.12
54
unsolicited, bona fide, written offer was not obtained or made in Violation of Section 5.4;
(C) CBTV has complied in all material respects with its obligations under Section 5.4, including
its obligations to provide notice(s) to APB of any Acquisition Proposal and other matters
requiring notice under Section 5.4; (D) at least three (3) Business Days prior to any intended
meeting of the CBTV Board at which such board of directors intends to consider and determine
whether to make a Change in Recommendation, CBTV provides APB with a written notice
specifying the date and time of such intended meeting, the reasons for convening such intended
meeting, the material terms and conditions of the Acquisition Proposal that is the basis of the
intended meeting at which the CBTV Board will consider a Change in Recommendation (the
“CBTV Offer”) and the identity of the Person making the CBTV Offer; (E) after receipt by APB
of the information and notice described in clause (D), APB notifies CBTV of its desire to
negotiate an amendment to the terms and conditions of this Agreement and during such three (3)
Business Day period, the Parties engage in good faith negotiations to amend this Agreement in
such a manner that, after giving effect to such amendment(s), the CBTV Board may conclude
that the CBTV Offer does not constitute a Superior Proposal; (F) at the end of such three (3)
Business Day period, the CBTV Board (x) concludes, after and taking into account any
amendment(s) to this Agreement proposed by APB during such three (3) Business Day period,
that such CBTV Offer is a Superior Proposal, and (y) determines in good faith, After
Consultation, that the failure by the CBTV Board to make a Change in Recommendation would
result in a breach of its fiduciary duties to shareholders under Applicable Legal Requirements;
and (G) CBTV thereafter enters into a definitive agreement providing for such Superior Proposal
and concurrently terminates this Agreement in accordance with Section 7.1(e), and pays to APB
the Termination Fee required by Section 7.2(b).
5.2.
Access to Information.
(a)
Upon reasonable notice, CBTV shall afford to the representatives of APB
and APB shall afford to the representatives, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts and records and, during
such period, each Party shall make available to the other (i) a copy of each report, schedule,
registration statement and other document filed or received by it during such period pursuant to
the requirements of federal or state securities laws, federal or state banking laws or the rules and
regulations of self-regulatory organizations (other than reports or documents which such Party is
not permitted to disclose under Applicable Legal Requirements) and (ii) all other information
concerning its business, properties and personnel as each Party may reasonably request;
provided, however, that each Party acknowledges and agrees that the other Party shall have no
obligation to disclose any discussions and/or reports regarding the transactions contemplated by
this Agreement by their respective Boards of Directors.
(b)
The Parties shall hold all information which is nonpublic in confidence to
the extent required by, and in accordance with, the provisions of the letter dated as of May 19,
2016, between CBTV and APB (the “Confidentiality Agreement”), which Confidentiality
Agreement shall remain in full force and effect until immediately following the Effective Time,
or if terminated, as provided in the Confidentiality Agreement.
(c)
No such investigation by either APB or CBTV shall affect the
representations and warranties of any Party expressly made in this Agreement.
4439.011/1041316.12
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5.3.
Reasonable Best Efforts. Each of CBTV and APB shall, and shall cause its
Subsidiaries to, use all commercially reasonable best efforts to take, or cause to be taken, all
actions necessary or advisable to consummate the Merger and make effective the other
transactions contemplated herein as promptly as reasonably practicable after the date hereof.
Without limiting the generality of the foregoing, each Party shall, and shall cause its Subsidiaries
to, use all reasonable best efforts (i) to take, or cause to be taken, all actions necessary to comply
promptly with all Applicable Legal Requirements which may be imposed on such Party with
respect to the Merger and to consummate the Merger, and (ii) to obtain (and to cooperate with
the other Party to obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and/or any other public or private third party which is required to be
obtained or made by such Party or any of its Subsidiaries pursuant to Applicable Legal
Requirements or any contract or other obligation in connection with the Merger and the
transactions contemplated by this Agreement; provided, however, that a Party shall not be
obligated to take any action pursuant to the foregoing if the taking of such action or such
compliance or the obtaining of such consent, authorization, order, approval or exemption shall
result in a condition or restriction on such Party or on the Surviving Bank having an effect of the
type referred to in Section 6.3(d). In furtherance and not in limitation of the Parties’ obligations
under this Section 5.3, each of the Parties further agrees as follows:
(a)
Within forty-five (45) days of the execution of this Agreement, APB shall,
and shall cause its Subsidiaries to, use all reasonable best efforts to prepare all necessary
documentation and effect all necessary filings in order to obtain the Requisite Regulatory
Approvals.
(b)
The Parties shall cooperate with each other and shall each furnish the other
and the other’s counsel with all information concerning themselves, their Subsidiaries, directors,
officers and shareholders and such other matters as may be necessary or advisable in connection
with any application, petition or any other statement or application made by or on behalf of any
Party to any Governmental Entity in connection with the Merger. CBTV and APB shall have the
right to review in advance all filings made in connection with the transactions contemplated by
this Agreement with any Governmental Entity (other than with regard to information reasonably
considered confidential by the providing Party). In addition, CBTV and APB shall each furnish
to the other a final copy of each such filing made in connection with the transactions
contemplated by this Agreement with any Governmental Entity (other than any part of such
filings reasonably considered confidential by the providing Party).
(c)
Subject to Applicable Legal Requirements, CBTV and APB shall permit
each other to review and discuss in advance, and consider in good faith the views of the other in
connection with, any proposed written or material oral communication (or other correspondence
or memoranda) between it and any Governmental Entity (except for any confidential portions
thereof).
(d)
CBTV and APB shall promptly inform each other of and supply to each
other any substantive communication (or other correspondence or memoranda) received by them
from, or given by them to, any Governmental Entity, in each case, regarding any of the
transactions contemplated hereby.
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(e)
CBTV and APB shall provide that representatives of CBTV and APB
shall have the right to attend and participate in any hearing, proceeding, meeting, conference or
similar event before or with any Governmental Entity or other organization relating to any
Requisite Regulatory Approval or otherwise relating to any transactions contemplated by this
Agreement, except as may otherwise be requested or required by such Governmental Entity. In
furtherance of the foregoing, CBTV and APB shall provide each other reasonable advance notice
of any such hearing, proceeding, meeting, conference or similar event.
(f)
Each of CBTV and APB and their respective boards of directors shall, if
any state takeover statute or similar statute becomes applicable to this Agreement, the Merger or
any other transactions contemplated hereby, use all reasonable best efforts to provide that the
Merger and the other transactions contemplated by this Agreement may be consummated as
promptly as reasonably practicable on the terms contemplated hereby and otherwise to minimize
the effect of such statute or regulation on this Agreement, the Merger and the other transactions
contemplated hereby.
5.4.
Acquisition Proposals of CBTV.
(a)
CBTV agrees that neither it nor any of its officers and directors (other than
directors who voted against adoption of this Agreement) shall, and that it shall use its reasonable
best efforts to cause its employees, agents and representatives (including any investment banker,
attorney or accountant retained by it) (collectively, “Representatives”) not to, directly or
indirectly, (i) initiate, solicit or knowingly encourage (including by way of providing nonpublic
information) the making of any inquiry, proposal or offer with respect to any transaction
contemplating a merger, reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving it or any purchase or sale
of 10% or more of its consolidated assets taken as a whole, or any purchase or sale of, or tender
or exchange offer for, its voting securities that, if consummated, would result in any Person (or
the shareholders of such Person) beneficially owning securities representing 10% or more of its
total voting power (or of the surviving parent entity in such transaction) (any such proposal, offer
or transaction (other than a proposal or offer made by APB or an Affiliate thereof) being
hereinafter referred to as an “Acquisition Proposal”), (ii) engage in any discussions or
negotiations with or provide any nonpublic information to any Person concerning an Acquisition
Proposal, or knowingly facilitate any effort or attempt to make or implement an Acquisition
Proposal, or (iii) approve, endorse or recommend (including by resolution or otherwise of CBTV
Board), or propose to approve, endorse or recommend, or execute or enter into, any letter of
intent, agreement in principle, memorandum of understanding, term sheet, merger agreement,
asset purchase, share exchange agreement, option agreement or other similar agreement (whether
binding or not) related to any Acquisition Proposal (other than an Acceptable Confidentiality
Agreement) or propose or agree to do any of the foregoing. CBTV shall be responsible for any
actions taken by its Representatives that are inconsistent with this Section 5.4.
(b)
Notwithstanding Section 5.4(a), prior to obtaining the Required CBTV
Vote, CBTV shall be permitted, and subject to compliance in all material respects by CBTV with
the other terms of this Section 5.4, to engage in discussions or negotiations with, and provide
nonpublic information to, any Person who has submitted and not withdrawn an unsolicited, bona
fide written Acquisition Proposal after the date of this Agreement that did not result from a
4439.011/1041316.12
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breach of Section 5.4(a) if the CBTV Board concludes in good faith, After Consultation, that
such Acquisition Proposal constitutes or is reasonably likely to result in a Superior Proposal;
provided, however, that such Party (i) first enters into an Acceptable Confidentiality Agreement,
(ii) provides APB at least one (1) Business Day prior written notice before engaging in any such
discussions or negotiations or providing information to such Person and (iii) thereafter keeps
APB promptly and fully informed on a current basis of the status of all discussions and
negotiations with such Person.
(c)
CBTV shall notify APB promptly (but in no event later than one (1)
Business Day) after receipt of any Acquisition Proposal or any inquiry, request for nonpublic
information or request for discussions or negotiations that relates to or might reasonably be
expected to lead to an Acquisition Proposal with respect to CBTV. Such notice shall be made
orally and confirmed in writing, and shall indicate the identity of the Person making the
Acquisition Proposal, request or inquiry and the material terms and conditions of any expressions
of interest, offers, proposals, requests or inquiries.
(d)
CBTV agrees that (i) it shall, and shall instruct and use its reasonable best
efforts to cause its Representatives to, cease immediately and terminate any and all existing
activities, discussions or negotiations with any third parties conducted heretofore with respect to
any Acquisition Proposal, and shall promptly request each Person, if any, that has heretofore
executed a confidentiality agreement with such Party in connection with the consideration of any
Acquisition Proposal, to return or destroy all confidential information or data heretofore
furnished to such Person, (ii) it shall enforce (and not release any third party from or waive) any
provisions of, any confidentiality, standstill, non-solicitation or similar agreement to which it is a
party with respect to any Acquisition Proposal, and (iii) it shall not take any action to render
inapplicable or to exempt any Person from any antitakeover statute, charter provision or bylaw.
CBTV agrees that it shall use its reasonable best efforts to inform its Representatives of the
obligations undertaken in this Section 5.4.
5.5.
Termination of Employee Benefit Plans and Employee Matters.
(a)
CBTV agrees that CBTV Benefit Plans may be terminated, modified or
merged into AP Bank’s Benefit Plans on or after the Closing Date, as determined by AP Bank in
its sole discretion, subject to compliance with applicable law so long as any such action does not
reduce any benefits already accrued thereunder. At the request of AP Bank, CBTV agrees to
terminate no later than immediately before the Closing Date any CBTV Benefit Plans for which
CBTV may have liability, to the extent such CBTV Benefit Plans permit termination so that
CBTV will have no liability from and after the Closing Date, and CBTV will accrue any and all
obligations with respect to the termination of such plans before the Closing Date. AP Bank
acknowledges that any termination or modification at the direction of AP Bank will not (a) be
deemed to cause CBTV Financial Statements to have been prepared other than in accordance
with GAAP, or (b) constitute a breach of any provision of this Agreement by CBTV.
(b)
APB agrees that as of and following the Effective Time, the employees of
CBTV as of the Effective Time who are employed by AP Bank after the Effective Time or who
are offered and who accept employment with AP Bank shall be eligible to participate in AP
4439.011/1041316.12
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Bank’s employee benefit plans in which similarly situated employees of AP Bank participate, to
the same extent as such similarly situated employees of AP Bank participate.
(c)
With respect to each employee benefit plan, program, policy or
arrangement maintained by AP Bank or APB for the benefit of current employees of AP Bank
(each such plan, program, policy or arrangement, an “AP Bank Plan”), APB agrees that for
purposes of determining eligibility to participate, vesting and benefits (other than benefit
accruals under any defined benefit pension plan), service with CBTV shall be treated as service
with AP Bank; provided, however, that such service shall not be recognized to the extent that
such recognition would result in a duplication of benefits.
(d)
AP Bank shall have the right but not the obligation to offer employment
immediately following the Effective Time to any and all persons who are expected to be officers
and employees of CBTV immediately before the Effective Time. CBTV will provide AP Bank
with information regarding such persons’ current employment arrangements with CBTV and will
otherwise assist AP Bank in making such offers.
(e)
With respect to any full time employee of CBTV who is not retained by
AP Bank following the Merger, such employee will be entitled to severance equal two weeks of
such terminated employee’s salary or wages for each full or partial year of service to CBTV
completed prior to the Closing, subject to a minimum of two weeks and a maximum of twelve
weeks' severance payment, calculated at the rate paid to such former CBTV employee
immediately prior to the Closing; provided, however, that no such benefit shall be paid or
payable to any officer or employee that is a party to an employment agreement, change in control
agreement or other severance agreement or arrangement.
5.6.
Fees and Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions contemplated hereby
shall be paid by the Party incurring such expense, except as otherwise provided in Section 7.2
hereof.
5.7.
Indemnification; Directors’ and Officers’ Insurance.
(a)
From and after the Effective Time, APB shall, to the fullest extent
permitted by Applicable Legal Requirements, indemnify, defend and hold harmless, and provide
advancement of expenses to, each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer, director or employee of CBTV or
any of its Subsidiaries (the “Indemnified Parties”) against all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement of or in connection with
any claim, action, suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director, officer or employee of
CBTV or any Subsidiary of CBTV, and pertaining to any matter existing or occurring, or any
acts or omissions occurring at or prior to the Effective Time, whether asserted or claimed prior
to, or at or after, the Effective Time (including matters, acts or omissions occurring in connection
with the approval of this Agreement and the consummation of the transactions contemplated
hereby) (“Indemnified Liabilities”) in the form attached as Exhibit E.
4439.011/1041316.12
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(b)
For a period of three years after the Effective Time, APB shall cause to be
maintained in effect the current policies of directors’ and officers’ liability insurance maintained
by CBTV (provided that APB may substitute therefor policies with a substantially comparable
insurer of at least the same coverage and amounts containing terms and conditions which are no
less advantageous to the insured) with respect to claims arising from facts or events which
occurred at or before the Effective Time. In lieu of the foregoing, CBTV, in consultation with,
but only upon the consent of APB, which consent shall not unreasonably withheld, conditioned
or delayed may obtain on or prior to the Effective Time a three-year “tail” policy or “extended
discovery period” under CBTV’s existing directors and officers insurance policy providing
equivalent coverage to that described in the preceding sentence.
(c)
APB shall indemnify an Indemnified Party for all expenses, including
reasonable fees and expenses of counsel, that an Indemnified Party may incur in successfully
enforcing the indemnity and other obligations provided for in this Section 5.7.
(d)
If APB or any of its successors or assigns (i) consolidates with or merges
into any other Person and shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and
assets to any Person, then, and in each such case, proper provision shall be made so that the
successors and assigns of APB shall assume the obligations set forth in this Section 5.7.
(e)
The provisions of this Section 5.7 (i) are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party, his or her heirs and representatives and (ii)
are in addition to, and not in substitution for, any other rights to indemnification or contribution
that any such Person may have by contract or otherwise.
5.8.
Public Announcements. Except to the extent required by Applicable Legal
Requirements, APB and CBTV shall use reasonable best efforts (a) to develop a joint
communications plan, and (b) to provide that all press releases and other public statements with
respect to the transactions contemplated hereby shall be consistent with such joint
communications plan, and (c) to consult with each other before issuing any press release or, to
the extent practical, otherwise making any public statement with respect to this Agreement or the
transactions contemplated hereby. In addition to the foregoing, except to the extent required by
Applicable Legal Requirements, none of APB or CBTV shall issue any press release or
otherwise make any public statement or disclosure concerning the other or the other’s
Subsidiaries, business, financial condition or results of operations without the consent of the
other, which consent shall not be unreasonably withheld or delayed.
5.9.
[Intentionally Deleted].
5.10. Untrue Representations. Each party shall promptly notify the other party in
writing if such party becomes aware of any fact or condition that makes untrue, or shows to have
been untrue, any schedule or any other information furnished to the other party or any
representation or warranty made in or pursuant to this Agreement or that results in such party’s
failure to comply with any covenant, condition or agreement contained in this Agreement.
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5.11. Litigation and Claims. Each of APB, on the one hand, or CBTV, on the other
hand, shall promptly notify the other of any legal action, suit or proceeding or judicial,
administrative or governmental investigation, pending or, to the knowledge of the notifying
Person, threatened against the notifying Person that questions or might question the validity of
this Agreement or the transactions contemplated hereby, or any actions taken or to be taken by
the notifying Person pursuant hereto or seeks to enjoin, materially delay or otherwise restrain the
consummation of the transactions contemplated hereby or thereby. CBTV shall give APB the
opportunity to participate in the defense or settlement of any shareholder litigation against CBTV
or its directors or officers relating to the Merger or the other transactions contemplated by this
Agreement. CBTV shall not enter into any settlement agreement in respect of any shareholder
litigation against CBTV or its directors or officers relating to the Merger or the other transactions
contemplated by this Agreement without the prior written consent of APB (such consent not to
be unreasonably withheld, conditioned or delayed).
5.12. Additional Agreements. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement or to vest the
Surviving Bank with full title to all properties, assets, rights, approvals, immunities and
franchises of either of the constituent corporations, the proper officers and directors of each Party
shall take all such necessary action, including the execution of all necessary and desirable
agreements, certificates, instruments and documents.
5.13. CBTV Support Agreements. Simultaneously with the execution of this
Agreement, the directors of CBTV listed on Exhibit A-1, shall enter into a Voting Agreement,
Non-Competition and Non-Solicitation Agreement and each of the executive officers of CBTV
shall enter into a Non-Solicitation Agreement.
5.14. Transaction Expenses. Prior to the Closing, based upon the final bills or estimates
of such final bills, CBTV shall have paid or accrued for all Transaction Expenses in full. CBTV
shall update CBTV Disclosure Schedule 4.2(ff) at least three (3) Business Days prior to the
Closing to reflect the anticipated final Transaction Expenses, and the anticipated Closing Date
shareholders' equity and ALLL of CBTV shall have been provided by CBTV to APB, and APB
shall have received such written back-up for such expenses and shareholders' equity and ALLL
calculations prior to the Effective Time as APB may reasonably request.
5.15. Disclosure Schedules. At least ten (10) days prior to the projected Closing,
CBTV agrees to provide APB and APB agrees to provide CBTV, with supplemental Disclosure
Schedules reflecting any material changes thereto between the date of this Agreement and the
delivery date. Delivery of such supplemental Disclosure Schedules shall not cure a breach or
modify a representation or warranty of this Agreement. Any information set forth in any one
section of the CBTV or APB Disclosure Schedules shall be deemed to apply to each other
applicable section or subsection of the CBTV or APB Disclosure Schedules, respectively, if its
relevance to the information called for in such section or subsection is reasonably apparent on its
face notwithstanding the omission of any cross-reference to such other section.
5.16. Acquisition Proposals of AP Bank and/or APB. APB shall not, and shall cause its
Subsidiaries and Representatives not to, enter, into any agreement with any Person subsequent to
the Agreement Date that (i) would restrict AP Bank’s and/or APB’s ability to comply with any of
4439.011/1041316.12
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the terms of this Agreement, (ii) relates to any Acquisition Proposal that would materially impair
AP Bank’s and/or APB’s ability to consummate the Merger and the transactions contemplated by
this Agreement, or (iii) relates to any Acquisition Proposal, unless such Acquisition Proposal
requires the completion of the Merger and payment of the Merger Consideration to CBTV
shareholders as provided in this Agreement prior to completion of any other Acquisition
Proposal respecting APB.
5.17. Certain Policies. Prior to the Closing Date, CBTV shall, consistent with GAAP
and applicable banking laws and regulations, to the extent requested by APB, modify or change
its loan, OREO, accrual, reserve, tax, litigation and real estate valuation policies and practices
(including loan classifications and levels of reserves) so as to be applied on a basis that is
consistent with that of APB; provided, however, that no such modifications or changes need be
made prior to the satisfaction of the condition set forth in Section 6.1(a); and further provided
that in any event, no accrual or reserve made by CBTV pursuant to this Section 5.18 shall
constitute or be deemed to be a breach, Violation of or failure to satisfy any representation,
warranty, covenant, agreement, condition or other provision of this Agreement or otherwise be
considered in determining whether any such breach, Violation or failure to satisfy shall have
occurred. The recording of any such adjustments shall not be deemed to imply any misstatement
of previously furnished financial statements or information and shall not be construed as
concurrence of CBTV or their management with any such adjustments.
5.18. Notice to CBTV Customers. On and after the receipt of all regulatory approvals
required to consummate the transactions contemplated hereby, CBTV shall permit APB to
provide one or more written notices (which may be joint notices from CBTV and APB) to
customers of CBTV to describe the proposed transactions, the effect on customers and planned
transition procedures. CBTV shall have the right to review and approve the substance of any
such communications, provided that CBTV shall not unreasonably withhold, delay or condition
its approval.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE TRANSACTION
6.1.
Conditions to Each Party’s Obligation. The respective obligation of each of the
parties hereto to consummate the transactions contemplated hereby (the “Closing”) is subject to
the fulfillment or, to the extent permitted by applicable law, written waiver by the parties hereto
prior to the Closing Date, of each of the following conditions:
(a)
Regulatory Approvals. All regulatory approvals required to consummate
the transactions contemplated hereby, including but not limited to the Merger, shall have been
obtained and shall remain in full force and effect and all statutory waiting periods in respect
thereof shall have expired.
(b)
No Injunction. No Governmental Entity of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment,
decree, injunction or other order (whether temporary, preliminary or permanent) which is in
effect and prohibits or makes illegal consummation of the transactions contemplated hereby.
4439.011/1041316.12
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(c)
Corporate Approvals. This Agreement, the Merger and the transactions
contemplated herein shall have been duly approved by the Required CBTV Vote as of the record
date for the CBTV Shareholders Meeting.
(d)
Issuance of Permit. The DBO Permit (and any necessary or appropriate
amendments or supplements thereto) shall have been issued by the CDBO, no stop order denying
effectiveness to, or suspending or revoking the effectiveness of such qualification shall be in
effect and no proceedings for such purpose shall have been initiated or threatened by or before
the CDBO, and the shares of APB Common Stock qualified under the permit issued by the
CDBO shall have received all state securities and “Blue Sky” permits or approvals required to
consummate the transactions contemplated by this Agreement.
(e)
Fairness Opinion. CBTV shall have received the written opinion of The
Findley Group at the time of execution of this Agreement stating that the Per Share Merger
Consideration is fair to CBTV’s shareholders from a financial point of view.
6.2.
Conditions to Obligations of CBTV. The obligations of CBTV to consummate
the transactions contemplated hereby are also subject to the fulfillment or written waiver by
CBTV prior to the Closing Date of each of the following conditions:
(a)
Representations and Warranties. The representations and warranties of
APB (i) set forth in Sections 4.3(a), 4.3(b) and 4.3(h) shall be true and correct in all respects
(other than de minimis inaccuracies) as of the Agreement Date and as of the Closing Date as
though made on and as of the Closing Date, and (ii) the representations and warranties of APB
set forth in this Agreement (other than the representations and warranties that are the subject of
clause (i)) shall be true and correct in all material respects (without giving effect to any
“materiality,” “Material Adverse Effect,” “Knowledge” or similar qualifiers contained in any
such representations and warranties) as of the Agreement Date and as of the Closing Date as
though made on and as of the Closing Date (unless any such representation or warranty is made
only as of a specific date in which event such representation and warranty shall be so true and
correct as of such specified date) or unless any such inaccuracy, together with all other
inaccuracies, has not had and would not reasonably be expected to have a Material Adverse
Effect on APB. and CBTV shall have received a certificate, dated the Closing Date and signed
on behalf of APB and AP Bank by its Chief Executive Officer and the Chief Financial Officer, to
such effect.
(b)
Performance of Obligations of APB. APB shall have performed in all
material respects all obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and CBTV shall have received a certificate or certificates, dated the Closing
Date, signed on behalf of APB by the Chief Executive Officer and Chief Financial Officer of
APB to such effect.
(c)
No APB Material Adverse Effect. There shall not have occurred any
event, circumstance, change, occurrence or state of facts that, individually or in the aggregate
with all such other events, circumstances, changes occurrences or states of facts, has resulted in
or could reasonably be expected to result in, a APB Material Adverse Effect.
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(d)
Delivery of Merger Consideration to Exchange Agent. APB shall have
delivered to the Exchange Agent for delivery to the holders of CBTV Common Stock, the
Merger Consideration in accordance with Section 2.3(a) on or prior to the Closing Date.
(e)
Other Actions. APB shall have furnished CBTV with such certificates of
its respective officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 6.1 and 6.2 as CBTV may reasonably request.
6.3.
Conditions to Obligation of APB. The obligations of APB to consummate the
Merger and the other transactions contemplated hereby is also subject to the fulfillment or
written waiver by APB prior to the Closing Date of each of the following conditions:
(a)
Representations and Warranties. The representations and warranties of
CBTV (i) set forth in Sections 4.2(a), 4.2(b), 4.2(c)(i) and 4.2(e)(i) shall be true and correct in all
respects (other than de minimis inaccuracies) as of the Agreement Date and as of the Closing
Date as though made on and as of the Closing Date, and (ii) the representations and warranties of
CBTV set forth in this Agreement (other than the representations and warranties that are the
subject of clause (i)) shall be true and correct in all material respects (without giving effect to
any “materiality,” “Material Adverse Effect,” “Knowledge” or similar qualifiers contained in any
such representations and warranties) as of the Agreement Date and as of the Closing Date as
though made on and as of the Closing Date (unless any such representation or warranty is made
only as of a specific date, in which event such representation and warranty shall be so true and
correct as of such specified date) or unless any such inaccuracy, together with all other
inaccuracies, has not had and would not reasonably be expected to have a Material Adverse
Effect on CBTV, and APB shall have received a certificate, dated the Closing Date and signed
on behalf of CBTV by its Chief Executive Officer and the Chief Financial Officer, to such effect.
(b)
Performance of Obligations of CBTV. CBTV shall have performed in all
material respects all obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and APB shall have received a certificate, dated the Closing Date, signed on
behalf of CBTV by the Chief Executive Officer of CBTV to such effect.
(c)
Estoppel Letters and Consents. CBTV shall have delivered fully executed
estoppel letters and consents or approvals as provided in CBTV Disclosure Schedule 4.2(c)(ii),
except where the failure to obtain such estoppel letters and consents would not have a CBTV
Material Adverse Effect.
(d)
Absence of Burdensome Conditions. No Requisite Regulatory Approval
shall have been granted subject to any condition or conditions which, and there shall not have
been any action taken, or any statute, rule, regulation, order or decree enacted, entered, enforced
or deemed applicable to the Merger by any Governmental Entity of competent jurisdiction
which, in connection with the grant of a Requisite Regulatory Approval or otherwise, (i) requires
any of the Parties, including the Surviving Bank, to pay any amounts (other than customary
filing fees), or divest any banking office, line of business or operations, or (ii) imposes any
condition, requirement or restriction upon APB or the Surviving Bank, that, in the case of clause
(i) or (ii), would, individually or in the aggregate, reasonably be expected to impose a materially
4439.011/1041316.12
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burdensome condition on APB or the Surviving Bank, as applicable, or otherwise would
materially alter the economics of the Merger for APB.
(e)
No CBTV Material Adverse Effect. There shall not have occurred any
event, circumstance, change, occurrence or state of facts that, individually or in the aggregate
with all such other events, circumstances, changes occurrences or states of facts, has resulted in
or would reasonably be expected to result in, a CBTV Material Adverse Effect.
(f)
Tax Opinion. APB shall have received an opinion of Vavrinek, Trine,
Day & Co., LLP addressed to APB, to the effect that the Merger shall qualify as a
“reorganization” within the meaning of Section 368(a) of the Code.
(g)
Option Cancellation Agreements. CBTV shall have delivered executed
Option Cancellation Agreements from each holder of a CBTV Stock Option for which the
exercise price is less than the Per Share Cash Consideration.
(h)
Closing Date Shareholders' Equity. As of the Closing Date, the total
shareholders' equity of CBTV, determined in accordance with GAAP, but excluding any
Transaction Expenses other than Transaction Expenses exceeding the Transaction Expense Cap
expensed by CBTV, shall be not less than $12.2 million, as certified by the Chief Financial
Officer of CBTV.
(i)
Allowance. As of the Closing Date, the ALLL of CBTV shall be at least
1.43% of the balance of gross loans outstanding, as certified by the Chief Financial Officer of
CBTV.
(j)
Transaction Expenses. The Transaction Expenses shall not exceed the
Transaction Expense Cap.
(k)
Other Actions. CBTV shall have furnished APB with such certificates of
their respective officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 6.1 and 6.3 as APB may reasonably request.
ARTICLE 7
TERMINATION
7.1.
Termination. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the board of directors of the terminating Party
or Parties:
(a)
by mutual consent of APB and CBTV in a written instrument;
(b)
by APB or CBTV, upon written notice to the other Party, if (i) a
Governmental Entity from which a Requisite Regulatory Approval is required has denied
approval of the Merger and such denial has become final and non-appealable, or (ii) any
Governmental Entity shall have issued an order, writ, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Merger, and such order, writ,
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decree, ruling or other action has become final and nonappealable; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be available to any Party
whose failure to comply with Section 5.3 or any other provision of this Agreement primarily
shall have resulted in, or materially contributed to, such action;
(c)
by either APB or CBTV, upon written notice to the other Party, if the
Merger shall not have been consummated on or the End Date, provided, however, that (i) such
End Date may be extended one or more times, but not to a date any later than June 30, 2017 or
such later date as may be mutually agreed upon by the Parties, by notice from APB to CBTV
delivered on or before the End Date, or the later date to which such date has then been most
recently extended as provided herein, if the only condition to the Closing that has not been
satisfied or is not capable of being satisfied as of the date such notice is delivered is receipt of
any Requisite Regulatory Approval or the Requisite Shareholder Approval and the satisfaction of
such condition remains reasonably possible, as determined by APB in good faith, and (ii) the
right to terminate this Agreement under this Section 7.1(c) shall not be available to any Party
whose failure to comply with any provision of this Agreement primarily shall have resulted in, or
materially contributed to, the failure of the Effective Time to occur on or before such date;
(d)
by APB, upon written notice to CBTV, if (i) the CBTV Board effects a
CBTV Change in Recommendation or fails to include the CBTV Board Recommendation in the
Proxy Statement, (ii) CBTV enters into a definitive agreement providing for a Superior Proposal,
(iii) within two (2) Business Days (or such longer period of time that the CBTV Board
determines in good faith is reasonably necessary to comply with its fiduciary duties) of a written
request by APB for the CBTV Board to reaffirm the CBTV Board’s Recommendation following
the date any Acquisition Proposal or any material change thereto is first publicly announced,
published or sent to CBTV’s shareholders, CBTV fails to issue a press release that reaffirms the
CBTV Board Recommendation (provided that such request may only be made once with respect
to such Acquisition Proposal absent further material changes thereto), (iv) a tender offer or
exchange offer (whether or not conditional) relating to shares of CBTV’s capital stock shall have
been commenced and the CBTV Board (or any committee thereof) fails to recommend against
such tender offer or exchange offer within ten (10) Business Days after the commencement of
such tender offer or exchange offer (including, for these purposes, by taking no position with
respect to the acceptance by CBTV’s shareholders of any such tender offer or exchange offer
within such period, which shall constitute a failure to recommend against such offer), or
(v) CBTV intentionally breaches Section 5.1(b), Section 5.1(c), Section 5.1(d) or Section 5.4;
(e)
by CBTV, upon written notice to APB, if (i) CBTV enters into a definitive
agreement providing for a Superior Proposal not in Violation of Section 5.1 or Section 5.4, prior
to the receipt of the Required CBTV Vote, and (ii) concurrently with such termination, CBTV
pays the CBTV Termination Fee to APB by wire transfer of immediately available funds;
(f)
by APB or CBTV, upon written notice to the other Party, if any
application for Requisite Regulatory Approval shall have been denied or withdrawn at the
request or recommendation of the Governmental Entity from which a Requisite Regulatory
Approval is required, or by APB if any such application is approved with commitments,
conditions or understandings, contained in an approval letter or otherwise, which imposes a
materially burdensome condition, as determined by APB under Section 6.3(d), on APB or the
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Surviving Bank, as applicable, or would otherwise materially alter the economics of the Merger
for APB.
(g)
by APB or CBTV, upon written notice to the other Party, if there shall
have been a breach by the other Party of any of the covenants or agreements or any of the
representations or warranties set forth in this Agreement on the part of such Party, which breach,
either individually or in the aggregate, would result in, if occurring or continuing on the Closing
Date, the failure of a condition set forth in one of Sections 6.2(a), 6.2(b), 6.3(a) or 6.3(b), as the
case may be, and which breach has not been cured within 30 days following written notice
thereof to the breaching Party or, by its nature, cannot be cured within such time period;
(h)
(i) by APB or CBTV, upon written notice to the other Party, if a vote shall
have been taken at the duly convened CBTV Shareholders Meeting (including any adjournments
thereof) and the Required CBTV Vote shall not have been obtained, or (ii) by APB if the CBTV
Shareholders Meeting is not held on or before February 15, 2017, unless such delay results
directly from any action or inaction by a Governmental Entity that is not caused by any action or
inaction of CBTV;
(i)
by APB, upon written notice to CBTV, if, since the date of this
Agreement, there shall have occurred a Material Adverse Effect with respect to CBTV;
(j)
by CBTV, upon written notice to APB, if, since the date of this Agreement
there shall have occurred a Material Adverse Effect with respect to APB;
(k)
by CBTV, upon written notice to APB, if there shall have been a breach
by APB or any of its Subsidiaries of Section 5.16; or
(l)
by APB or CBTV for the failure of any condition to the obligations of the
terminating Party to consummate the Merger not otherwise specifically enumerated above in
Section 7.1; provided the right to terminate under this Section 7.1(l) shall not be available to any
Party whose failure to comply with any provision of this Agreement primarily shall have resulted
in, or materially contributed to, the failure of such condition.
7.2.
Effect of Termination.
(a)
In the event of termination of this Agreement by CBTV or APB as
provided in Section 7.1, this Agreement shall, to the fullest extent permitted by Applicable Legal
Requirements, forthwith become void and of no effect and there shall be no liability or obligation
on the part of APB or CBTV or their respective officers or directors, except with respect to
Sections 4.2(ee), 4.3(l), 5.2(b), 5.6, 7.1, and 7.2 and Article 8, which shall survive such
termination, and, except that as otherwise provided herein, no Party shall be relieved or released
from any liabilities or damages arising out of its own fraud or willful and material breach of this
Agreement. Except as otherwise provided in this Section 7.2, all fees and expenses incurred in
connection with this Agreement, the Merger, and the other transactions contemplated hereby
shall be paid by the Party incurring such fees or expenses, whether or not the Merger is
consummated.
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(b)
CBTV shall pay APB, by wire transfer of immediately available funds, the
sum of $500,000 (the “CBTV Termination Fee”) if this Agreement is terminated as follows:
(i)
if APB shall terminate this Agreement pursuant to clause (i), (ii),
(iii), (iv) or (v) of Section 7.1(d), in which case, CBTV shall pay CBTV Termination Fee to APB
within three (3) Business Days of CBTV’s receipt of written notice of such termination; or
(ii)
if CBTV shall terminate this Agreement pursuant to Section 7.1(e),
then CBTV shall pay the CBTV Termination Fee to APB concurrently with such termination; or
(iii) if (A) any Party shall terminate this Agreement pursuant to Section
7.1(c) following CBTV having taken action that constitutes a breach of Section 5.1(c) or if a
third party has made an Acquisition Proposal prior to such termination, (B) at any time after the
date of this Agreement and at or before such termination, CBTV shall have received an
Acquisition Proposal, and (C) within twelve (12) months of the date of such termination of this
Agreement, CBTV executes any definitive agreement with respect to, or consummates, any such
Acquisition Proposal (provided that for purposes of this clause (iii) only, the term “Acquisition
Proposal” shall have the meaning assigned to such term in Section 5.4(a), except that the
reference to “10% or more” in the definition of “Acquisition Proposal” shall be deemed to be a
reference to “more than 50%”), then CBTV shall pay APB the Termination Fee upon the first to
occur of such execution or consummation; or
(iv)
if any Party entitled to terminate the Agreement under Section
7.1(h) shall terminate this Agreement pursuant to Section 7.1(h), in which case, CBTV shall pay
CBTV Termination Fee to APB within three Business Days; provided, however that in the event
the termination occurs under Section 7.1(h)(i) the CBTV Termination Fee shall be reduced from
$500,000 to $200,000, if no grounds shall exist that would also permit termination of the
Agreement pursuant to clause (i), (ii), (iii), (iv) or (v) of Section 7.1(d).
(c)
In the event that APB, does not complete the Merger after all conditions
specified in Sections 6.1 and 6.3 to its obligation to complete the Merger have been satisfied, and
CBTV elects to terminate this Agreement under Section 7.1(g), and such breach is not cured
within the cure period provided in Section 7.1(g), then APB shall pay the APB Termination Fee
to CBTV upon the expiration of such cure period if APB is unable to complete the Merger within
such cure period.
(d)
In the event of termination of this Agreement by either APB or CBTV
pursuant to Section 7.1(g), then the non-breaching Party shall be entitled to claim from the
breaching party liquidated damages equal to $200,000. The liquidated damages shall be paid by
the breaching Party to the non-breaching Party, in the event of termination pursuant to Section
7.1(g), promptly, and in any event no later than three (3) Business Days after the date of such
termination. The payment of the liquidated damages shall be the sole and exclusive remedy of
the non-breaching Party for damages against the breaching Party with respect to the breach of
any representation, warranty, covenant or agreement giving rise to such payment.
(e)
APB AND CBTV ACKNOWLEDGE THAT THE AGREEMENTS
CONTAINED IN SECTIONS 7.2(b) AND 7.2(d) ARE AN INTEGRAL PART OF THE
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TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AND THAT, WITHOUT
THESE AGREEMENTS, NEITHER PARTY WOULD ENTER INTO THIS AGREEMENT.
THE AMOUNTS PAYABLE BY CBTV OR APB PURSUANT TO SECTION 7.2(b),
SECTION 7.2(c) OR SECTION 7.2(d) CONSTITUTE LIQUIDATED DAMAGES AND NOT
A PENALTY AND SHALL BE THE SOLE MONETARY REMEDY OF APB OR CBTV, OR
ANY OF ITS SUBSIDIARIES, IN THE EVENT OF TERMINATION OF THIS AGREEMENT
BY SUCH PARTY UNDER SUCH APPLICABLE SECTION GIVING RISE TO THE
PAYMENT OF THE CBTV TERMINATION FEE, APB TERMINATION FEE OR OTHER
AMOUNTS PAYABLE UNDER SECTION 7.2(d). IF ANY PARTY FAILS TO PAY WHEN
DUE ANY AMOUNTS REQUIRED TO BE PAID BY IT PURSUANT TO SECTION 7.2(b),
SECTION 7.2(c) OR SECTION 7.2(d) AND IN ORDER TO OBTAIN SUCH PAYMENT,
THE OTHER PARTY COMMENCES AN ACTION, SUIT OR PROCEEDING, THEN IN
ADDITION TO THE AMOUNT OF SUCH JUDGMENT, THE BREACHING PARTY SHALL
PAY TO THE NON-BREACHING PARTY AN AMOUNT EQUAL TO THE FEES, COSTS
AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES, COSTS AND
EXPENSES) INCURRED BY THE OTHER PARTY IN CONNECTION WITH SUCH
ACTION, SUIT OR PROCEEDING, TOGETHER WITH INTEREST ON ALL UNPAID
AMOUNTS FROM THE DATE SUCH AMOUNTS WERE REQUIRED TO BE PAID
UNDER THIS AGREEMENT AT THE PRIME LENDING RATE PREVAILING AT SUCH
TIME, AS PUBLISHED IN THE WALL STREET JOURNAL, PLUS 3%. UNDER NO
CIRCUMSTANCES SHALL CBTV BE OBLIGATED TO ACTUALLY PAY MORE THAN
ONE (1) CBTV TERMINATION FEE PURSUANT TO SECTION 7.2(b).
ARTICLE 8
MISCELLANEOUS
8.1.
Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties, covenants and agreements in this Agreement or in any instrument
delivered pursuant to this Agreement, including any rights arising out of any breach of such
representations, warranties, covenants, and agreements, shall survive the Effective Time, except
for those covenants and agreements contained herein and therein that by their terms apply or are
to be performed in whole or in part after the Effective Time.
8.2.
Amendment, Extension, Waiver.
(a)
This Agreement may be amended by the Parties, by action taken or
authorized by their respective boards of directors, at any time prior to the Effective Time, but,
after any such approval, no amendment shall be made which by law requires further approval by
shareholders without such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the Parties.
(b)
At any time prior to the Effective Time, the Parties, by action taken or
authorized by their respective board of directors, may, to the extent legally allowed, (iii) extend
the time for the performance of any of the obligations or other acts of the other Party, (ii) waive
any breaches in the representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements, covenants or conditions
4439.011/1041316.12
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contained herein. Any agreement on the part of a Party to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such Party. The failure of a
Party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of
those rights. No single or partial exercise of any right, remedy, power or privilege hereunder
shall preclude any other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. Any waiver shall be effective only in the specific instance and for the
specific purpose for which given and shall not constitute a waiver to any subsequent or other
exercise of any right, remedy, power or privilege hereunder.
8.3.
Counterparts. This Agreement may be executed in one or more counterparts, all
of which shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the other parties, it being
understood that each party need not sign the same counterpart.
8.4.
Governing Law; Submission to Jurisdiction; Interpretation.
(a)
This Agreement and the transactions contemplated herein, and all disputes
between the Parties under or related to this Agreement or the facts and circumstances leading to
its execution or performance, whether in contract, tort or otherwise, shall be governed by and
construed in accordance with the laws of the State of California, without reference to the conflict
of laws principles thereof.
(b)
Each of the Parties (i) irrevocably submits itself to the personal
jurisdiction of all state and federal courts sitting in the State of California, including to the
jurisdiction of all courts to which an appeal may be taken from such courts, in any action, suit or
proceeding arising out of or relating to this Agreement, any of the transactions contemplated by
this Agreement or any facts and circumstances leading to its execution or performance, (ii)
agrees that all claims in respect of any such action, suit or proceeding must be brought, heard and
determined exclusively in the State of California, (iii) agrees that it shall not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from such courts, (iv)
agrees not to bring any action, suit or proceeding against the other Party or its Affiliates arising
out of or relating to this Agreement, any of the transactions contemplated by this Agreement or
any facts and circumstances leading to its execution or performance in any other courts and (v)
waives any defense of inconvenient forum to the maintenance of any action, suit or proceeding
so brought. Each of the Parties agrees to waive any bond, surety or other security that might be
required of any other Party with respect to any such action, suit or proceeding, including any
appeal thereof.
(c)
Each of the Parties agrees that service of any process, summons, notice or
document in accordance with Section 8.4 shall be effective service of process for any action, suit
or proceeding brought against it by the other Party in connection with Section 8.4(b), provided
that nothing contained herein shall affect the right of any Party to serve legal process in any other
manner permitted by applicable law.
(d)
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement
unless otherwise indicated. The table of contents and headings contained in this Agreement are
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for reference purposes only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words “include,” “includes” or “including” are used in this
Agreement, they shall be deemed to be followed by the words “without limitation.” The phrase
“made available” or “furnished” in this Agreement shall mean that the information referred to
has been made available if requested by the Party to whom such information is to be made
available or access has been provided to (and print capabilities enabled on) a virtual data room
containing such information. The phrases “herein,” “hereof,” “hereunder” and words of similar
import shall be deemed to refer to this Agreement as a whole, including the Exhibits and
Schedules hereto, and not to any particular provision of this Agreement. Any pronoun shall
include the corresponding masculine, feminine and neuter forms. Each Party has been
represented and advised by independent counsel of its choice in connection with the execution of
this Agreement and has cooperated in the drafting and preparation of this Agreement and the
documents delivered in connection herewith. Accordingly, any Applicable Legal Requirement
that would require interpretation of this Agreement or any document delivered in connection
herewith, including any ambiguous, vague or conflicting term herein or therein, against the
drafter should not apply and is expressly waived.
8.5.
WAIVER OF JURY TRIAL. EACH PARTY ACKNOWLEDGES AND
AGREES THAT ANY DISPUTE WHICH MAY ARISE UNDER THIS AGREEMENT IS
LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE
EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LEGAL REQUIREMENTS, ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION, DIRECTLY OR INDIRECTLY, ARISING OUT OF, OR RELATING TO, THIS
AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, TO
THE FULLEST EXTENT PERMITTED BY LAW. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE FOREGOING WAIVER, (B) EACH PARTY UNDERSTANDS AND HAS
CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH PARTY MAKES THIS
WAIVER VOLUNTARILY, AND (D) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 8.5.
8.6.
Expenses. Except as otherwise provided for in Section 7.2, each party hereto will
bear all expenses incurred by it in connection with this Agreement and the transactions
contemplated hereby, including fees and expenses of its own financial consultants, accountants
and counsel, provided that nothing contained herein shall limit either party’s rights to recover
any liabilities or damages arising out of the other party’s fraud or willful breach of any provision
of this Agreement.
8.7.
Notices. All notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given if personally delivered, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt requested) or delivered by
an overnight courier (with confirmation) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
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If to APB:
AltaPacific Bancorp
4845 Old Redwood Highway
Santa Rosa, CA 95403
Attention:
Charles H. Hall, CEO
Facsimile:
(707) 543-2703
Email:
[email protected]
With a copy (which shall not constitute notice) to:
King, Holmes, Paterno & Soriano, LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, CA 90067
Attention:
Keith T. Holmes
Facsimile:
(310) 282-8903
Email:
[email protected]
If to CBTV to:
Commerce Bank of Temecula Valley
25220 Hancock Avenue, Suite 140
Murrieta, CA 92562
Attention:
Donald W. Murray, Chairman
Facsimile:
(951) 973-7701
Email:
[email protected]
With a copy to:
Loren P. Hansen
Attorney at Law
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Attention:
Loren P. Hansen, Esq.
Fax:
(949) 851-1732
Email:
[email protected]
8.8.
Entire Agreement; No Third Party Beneficiaries. This Agreement (including the
exhibits and schedules to this Agreement and the Confidentiality Agreement) constitute the
entire agreement of the Parties and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, among the Parties with respect to the
subject matter of this Agreement. No representation, warranty, inducement, promise,
understanding or condition not set forth in this Agreement has been relied upon or made by any
of the Parties. Except as provided in Section 5.7, this Agreement is not intended to confer upon
any Person other than the Parties any rights or remedies hereunder. The representations and
warranties in this Agreement are the product of negotiations among the Parties and are for the
sole benefit of the Parties. Any breaches in such representations and warranties are subject to
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waiver by the Parties in accordance with the terms of this Agreement without notice or liability
to any other Person. The representations and warranties in this Agreement may represent an
allocation among the Parties of risks associated with particular matters regardless of the
knowledge of any of the Parties and may have been qualified by certain disclosures not reflected
in the text of this Agreement. Accordingly, Persons other than the Parties may not rely upon the
representations and warranties in this Agreement as characterizations of actual facts or
circumstances as of the date of this Agreement or as of any other date. In no event shall the
terms of this Agreement be deemed to (i) establish, amend or modify any employee benefit plan
of CBTV or APB or any of their respective Subsidiaries or any other benefit plan, program,
agreement or arrangement maintained or sponsored by any of them, (ii) alter or limit the ability
of CBTV or APB, or any of their respective Subsidiaries to amend, modify or terminate any
employee benefit plan maintained by any of them, (iii) confer upon any current or former
employee, officer, director or consultant, any right to employment or continued employment or
continued service with CBTV or APB or the Surviving Corporation or any of their Subsidiaries,
or constitute or create an employment agreement with or for any individual, or (iv) alter or limit
the ability of CBTV or APB or the Surviving Corporation or any of their Subsidiaries to make
necessary or appropriate changes to their respective businesses in response to changed
circumstances, unforeseen events or the like. The disclosure in any correspondingly identified
subsection of the Disclosure Schedules delivered by CBTV or APB, as applicable, shall qualify
(i) the corresponding subsection of this Agreement and (ii) the other Sections or subsections of
this Agreement, to the extent that it is reasonably apparent from a reading of such disclosure that
it also qualifies or applies to such other Sections or subsections.
8.9.
Severability. If any provision of this Agreement or the application thereof to any
person or circumstance is determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or unenforceable, will remain
in full force and effect and will in no way be affected, impaired or invalidated thereby, so long as
the economic or legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party hereto. Upon such determination, the parties will
negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to
effect the original intent of the parties.
8.10. Enforcement of the Agreement. The Parties agree that irreparable injury, for
which damages, even if available, would not be an adequate remedy, would occur in the event
that any of the provisions of this Agreement were not performed in accordance with their
specific terms on a timely basis or were otherwise breached. It is accordingly agreed that,
subject to the limitations of Section 7.2(e), the Parties shall be entitled to an injunction or other
equitable relief, without the necessity of proving actual monetary loss or posting any bond or
other security, to prevent breaches of this Agreement and to enforce specifically the terms and
provisions of this Agreement in any court identified in Section 8.4, this being in addition to any
other remedy to which they are entitled at law or in equity.
8.11. Waiver of Conditions. The conditions to each of the parties’ obligations to
consummate the Merger are for the sole benefit of such party and may be waived by such party
in whole or in part to the extent permitted by applicable laws.
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8.12. Interpretation. When a reference is made in this Agreement to Sections, Exhibits
or Schedules, such reference shall be to a Section of, or Exhibit or Schedule to, this Agreement
unless otherwise indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and are not part of this Agreement. Whenever the words “include,”
“includes” or “including” are used in this Agreement, they shall be deemed to be followed by the
words “without limitation.” Whenever the words “as of the date hereof” are used in this
Agreement, they shall be deemed to mean the day and year first above written.
8.13. Assignment. Neither this Agreement nor any of the rights, interests or obligations
of the Parties hereunder shall be assigned by either of the Parties (whether by operation of law or
otherwise) without the prior written consent of the other Party, and any attempt to make any such
assignment without such consent shall, to the fullest extent permitted by Applicable Legal
Requirements, be null and void. Subject to the preceding sentence, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the Parties and their respective
successors and permitted assigns.
8.14. Alternative Structure. Notwithstanding any provision of this Agreement to the
contrary, APB may at any time modify the structure of the acquisition of CBTV set forth herein,
provided that the consideration to be paid to the holders of CBTV Common Stock and CBTV
Stock Options is not thereby changed in kind or reduced in amount as a result of such
modification and that such modification creates no additional adverse tax consequences for the
holders of CBTV Common Stock or CBTV Stock Options. In the event APB elects to make
such a change, the parties agree to execute appropriate documents to reflect the change.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day and year first above
written.
ALTAPACIFIC BANCORP
COMMERCE BANK OF TEMECULA
VALLEY
By: /s/ Frank Basirico
Name: Frank Basirico
Title: Senior Executive Vice President,
Chief Operating Officer
By: /s/ Donald W. Murray
Name: Donald W. Murray
Title: President, Chief Executive Officer
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EXHIBIT A
Nrune: ____________________
CBTV Voting and Non-Competition Agreement
VOTING AND NON-COMPETITION AGREEMENT (this "Agreement"), dated as
of September 1, 2016, by and runong AltaPacific Bancorp, a California corporation (''APB") and
Commerce Bank of Temecula Valley, a California banking corporation ("CBTV"), and the
undersigned member ofthe Board of Directors ofCBTV ("Director").
WHEREAS, APB and CBTV are entering into an Agreement and Plan of Reorganization
and Merger of even date herewith (including all annexes and/or schedules attached thereto, and
as it may be runended, the "Merger Agreement"), pursuant to which CBTV will merge with and
into AltaPacific Bank, a California banking corporation and wholly-owned subsidiary of APB
("AP Bank") on the terms and conditions set forth therein (the "Merger"), and, in connection
therewith, all outstanding shares of CBTV Common Stock will be converted into the Merger
Consideration in the manner set forth therein. Unless otherwise indicated, capitalized terms used
and not defined herein shall have the meanings set forth in the Merger Agreement.
WHEREAS, Director, as of the date of this Agreement, does not own shares of CBTV
Common Stock (but all shares of capital stock, if any, subsequently acquired by Director during
the term of this Agreement shall be referred to as the "Shares"), and, as a result, Director may
have a material economic interest in the consummation of the Merger.
WHEREAS, in order to induce APB and CBTV to enter into the Merger Agreement,
Director has agreed to enter into and perform this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency and
adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
1.
Agreement to Vote Shares. Director agrees that at any meeting of the shareholders
ofCBTV, or in connection with any written consent ofthe shareholders ofCBTV, Director shall:
(a)
appear at each such meeting or otherwise cause the Shares to be counted
as present thereat for purposes of establishing a quorum; and
(b)
vote (or cause to be voted), in person or by proxy, or deliver a written
consent (or cause a consent to be delivered) covering, all of the Shares (whether acquired
heretofore or hereafter) that are owned of record or beneficially by Director or as to which
Director has, directly or indirectly, the right to vote or direct the voting: (i) in favor of adoption
and approval of the Merger Agreement, the Merger and any other transactions contemplated by
the Merger Agreement; (ii) against any action or agreement that could reasonably be expected to
result in a breach of any covenant, representation or warranty or any other obligation or
agreement of CBTV contained in the Merger Agreement or of Director contained in this
Agreement; and (iii) against any action, agreement or transaction that is intended, or could
reasonably be expected, to materially impede, interfere or be inconsistent with, delay, postpone,
discourage or materially and adversely affect consummation of the Merger or the performance
by Director of his or her obligations under this Agreement.
4439.01111046654.5
-1-
2.
Transfer of Shares.
(a)
Prohibition on Transfers of Shares; Other Actions. Director hereby agrees
that while this Agreement is in effect, Director shall not, except with the prior written approval
of APB, (i) sell, transfer, pledge, encumber, distribute by gift or donation, or otherwise dispose
of any of the Shares (or any securities convertible into or exercisable or exchangeable for the
Shares) or any interest therein, whether by actual disposition, physical settlement or effective
economic disposition through hedging transactions, derivative instruments or other means, (ii)
enter into any agreement, arrangement or understanding with any Person, or take any other
action, that violates or conflicts with or could reasonably be expected to violate or conflict with
Director's representations, warranties, covenants and obligations under this Agreement, or (iii)
take any other action that could reasonably be expected to impair or otherwise adversely affect,
in any material respect, Director's power, authority and ability to comply with and perform his or
her covenants and obligations under this Agreement.
(b)
Transfer of Voting Rights. Director hereby agrees that he or she shall not
deposit any Shares in a voting trust, grant any proxy or, other than this Agreement, enter into any
voting agreement or similar agreement or arrangement with respect to any of the Shares.
3.
Director Support. Director agrees that for a period of two (2) years from the
Effective Time, to use his/her commercially reasonable efforts to support and refrain from (a)
disparaging the goodwill of APB and its subsidiaries and CBTV, (b) harming their respective
customer and client relationships, and (c) disparaging the business or banking reputation of APB
or AP Bank.
4.
Director Covenants. Director agrees that for a period of two (2) years from the
Effective Time, Director shall not, directly or indirectly, individually or as an employee, partner,
officer, director, promoter or shareholder or in any other capacity whatsoever, except in the
performance of customary legal, accounting, insurance, or investment or investment
management services as performed at the time of execution of the Agreement or of a similar
nature:
(a)
solicit the banking business of any current customers of APB, AP Bank or
CBTV or customers who are customers on the Effective Time;
(b)
(i) acquire, charter, operate or enter into any franchise or other
management agreement with any "Financial Institution," as defined below, in which Director
shall be involved in activities competitive with APB, AP Bank or CBTV, in each case as in
existence as of the date hereof, (ii) serve as an officer, director, employee, agent, promoter, or
consultant to any Financial Institution (whether in existence or in organization) in connection
with activities that are competitive with APB, AP Bank or CBTV, in each case as in existence as
of the date hereof, or (iii) establish or operate a branch or other office of a Financial Institution,
provided that the restrictions in clauses (i) though (iii) above shall apply only to any Financial
Institution located within Riverside, San Bernardino and San Diego counties in California
("Covered Financial Institution"). For purposes of this Agreement, "Financial Institution" means
a "depository institution" as that term is defined in 12 C.P.R. Section 348.2 and any parent or
subsidiary thereof.
-24439.011/1046654.5
(c)
Director further agrees that Director shall not:
(i)
prior to the Effective Time, recruit, hire, assist others in recruiting
or hiring, discuss employment with, or refer others concerning employment, any person who is,
or within the preceding twelve (12) months was, an employee of CBTV; and
(ii)
after the Effective Time and until the second anniversary of the
Effective Time, recruit, hire, assist others in recruiting or hiring, any person who is an employee
of APB or AP Bank at the date of the recruitment or hire or who was an employee of CBTV
within the twelve (12) months immediately preceding to the date of the recruitment or hire;
provided, however, that this prohibition shall not apply to general recruitment, solicitations
and/or hires through employment agencies or advertisements that are placed in publications of
general circulations or trade journals whether on the internet or otherwise.
(d)
If any court of competent jurisdiction should determine that any term or
terms of this covenant are too broad with respect to time, geographic area, lines of commerce or
otherwise, such court shall modify and revise any such term or terms so that they comply with
applicable law.
(e)
Direct9r agrees that (i) this Agreement is entered into in connection with
the conveyance to APB or AP Bank of the goodwill of the business of CBTV; (ii) Director may
receive valuable consideration in this Agreement and in the Merger pursuant to the Merger
Agreement; (iii) the restrictions imposed upon Director by this Agreement are essential and
necessary to ensure that APB or AP Bank receive the goodwill of CBTV; and (iv) all the
restrictions (including particularly the time and geographical limitations) set forth in this
Agreement are fair and reasonable.
(f)
Notwithstanding the foregoing, nothing in this Agreement shall require
Director to (i) divest any passive investment in any Covered Financial Institution existing as of
the date of this Agreement or the Effective Time, (ii) refrain from becoming a shareholder of no
more than 4.9% of any class of equity security or debt security or other ownership interest of any
Covered Financial Institution, or (iii) resign from any board position held at any Covered
Financial Institution as of the date of this Agreement. In the event that Director holds a passive
investment, becomes a shareholder or currently serves on a board of a Covered Financial
Institution as outlined in this Section 4(f), such Director will still be subject to the duties outlined
in Sections 4(a), (b) and (c) above.
5.
Release.
(a)
Director acknowledges that he is aware of no existing claim or defense,
personal or otherwise, or rights of set off whatsoever against CBTV, except as expressly
provided herein. For and in consideration of the consummation of the Merger and the other
transactions contemplated by the Merger Agreement, Director, for himself/herself and on behalf
of his/her heirs and assigns (the "Director Releasing Parties"), releases, acquits and forever
discharges CBTV and its predecessors, successors, assigns, officers, directors, employees, agents
and servants, and all persons, natural or corporate, in privity with them or any of them, from any
and all known claims or causes of action of any kind wha~soever, at common law, statutory or
-34439.01111046654.5
otherwise, which Director Releasing Parties, or any of them, has now existing or that may
hereafter arise in respect of any and all agreements and obligations incurred on or prior to the
date hereof, or in respect of any event occurring or circumstances existing on or prior to the date
hereof; provided, however, that CBTV shall not be released from any written contractual
obligations or accrued benefits of CBTV to Director as set forth on Schedule 1 attached hereto or
any potential claim for indemnification under CBTV's articles of incorporation or bylaws (in
each case as in existence on the date hereof) for any matters arising in connection with Director's
service as a director or officer or employee of CBTV relating to acts, circumstances, actions or
omissions arising on or prior to the date hereof to the extent such claims have not been asserted
or are not known to Director.
It is expressly understood and agreed that the terms hereof are contractual
(b)
and not merely recitals, and that the agreements herein contained and the consideration herein
transferred is to compromise doubtful and disputed claims, and that no releases made or other
consideration given hereby or in connection herewith shall be construed as an admission of
liability, all liability being expressly denied by CBTV. Director hereby represents and warrants
that the consideration hereby acknowledged for entering into this Agreement and the transactions
contemplated hereby is greater than the value of all claims, demands, actions and causes of
action herein relinquished, released, renounced, abandoned, acquitted, waived and/or discharged,
and that this Agreement is in full settlement, satisfaction and discharge of any and all such
claims, demands, actions, and causes of action that Director may have or be entitled to against
CBTV and its predecessors, assigns, legal representatives, officers, directors, employees,
attorneys and agents other than obligations or liabilities to Director in connection with any
written contractual obligations or accrued benefits of CBTV to Director as set forth on Schedule
1 attached hereto.
6.
Representations and Warranties of Director. Director represents and warrants to
each of APB and CBTV that the following statements are true and correct and not misleading:
(a) . Capacity. Director has all requisite capacity and authority to enter .into
and perform his or her obligations under this Agreement.
(b)
Binding Agreement. This Agreement has been duly executed and
delivered by Director and constitutes the valid and legally binding obligation of Director, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general equity principles.
(c)
Non-Contravention. The execution and delivery of this Agreement by
Director does not, and the performance by Director of his or her obligations hereunder and the
consummation by Director of the transactions contemplated hereby will not, violate or conflict
with, or constitute a default under, any agreement, instrument, contract or other obligation or any
order, arbitration award, judgment or decree to which Director is a party or by which Director is
bound, or any statute, rule or regulation to which Director is subject.
(d)
Ownership. The Shares are, and through the term of this Agreement will
be, owned beneficially and of record by Director or otherwise controlled by him or her. Director
hfl.S good and marketa:ble .title to the Shares, free and clear of any lien, pledge, mortgage, security
-44439.01111046654.5
interest or other encumbrance. As of the date hereof, this Director is the beneficial and record
owner of, or otherwise holds voting power with respect to
shares of CBTV Common
Stock and holds options to purchase
shares of CBTV Common Stock. Director has
and will have at all times during the term of this Agreement (i) voting power and power to issue
instructions with respect to the matters set forth in Section 1 hereof, (ii) power of disposition and
(iii) power to agree to all of the matters set forth in this Agreement, in each case with respect to
all of the Shares owned by Director on the date of this Agreement and all of the Shares hereafter
acquired by Director and owned beneficially or of record by, directly or indirectly, by Director
during the term of this Agreement. For purposes of this Agreement, the term "beneficial
ownership" shall be interpreted in accordance with Rule 13d-3 under the Exchange Act, provided
that a Person shall be deemed to beneficially own any securities which may be acquired by such
Person pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise (irrespective of whether the
right to acquire such securities is exercisable immediately or only after the passage of time,
including the passage of time within 60 days, the satisfaction of any conditions, the occurrence
of any event or any combination of the foregoing).
(e)
Consents and Approvals. Director has taken all actions necessary to
approve the actions contemplated by this Agreement. The execution and delivery of this
Agreement by Director does not, and the performance by Director of his or her obligations under
this Agreement and the consummation by Director of the transactions contemplated hereby will
not, require Director to obtain any consent, approval, authorization or permit of, or to make any
filing with or notification to, any Governmental Authority.
(f)
Absence of Litigation.
There is no suit, action, investigation or
proceeding pending or, to the ~owledge of Director, threatened against or affecting Director or
any of his or her affiliates before' or by any Governmental Authority that could reasonably be
expected to materially impair the ability of Director to perform his or her obligations hereunder
or to consummate the transactions contemplated hereby on a timely basis.
7.
Specific Performance and Remedies. Director acknowledges that it will be
impossible to measure in money the damage to APB and CBTV if Director fails to comply with
the obligations imposed by this Agreement and that, in the event of any such failure, neither APB
nor CBTV will have an adequate remedy at law. Accordingly, Director agrees that injunctive
relief or other equitable remedy, in addition to remedies at law or in damages, is the appropriate
remedy of APB and CBTV for any such failure and will not oppose the granting of such relief on
the basis that APB or CBTV may have an adequate remedy at law. Director agrees that he or she
will not seek, and agrees to waive any requirement for, the securing or posting of a bond in
connection with APB's or CBTV's seeking or obtaining such equitable relief.
8.
Term of Agreement; Termination. The term of this Agreement shall commence on
the date hereof. In the event the Merger is not consummated and the Merger Agreement is
terminated in accordance with its terms (other than as a result of a breach of this Agreement),
this Agreement shall be null and void.
9.
Stop Transfer Order. In furtherance of this Agreement, Director hereby authorizes
and instructs CBTV to instruct its transfer agent, if any, to enter a stop transfer order with respect
-54439.011/1046654.5
to all of the Shares for the period from the date hereof through the date this Agreement is
terminated in accordance with Section 8.
10.
Confidentiality. Director agrees (a) to hold any and all information regarding this
Agreement, the Merger and the Merger Agreement in strict confidence, and (b) not to divulge
any information regarding this Agreement, the Merger or the Merger Agreement to any third
person, until such time as the Merger has been publicly announced by APB and CBTV, at which
time Director may only divulge such information as has been publicly disclosed by APB and
CBTV.
11.
Entire Agreement. This Agreement supersedes all prior agreements, written or
oral, among the parties hereto with respect to the subject matter hereof and contains the entire
agreement among the parties with respect to the subject matter hereof. This Agreement may not
be amended, supplemented or modified, and no provisions hereof may be modified or waived,
except by an instrument in writing signed by each party hereto. No waiver of any provisions
hereof by any party shall be deemed a waiver of any other provisions hereof by any such party,
nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party.
12.
Attorneys' Fees. If any action at law or in equity is necessary to enforce or
interpret the terms of .this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the
prevailing party is entitled.
13.
Severability. If any provlSlon of this Agreement or the application of such
provision to any person or circumstances shall be held invalid or unenforceable by a court of
competent jurisdiction, such provision or application shall be unenforceable only to the extent of
such invalidity or unenforceability, and the remainder of the provision held invalid or
unenforceable and the application of such provision to persons or circumstances, other than the
party as to which it is held invalid, and the remainder of this Agreement, shall not be affected.
14.
Notices. All notices, requests, claims, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered personally, upon receipt
of a transmission confirmation if sent by telecopy or like transmission and on the next Business
Day when sent by a reputable overnight courier service to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
Ifto APB:
AltaPacific Bancorp
4845 Old Redwood Highway
Santa Rosa, CA 95403
Attention: Charles 0. Hall, ChiefExecutive Officer
Facsimile: (707) 543-2703
-64439.01111046654.5
With a copy (which shall not constitute notice) to:
King, Holmes, Paterno & Berliner, LLP
1900 A venue of the Stars
25th Floor
Los Angeles, CA 90067
Attention: Keith T. Holmes, Esq.
Telephone: (31 0) 282-8932
Facsimile: (31 0) 282-8903
Ifto CBTV:
Commerce Bank ofTemecula Valley
25220 Hancock A venue, Suite 140
Murrieta, CA 90067
Attention: Donald W. Murray, Chairman
Facsimile: (951) 973-7701
With a copy (which shall not constitute notice) to:
Loren Hansen, Esq.
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Facsimile: (949) 851-1732
If to Director, at the address of Director appearing on the signature page of this
Agreement.
A~ignment; Binding Effect. No party may assign either this Agreement or any of
15.
its rights, interests or obligations hereunder without the prior written approval of the other
parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and permitted assigns.
16.
Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of California applicable to contracts made and entirely to
be performed within such state, without regard to any applicable conflicts of law principles that
would require the application of the laws of any other jurisdiction.
17.
Independent Review and Advice. Director represents and warrants that he or she
has carefully read this Agreement; that Director executes this Agreement with full knowledge of
the contents of this Agreement, the legal consequences thereof, and any and all rights which any
party may have with respect to the other parties; that Director has had the opportunity to receive
independent legal advice with respect to the matters set forth in this Agreement and with respect
to the rights and asserted rights arising out of such matters, and that Director is entering into this
Agreement of his or her own free will. Director expressly agrees that there are no expectations
contrary to this Agreement and no usage of trade or regular practice in the industry shall· be used
-74439.011/1046654.5
to modify this Agreement. The parties agree that this Agreement shall not be construed for or
against any party in any interpretation thereof.
18.
Headings. The descriptive headings of the Sections of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
19.
Counterparts. This Agreement may be executed in one or more counterparts, all
of which shall be considered one and the same agreement and shall become effective when one
or more counterparts have been signed by each party hereto and delivered to each party hereto.
[Signature page follows]
-84439.011/1046654.5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
ALTAPACIFIC BANCORP
By: -------------------------Name: -----------------------Title:
-------------------------
COMMERCE BANK OF TEMECULA VALLEY
By: --------------------------Name: ------------------------Title: ___________________
DIRECTOR
Name: ------------------------Address:
-94439.011/1046654.5
Schedule 1
Contractual Obligations and Accrued Benefits
4439.011/1046654.5
EXHIBIT A-1
Exhibit A-1
CBTV Directors Executing Non-Competition and Voting Agreements
Nancy K. Hughes
Philip D. Oberhansley
Thomas T. Pangelinan
Richard K. Shuman, M.D.
Thomas G. Williams, M.D.
Gerald R. Wilson
EXHIBITB
Name:
--------------------
Form of Executive Voting and Non-Solicitation Agreement
VOTING AND NON-SOLICITATION AGREEMENT (this "Agreement"), dated as
of September 1, 2016, by and among AltaPacific Bancorp, a California corporation ("APB") and
Commerce Bank of Temecula Valley, a California banking corporation ("CBTV"), and the
undersigned executive officer of CBTV ("Executive").
WHEREAS, APB and CBTV are entering into an Agreement and Plan of Reorganization
and Merger of even date herewith (including all annexes and/or schedules attached thereto, and
as it may be amended, the "Merger Agreement"), pursuant to which CBTV will merge with and
into AltaPacific Bank, a California banking corporation and wholly-owned subsidiary of APB
("AP Bank"), on the terms and conditions set forth therein (the "Merger") and, in connection
therewith, all outstanding shares of CBTV Common Stock will be converted into the Merger
Consideration in the manner set forth therein.
WHEREAS, in order to induce APB to enter into the Merger Agreement, Executive has
agreed to agrees to restrict his or her activities in accordance with this Agreement for the benefit
of any Person or entity other than APB.
WHEREAS, Executive owns shares of CBTV Common Stock (such shares, together with
all shares of capital stock of CBTV, if any, subsequently acquired by Executive during the term
of this Agreement, being referred to as the "Shares"), and, as a result, Executive has a material
economic interest in the consummation of the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency and
adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
1.
Defined Terms.
(a)
Except as otherwise provided herein, each capitalized term shall have the
meaning given to such term in the Merger Agreement. As used in this Agreement, the following
terms shall have the meanings set forth:
(b)
"Customer" shall mean any person with whom AP Bank or APB has an
existing relationship for Financial Services (as defined below) from the date of the Merger
Agreement until immediately prior to the Effective Date (as that term is defined in the Merger
Agreement) or with whom APB, AP Bank and their respective parents, affiliates and subsidiaries
has an existing relationship for Financial Services at any point from the date of the Merger
Agreement.
"Financial Institution" shall mean a "depository institution" as that term is
(c)
defined in 12 C.F.R. Section 348.2 and any parent, subsidiary or affiliate thereof and shall also
include any state chartered commercial bank, savings bank, trust company, savings and loan
association, industrial loan company, or credit union.
4439.011/1046778.4
-1-
(d)
"Financial Services" shall mean the origination, purchasing, selling and
servicing of secured or unsecured commercial, real estate, residential, construction, SBA and
consumer loans and the solicitation and provision of deposit and investment services and
services related thereto.
"Prospective Customer" shall mean any Person with whom CBTV, AP
(e)
Bank or APB has actively pursued a relationship for Financial Services at any time prior to and
between the date of the Merger Agreement and the Effective Date or with whom APB or AP
Bank actually pursues a relationship for Financial Services from and after the Effective Date;
provided, however, CBTV's, AP Bank's or APB's general solicitation for business, such as
through television or media advertising, does not constitute active pursuit of a relationship.
(f)
"Surviving Bank" means AP Bank, its parents, subsidiaries and affiliates
and/or the bank which is the surviving entity after the Merger.
(g)
"Trade Secrets" shall mean:
(i)
All secrets and other confidential information, ideas, knowledge,
know-how, techniques, secret processes, improvements, discoveries, methods, inventions, sales,
financial information, lists of Customers and Prospective Custom~rs, plans, concepts, strategies
or products, as well as all documents, reports, drawings, designs, plans and proposals otherwise
pertaining to same or relating to the business and properties ofCBTV, AP Bank or APB of
which Executive has acquired, or may hereafter acquire, knowledge and possession as a director,
officer or employee or as a result of the transactions contemplated by the Merger Agreement.
(ii)
Notwithstanding any other provisions of this Agreement to the
contrary, "Trade Secrets" shall not include any (i) information that is or has become available
from a third party who was not previously an employee, agent or contractor of CBTV, and who
learned the information independently and is not or was not bound by a confidentiality
agreement with respect to such information; (ii) information readily ascertainable from public,
trade or other nonconfidential sources (other than as a result, directly or indirectly, of a
disclosure or other dissemination in contravention of a confidentiality.agreement); or (iii)
information that has been acquired by a director or officer as a result of a professional
relationship with a Customer or Prospective Customer unrelated to such director's or officer's
service as a director or employment as an officer of CBTV.
2.
Acknowledgments. Executive acknowledges that:
APB would not enter into the Merger Agreement unless Executive agrees
(a)
not to use or disclose Trade Secrets for the benefit of any Person or entity other than APB, AP
Bank or the Surviving Bank or any of their respective subsidiaries or successors and unless
Executive agrees not to solicit Customers or Prospective Customers, for Financial Services,
suppliers, or distributors, officers or employees of APB, AP Bank or the Surviving Bank, or any
of their respective subsidiaries or successors. Accordingly, this Agreement is a material
inducement for APB to enter into and to carry out the terms of the Merger Agreement.
Executive expressly acknowledges that he or she is entering into this Agreement to induce APB
to enter into and carry out the terms of the Merger Agreement.
-24439.0 II/I 046778.4
(b)
By virtue ofhis or her position with CBTV, Executive has developed
considerable expertise in the business operations of CBTV and has or will develop considerable
expertise in the business operations of APB, AP Bank and/or the Surviving Bank. Executive has
had and will have access to Trade Secrets. Executive recognizes that APB would be irreparably
damaged, and its substantial investment in CBTV materially impaired, if Executive were to
disclose or make unauthorized use of any Trade Secrets in any way, including but not limited to
the use ofTrade Secrets to solicit or aid in the solicitation of Customers or Prospective
Customers for Financial Services or induce or attempt to induce any Person who is a Customer,
Prospective Customer, supplier, or distributor of CBTV, APB, AP Bank or the Surviving Bank to
terminate such Person's relationships with, or to take any action that would be disadvantageous
to, CBTV, APB or the Surviving Bank. Moreover, Executive recognizes that CBTV and APB
would be irreparably damaged, and APB's substantial investment in CBTV materially impaired
ifExecutive were to solicit or aid in the solicitation of any Person who is a CBTV, APB, or
Surviving Bank officer or employee to terminate such Person's employment relationship with, or
to take any action that would be disadvantageous to, CBTV, APB, AP Bank or the Surviving
Bank. Accordingly, Executive expressly acknowledges that he or she is voluntarily entering into
this Agreement and that the terms and conditions of this Agreement are fair and reasonable to
Executive in all respects.
3.
Executive Covenants.
(a)
Trade Secrets. Without limiting the generality of the foregoing and at all
times after the date hereof and until following the Effective Date, other than for the benefit of
CBTV and, after the Effective Date, other than for the benefit of APB and the Surviving Bank,
Executive shall make no use of the Trade Secrets, or any other part thereof, for the benefit of any
other Person, and if Executive is not continuing his or her service as a director or officer of APB
or the Surviving Bank, shall deliver, on and after the Effective Date, all documents, reports,
drawings, designs, plans, proposals and other tangible evidence of Trade Secrets, now possessed
or hereafter acquired by Executive, to the Surviving Bank.
(b)
Exceptions. Notwithstanding any provision ofthis Agreement to the
contrary, Executive may disclose or reveal any information, whether including in whole or in
part any Trade Secrets, that:
(i)
Executive is required to disclose or reveal under any applicable
law, provided Executive makes a good faith request that the confidentiality of the Trade Secrets
be preserved and, to the extent not prohibited by applicable law, gives APB prompt notice of
such requirement in advance of such disclosure.
(ii)
Executive is otherwise required to disclose or reveal by any
Governmental Authority, provided Executive makes a good faith request that the confidentiality
of the Trade Secrets be preserved and, to the extent not prohibited by applicable laws, gives APB
prompt notice of such requirement in advance of such disclosure; or
(iii)
In the opinion of Executive's counsel, Executive is compeiled to
disclose or else stand liable for contempt or suffer other censure or penalty imposed by any
Governmental Authority, providedExecutive makes a goo4 faith request that the confidentiality
-34439.011/1046778.4
of the Trade Secrets be preserved and, to the extent not prohibited by applicable laws, gives APB
prompt notice of such requirement in advance of such disclosure.
(c)
Non-Solicitation.
Non-Solicitation of Customers and Prospective Customers. From
(i)
the date hereof and for the period ending on the later of: (A) one (1) year from and after the
Effective Date or, (B) one (1) year from and after the date on which Executive is no longer a
director or employee ofCBTV, APB, AP Bank or the Surviving Bank, Executive shall not,
directly or indirectly, without the prior written consent of APB, AP Bank or the Surviving Bank,
on behalf of any Financial Institution, use any Trade Secret to solicit or aid in the solicitation of
Customers or Prospective Customers for Financial Services or use any Trade Secret to induce or
attempt to induce any Person who is a Customer, Prospective Customer, supplier, or distributor
of CBTV, whose business Executive was directly, actively and substantively involved in
soliciting or recruiting while serving as an executive officer or director of CBTV, APB, AP Bank
or the Surviving Bank as of the date of said solicitation to terminate such Person's relationships
with CBTV, APB, AP Bank and/or the Surviving Bank or to obtain Financial Services from a
Person or entity other than CBTV, APB, AP Bank and/or the Surviving Bank. From the date
hereof and for any period that Executive is employed by or provides service for CBTV, APB, AP
Bank or the Surviving Bank, Executive, upon the reasonable request ofCBTV, APB, AP Bank
or the Surviving Bank, agrees to use his or her best efforts to retain the business of the Surviving
Bank and promote the acquisition of new business by the Surviving Bank.
Non-Solicitation of Officers or Employees. From the date hereof
(ii)
and for the period ending on the later of: (A) one (1) year from and after the Effective Date or,
(B) one (1) year from and after the date on which Executive is no longer a director or employee
of CBTV, APB, AP Bank or the Surviving Bank, Executive shall not, directly or indirectly,
without the prior written consent of APB, AP Bank or the Surviving Bank, on behalf of any
Financial Institution, solicit or aid in the solicitation of any officer or employee or induce or
attempt to induce any officer or employee ofCBTV, APB, AP Bank and/or the Surviving Bank
to terminate such Person's relationships with CBTV, APB, AP Bank and/or the Surviving Bank.
From the date hereof and for any period that Executive is employed by CBTV, APB, AP Bank or
the Surviving Bank, Executive, upon the reasonable request of CBTV, APB, AP Bank or the
Surviving Bank, agrees to use his or her best efforts to retain the officers and employees of the
Surviving Bank. For purposes of this Section, the terms "officer" and "employee" shall mean
the following: any person employed by CBTV, APB, AP Bank and/or the Surviving Bank at the
time of the solicitation or attempted solicitation, and/or any person who was employed by
CBTV, APB, AP Bank and/or the Surviving Bank at any time within the forty-five (45) days
prior to the date of said solicitation or attempted solicitation. This prohibition shall not apply to
general solicitations through employment advertisements that are placed in publications of
general circulation or in trade j oumals.
-44439.011/1046778.4
4.
Release.
(a)
Executive acknowledges that he or she is aware of no existing claim or
defense, personal or otherwise, or rights of set off whatsoever against CBTV, except as expressly
provided herein. For and in consideration of the consummation of the Merger and the other
transactions contemplated by the Merger Agreement, Executive, for himself/herself and on
behalf of his/her heirs and assigns (the "Executive Releasing Parties"), releases, acquits and
forever discharges CBTV and its predecessors, successors, assigns, officers, directors,
employees, agents and servants, and all persons, natural or corporate, in privity with them or any
of them, from any and all known claims or causes of action of any kind whatsoever, at common
law, statutory or otherwise, which Executive Releasing Parties, or any of them, has now existing
or that may hereafter arise in respect of any and all agreements and obligations incurred on or
prior to the date hereof, or in respect of any event occurring or circumstances existing on or prior
to the date hereof; provided, however, that CBTV shall not be released from any written
contractual obligations or accrued benefits of CBTV to Executive as set forth on Schedule 1
attached hereto or any potential claim for indemnification under CBTV' s articles of
incorporation or bylaws (in each case as in existence on the date hereof) for any matters arising
in connection with Executive's service as a director or officer or employee of CBTV relating to
acts, circumstances, actions or omissions arising on or prior to the date hereof to the extent such
claims have not been asserted or are not known to Executive:
It is expressly understood and agreed that the terms hereof are contractual
(b)
and not merely recitals, and that the agreements herein contained and the consideration herein
transferred is to compromise doubtful and disputed claims, and that no releases made or other
consideration given hereby or in connection herewith shall be construed as an admission of
liability, all liability being expressly denied by CBTV. Executive hereby represents and warrants
that the consideration hereby acknowledged for entering into this Agreement and the transactions
contemplated hereby is greater than the value of all claims, demands, actions and causes of
action herein relinquished, released, renounced, abandoned, acquitted, waived and/or discharged,
and that this Agreement is in full settlement, satisfaction and discharge of any and all such
claims, demands, actions, and causes of action that Executive may have or be entitled to against
CBTV and its predecessors, assigns, legal representatives, officers, directors, employees,
attorneys and agents other than obligations or liabilities to Executive in connection with any
written contractual obligations or accrued benefits of CBTV to Executive as set forth on
Schedule 1 attached hereto.
5.
Agreement to Vote Shares. Executive agrees that at any meeting of the
shareholders ofCBTV, or in connection with any written consent ofthe shareholders ofCBTV,
Executive shall:
(a)
appear at each such meeting or otherwise cause the Shares to be counted
as present thereat for purposes of establishing a quorum; and
(b)
vote (or cause to be voted), in person or by proxy, or deliver a written
consent (or cause a consent to be delivered) covering, all ofthe Shares (whether acquired
heretofore or hereafter) that are owned of record or beneficially by Executive or as to which
Executive has, directly or indirectly, the right to vote. or direct the voting: (i)in favor of adoption
-54439.011/1046778.4
and approval of the Merger Agreement, the Merger and any other transactions contemplated by
the Merger Agreement; (ii) against any action or agreement that could reasonably be expected to
result in a breach of any covenant, representation or warranty or any other obligation or
agreement of CBTV contained in the Merger Agreement or of Executive contained in this
Agreement; and (iii) against any action, agreement or transaction that is intended, or could
reasonably be expected, to materially impede, interfere or be inconsistent with, delay, postpone,
discourage or materially and adversely affect consummation of the Merger or the performance
by Executive of his or her obligations under this Agreement.
6.
Transfer of Shares.
(a)
Prohibition on Transfers of Shares; Other Actions. Executive hereby
agrees that while this Agreement is in effect, Executive shall not, except with the prior written
approval of APB, (i) sell, transfer, pledge, encumber, distribute by gift or donation, or otherwise
dispose of any of the Shares (or any securities convertible into or exercisable or exchangeable for
the Shares) or any interest therein, whether by actual disposition, physical settlement or effective
economic disposition through hedging transactions, derivative instruments or other means, (ii)
enter into any agreement, arrangement or understanding with any Person, or take any other
action, that violates or conflicts with or could reasonably be expected to violate or conflict with
Executive's representations, warranties, covenants and obligations under this Agreement, or (iii)
take any other action that could reasonably be expected to impair or otherwise adversely affect,
in any material respect, Executive's power, authority and ability to comply with and perform his
or her covenants and obligations under this Agreement.
(b)
Transfer ofVoting Rights. Executive hereby agrees that he or she shall not
deposit any Shares in a voting trust, grant any proxy or, other than this Agreement, enter into any
voting agreement or similar agreement or arrangement with respect to any of the Shares.
7.
Representations and Warranties of Executive. Executive represents and warrants
to each of APB and CBTV that the following statements are true and correct and not misleading:
(a)
Capacity. Executive has all requisite capacity and authority to enter into
and perform his or her obligations under this Agreement.
(b)
Binding Agreement. This Agreement has been duly executed and
delivered by Executive and constitutes the valid and legally binding obligation of Executive,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights and to general equity
principles.
(c)
Non-Contravention. The execution and delivery of this Agreement by
Executive does not, and the performance by Executive of his or her obligations hereunder and
the consummation by Executive of the transactions contemplated hereby will not, violate or
conflict with, or constitute a default under, any agreement, instrument, contract or other
obligation or any order, arbitration award, judgment or decree to which Executive is a party or by
which Executive is bound, or any statute, rule or regulation to which Executive is subject.
-64439.01111046778.4
(d)
Ownership. The Shares are, and through the term ofthis Agreement will
be, owned beneficially and of record by Executive or otherwise controlled by him or her.
Executive has good and marketable title to the Shares, free and clear of any lien, pledge,
mortgage, security interest or other encumbrance. As of the date hereof, the Executive is the
beneficial and record owner of, or otherwise holds voting power with respect to
shares
of CBTV Common Stock and holds options to purchase
shares of CBTV Common
Stock. Executive has and will have at all times during the term of this Agreement (i) voting
power and power to issue instructions with respect to the matters set forth in Section 1 hereof,
(ii) power of disposition and (iii) power to agree to all of the matters set forth in this Agreement,
in each case with respect to all ofthe Shares owned by Executive on the date of this Agreement
and all of the Shares hereafter acquired by Executive and owned beneficially or of record by,
directly or indirectly, by Executive during the term of this Agreement. For purposes of this
Agreement, the term "beneficial ownership" shall be interpreted in accordance with Rule 13d-3
under the Exchange Act, provided that a Person shall be deemed to beneficially own any
securities which may be acquired by such Person pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or
otherwise (irrespective of whether the right to acquire such securities is exercisable immediately
or only after the passage oftime, including the passage of time within 60 days, the satisfaction of
any conditions, the occurrence of any event or any combination of the foregoing).
(e)
Consents and Approvals. Executive has taken all actions necessary to
approve the actions contemplated by this Agreement. The execution and delivery of this
Agreement by Executive does not, and the performance by Executive of his or her obligations
under this Agreement and the consummation by Executive of the transactions contemplated
hereby will not, require Executive to obtain any consent, approval, authorization or permit of, or
to make any filing with or notification to, any Governmental Authority.
(f)
Absence of Litigation. There is no suit, action, investigation or
proceeding pending or, to the knowledge of Executive, threatened against or affecting Executive
or any of his or her affiliates before or by any Governmental Authority that could reasonably be
expected to materially impair the ability of Executive to perform his or her obligations hereunder
or to consummate the transactions contemplated hereby on a timely basis.
8.
Specific Performance and Remedies. Executive acknowledges that it will be
impossible to measure in money the damage to APB and CBTV if Executive fails to comply with
the obligations imposed by this Agreement and that, in the event of any such failure, neither APB
nor CBTV will have an adequate remedy at law. Accordingly, Executive agrees that injunctive
relief or other equitable remedy, in addition to remedies at law or in damages, is the appropriate
remedy of APB and CBTV for any such failure and will not oppose the granting of such relief on
the basis that APB or CBTV may have an adequate remedy at law. Executive agrees that he or
she will not seek, and agrees to waive any requirement for, the securing or posting of a bond in
connection with APB's or CBTV's seeking or obtaining such equitable relief.
Term of Agreement; Termination. The term of this Agreement shall commence on
9.
the date hereof. In the event the Merger is not consummated and the Merger Agreement is
terminated in accordance with its terms (other than as a result of a breach of this Agreement),
this Agreement shall be null and void.· Unless sooner terminated pursuantto the preceding
-74439.01111046778.4
sentence, Executive's obligations under this Agreement shall terminate two years after the later
to occur of the Effective Date or Executive's cessation of service with the Surviving Banl<..
10.
Confidentiality. Executive agrees (a) to hold any and all information regarding
this Agreement, the Merger and the Merger Agreement in strict confidence, and (b) not to
divulge any information regarding this Agreement, the Merger or the Merger Agreement to any
third person, until such time as the Merger has been publicly announced by APB and CBTV, at
which time Executive may only divulge such information as has been publicly disclosed by APB
andCBTV.
11.
Independence Of Obligations. The covenants of Executive set forth in this
Agreement shall be construed as independent of any other agreement or arrangement between
Executive, on the one hand, and APB and the Surviving Bank on the other, and the existence of
any claim or cause of action by Executive against CBTV, APB and/or the Surviving Bank or any
of their respective subsidiaries shall not constitute a defense to the enforcement of such
covenants against Executive.
12.
Entire Agreement. This Agreement supersedes all prior agreements, written or
oral, among the parties hereto with respect to the subject matter hereof and contains the entire
agreement among the parties with respect to the subject matter hereof. This Agreement may not
be amended, supplemented or modified, and no provisions hereof may be modified or waived,
except by an instrument in writing signed by each party hereto. No waiver of any provisions
hereof by any party shall be deemed a waiver of any other provisions hereof by any such party,
nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party.
13.
Attorneys' Fees. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and necessary disbursements, in addition to any other relief to which the
prevailing party is entitled.
14.
Severability. If any provision of this Agreement or-the application of such
provision to any person or circumstances shall be held invalid or unenforceable by a court of
competent jurisdiction, such provision or application shall be unenforceable only to the extent of
such invalidity or unenforceability, and the remainder of the provision held invalid or
unenforceable and the application of such provision to persons or circumstances, other than the
party as to which it is held invalid, and the remainder of this Agreement, shall not be affected.
15.
Notices. All notices, requests, claims, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered personally, upon receipt
of a transmission confirmation if sent by telecopy or like transmission and on the next Business
Day when sent by a reputable overnight courier service to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
-84439.01111046778.4
Ifto APB:
AltaPacific Bancorp
4845 Old Redwood Highway
Santa Rosa, CA 95403
Attention: Charles 0. Hall, ChiefExecutive Officer
Facsimile: (707) 543-2703
With a copy (which shall not constitute notice) to:
King, Holmes, Paterno & Soriano, LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, CA 90067
Attention: Keith T. Holmes, Esq.
Telephone: (31 0) 282-8932
Facsimile: (31 0) 282-8903
Ifto CBTV:
Commercial Bank of Temecula Valley
25220 Hancock Avenue, Suite 140
Murrieta, CA 92562
Attention: Donald W. Murray, Chairman
Facsimile: (951) 973-7701
With a copy (which shall not constitute notice) to:
Loren Hansen, Esq.
1301 Dove Street, Suite 900
Newport Beach, CA 92660
Facsimile: (949) 851-1732
If to Executive, at the address of Executive appearing on the signature page of this
Agreement.
16.
Assignment; Binding Effect. No party may assign either this Agreement or any of
its rights, interests or obligations hereunder without the prior written approval of the other
parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and permitted assigns.
17.
Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of California applicable to contracts made and entirely to
be performed within such state, without regard to any applicable conflicts of law principles that
would require the application of the laws of any other jurisdiction.
18.
Independent Review and Advice. Executive represents and warrants that he or
she has carefully read this Agreement; that Executive executes this Agreement with full
knowledge of the contents of this Agreement, the legal consequences thereof, and any and all
-94439.011/1046778.4
rights which any party may have with respect to the other parties; that Executive has had the
opportunity to receive independent legal advice with respect to the matters set forth in this
Agreement and with respect to the rights and asserted rights arising out of such matters, and that
Executive is entering into this Agreement of his or her own free will. Executive expressly agrees
that there are no expectations contrary to this Agreement and no usage of trade or regular
practice in the industry shall be used to modify this Agreement. The parties agree that this
Agreement shall not be construed for or against any party in any interpretation thereof.
19.
Headings. The descriptive headings ofthe Sections ofthis Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
20.
Counterparts. This Agreement may be executed in one or more counterparts, all
of which shall be considered one and the same agreement and shall become effective when one
or more counterparts have been signed by each party hereto and delivered to each party hereto.
[Signature page follows]
-104439.011/1046778.4
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date frrst written above.
ALTAPACIFIC BANCORP
By: --------------------------
Nmne: -----------------------Title: ------------------------
COMMERCIAL BANK OF TEMECULA VALLEY
By: -------------------------
Nmne: ----------------------Title: ------------------------
EXECUTIVE
Nmne: ----------------------Address: - - - - - - - - - - - - - - - - -
-114439.011/1046778.4
Schedule 1
Contractual Obligations and Accrued Benefits
[Payment of severance benefit contained in employment agreement with Executive.]
4439.0 II/I 046778.4
EXHIBIT B-1
Exhibit B-1
Executive Executing Voting and Non-Solicitation Agreements
Donald W. Murray
Lou Ellen Ficke
Carl P. Patsko
EXHIBITC
EXHffiiTC
Form of Merger Agreement
AGREEMENT OF MERGER
This AGREEMENT OF MERGER, dated as of [
], (this "Merger
Agreement"), is made and entered into by and between AltaPacific Bank, a California banking
corporation ("AP Bank"), Commerce Bank of Temecula Valley, a California banking
corporation ("CBTV"), and AltaPacific Bancorp, a California corporation ("APB").
WHEREAS, the Boards of Directors of AP Bank, CBTV and APB have
approved, and deem it advisable and in the best interests of AP Bank, CBTV, APB and their
respective shareholders, that AP Bank, and CBTV consummate the business transaction provided
for herein in which CBTV would merge with and into AP Bank (the "Merger") as contemplated
in that certain Agreement and Plan of Reorganization and Merger, dated as of [
],
2016, by and among APB and CBTV (the "Plan of Merger"), providing, among other things, for
the execution and filing of this Merger Agreement and the consummation of the Merger.
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained in this Merger Agreement and the Plan of Merger, the parties to this Merger
Agreement hereby agree that CBTV shall be merged with and into AP Bank in accordance with
the provisions of the laws of the State of California and upon the terms and subject to the
conditions set forth as follows:
1.
The Merger.
(a)
Effective Time. The Merger and this Merger Agreement shall be effective as and
at the time provided in Section 4887(b) of the California Financial Code (the "Effective Time").
(b)
Effect of the Merger. At the Effective Time, CBTV shall be merged with and into
AP Bank and the separate corporate existence of CBTV shall cease. AP Bank shall be the
Surviving Bank (the "Surviving Bank") in the Merger. At such time, without other transfer, all
the property, rights, privileges, powers and franchises of CBTV shall vest in the Surviving Bank,
and all debts, liabilities, obligations, restrictions, disabilities and duties of CBTV shall become
the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Bank. The
separate existence of the Surviving Bank as a California corporation, with all its purposes,
objects, rights, powers, privileges and franchises, shall continue unaffected and unimpaired by
the Merger.
(c)
2.
Name. The name of the Surviving Bank shall be "AltaPacific Bank."
Corporate Governance.
(a)
Articles of Incorporation; Bylaws. From and after the Effective Time and until
thereafter .amended in accordance with applicable law, (i) the Articles of Incorporation of AP..
4439.01111046673.1
Bank as in effect immediately prior to the Effective Time shall be and continue to be the Articles
of Incorporation of the Surviving Bank; and (ii) the Bylaws of AP Bank as in effect immediately
prior to the Effective Time shall be and continue to be the Bylaws of the Surviving Bank.
(b)
Board of Directors. The directors and officers of AP Bank at the Effective Time
will be the directors and officers of the Surviving Bank from and after the Effective Time until
they are removed or their successors are elected and qualified.
3.
Effect of Merger on Outstanding Shares.
(a)
Shares of CBTV. At the Effective Time, automatically by virtue of the Merger,
and without any action on the part of any person, each share of the common stock, no par value
of CBTV (the "CBTV Common Stock"), issued and outstanding immediately prior to the
Effective Time (as defined below), other than any Dissenting Shares (as defined below) shall be
converted into the right to receive, at the election of each of the holders of the CBTV Common
Stock, and subject to adjustment and proration as provided in the Plan of Merger, the following
consideration (the "Merger Consideration"):
(i)
Cash Consideration. A cash payment, without interest, of$ _ _ ; or
(ii)
Stock Consideration. The right to receive _
shares of APB Common
Stock.
(b)
CBTV Stock Options. Immediately prior to the Effective Time, each CBTV Stock
Option that has not previously been exercised, shall terminate and be of no further effect and any
rights thereunder to purchase shares of CBTV Common Stock shall also terminate and be of no
further force or effect.
(c)
Dissenting Shares. Any shares of CBTV Common Stock held by a person who
dissents from the .Merger in accordance with the provisions of Chapter 13 of the California
General Corporation Law shall be herein called ''Dissenting Shares." Notwithstanding any other
provision of this Agreement, any Dissenting Shares shall not, after the Effective Time, be
entitled to vote for any purpose or receive any dividends or other distributions and shall be
entitled only to such rights as are afforded in respect of Dissenting Shares pursuant to applicable
law.
(d)
Fractional Shares. Notwithstanding any other provision of this Agreement, no
fractional shares of APB Common Stock will be issued and any holder of shares of Company
Common Stock entitled to receive a fractional share of APB Common Stock but for this Section
J shall be entitled to receive a cash payment in lieu thereof.
(e)
Shares of AP Bank. All shares of AP Bank common stock issued and outstanding
immediately prior to the Effective Time shall remain outstanding.
4.
General Provisions.
(a)
Termination and Agreement. The obligations of the parties to effect the Merger
· shall be'subject to a:ll the terins and conditions contained ih the Plan of Merger. Notwithstanding
4439.01111046673.1
2
shareholder approval of this Merger Agreement and the Plan of Merger, this Merger Agreement
shall terminate forthwith in the event that the Plan of Merger shall be terminated as therein
provided prior to the Effective Time.
(b)
Amendment. Subject to applicable law, this Merger Agreement may be amended
by APB, AP Bank and CBTV at any time prior to the Effective Time. This Merger Agreement
may not be amended except by an instrument in writing signed on behalf of each of the parties
hereto.
(c)
Successors and Assigns. This Merger Agreement shall be binding upon and
enforceable by the parties hereto and their respective successors, assigns and transferees, but this
Merger Agreement may not be assigned by any party hereto without the written consent of the
other.
(d)
Governing Law. This Merger Agreement has been executed in the state of
California, and the laws of the state of California shall govern the validity and interpretation
hereof and the performance by the parties hereto.
(e)
Further Actions. The parties hereto shall execute and deliver, or cause to be
execut<?d and delivered, all such deeds and other instruments, and will take or cause to be taken
all further or other action as they may deem necessary or desirable in order to vest in and confirm
to the Surviving Bank title to and possession of CBTV's property, rights, privileges, powers and
franchises hereunder, and otherwise carry out the intent and purposes of this Merger Agreement.
(f)
Counterparts. This Merger Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same
instrument.
[The remainder of this page is intentionally blank.]
. 0
4439.01111046673.1
3
IN WITNESS WHEREOF, the parties have executed this Merger Agreement as
of the date first written above.
ALTAPACIFIC BANCORP
By:
Name: _________________________
Title:
By:
Nrune: _________________________
Title:
COMMERCE BANK OF TEMECULA
VALLEY
By:
Nrune: _________________________
Title:
By:
Nrune: ________________________
Title:
ALTAPACIFIC BANK
By:
Name: _________________________
Title:
By:
Name: _________________________
Title:
4439.011/1046673.1
EXHIBITD
[NAME OF OPTION HOLDER]
EXHIBITD
COMMERCE BANK OF TEMECULA VALLEY
AGREEMENT REGARDING CANCELLATION OF OPTIONS
This agreement ("Agreement") is made and entered into this __ day of
, 2016, by and
between the undersigned ("Option Holder") and Commerce Bank of Temecula Valley
("CBTV"). Capitalized terms not otherwise defined herein shall have the meaning given to them
in the Merger Agreement, as defined below.
WHEREAS, Option Holder currently holds outstanding Options (the "Options")
to purchase the common stock of CBTV ("CBTV Common Stock") as set forth in
Attachment A hereto;
WHEREAS, Option Holder is aware that AltaPacific Bancorp ("APB") and
CBTV have entered into an Agreement and Plan of Reorganization and Merger
dated
, 2016 (the "Merger Agreement"), providing for the merger of
CBTV with and into AltaPacific Bank (the "Merger") and the conversion of the
outstanding shares of CBTV in exchange for cash consideration consisting of cash
and shares of CBTV Common Stock as described in the Merger Agreement;
WHEREAS, APB and CBTV have agreed that CBTV shall enter into agreements
to cancel the outstanding Options to purchase shares of CBTV Common Stock in
exchange for a cash payment; and
WHEREAS, CBTV has agreed to make a cash payment to Option Holder in
return for cancellation of the Options;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants contained herein, the parties agree as follows:
1.
Option Holder hereby agrees with CBTV that he or she shall not exercise the
Options at any time from the date hereof prior to the Effective Time of the Merger
(as defined in the Merger Agreement) ,or, if the Merger is terminated, the date of
the Merger Agreement is terminated in accordance with its terms.
2.
Immediately prior to the Effective Time of the Merger, CBTV will pay to the
Option Holder, in lieu of all shares of CBTV Common Stock that would
otherwise have been issuable upon exercise of the Options, a payment in cash in
an amount equal to (a) $10.00 less (b) the exercise price per share with respect to
each Option (the "Option Termination Consideration").
Option Holder
acknowledges that the consideration to be received by Option Holder pursuant to
this Agreement is adequate consideration for the agreement by Option Holder to
the terms and conditions of this Agreement, including, without limitation, the
release set forth below.
4439.011/1046861.3
3.
At the Effective Time, the Options shall terminate and have no further force or
effect.
4.
Upon the receipt of the Option Termination Consideration for the Options, Option
Holder hereby releases CBTV, APB and AltaPacific Bank and their respective
subsidiaries, boards of directors, agents, successors and assigns from any and all
obligations to Option Holder relating to the Options.
5.
This Agreement shall be binding upon, inure to benefit of and be enforceable by
the respective heirs, successors and assigns of the parties hereto.
6.
This Agreement shall terminate forthwith in the event that the Merger Agreement
is terminated in accordance with its terms and the Options will remain in full
force and effect.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
undersigned as of the day and year first written above.
OPTION HOLDER
COMMERCE BANK OF TEMECULA
VALLEY
Name:
By: _ _ _ _ _ _ _ _ _ _ _ _ __
Name:
Title:
'
4439.011/1046861.3
.
2
Attachment A
Option Issue Date
# of Shares of CBTV
Common Stock Issuable upon
Exercise of Options
Option Exercise Price
$_ _
4439.011/1046861.3
3
EXHIBITE
EXHIBITE
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of [the Closing Date], 2012, is made
by and between AltaPacific Bancorp, a corporation organized under the laws of the State
of California (the "Company"), and [
] (the "Indemnitee").
WHEREAS, the Indemnitee is a director or former director of Commerce
Bank of Temecula ("CBTV") which was acquired by a subsidiary of the Company,
AltaPacific Bank ("Bank") on [Closing Date], which acquisition was effected pursuant to
, 2016 (the
an Agreement and Plan of Reorganization and Merger, dated
"Merger Agreement");
WHEREAS, prior to the [Closing Date] Indemnitee served as a director of
CBTV, and is entitled to the benefits of Section 5.7 ofthe Merger Agreement; and
WHEREAS, the Company and Indemnitee desire to enter into this
Indemnity Agreement to carry out the provisions of Section 5.7 ?fthe Merger Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1.
Certain Definitions. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement:
4439.01111051702.3
(a)
Agreement: means this Indemnity Agreement, as amended from
time to time hereafter.
(b)
Board of Directors: means the Board of Directors of the Company.
(c)
Claim: shall mean a claim for an Indemnified Liability (as defined
in Section 5.7(a) ofthe Merger Agreement).
(d)
Indemnifiable Expenses: means all losses, claims, damages, costs,
expenses, liabilities or judgments or other Indemnified Liability,
including attorneys' fees, related to any Indemnified Liability,
incurred by Indemnitee by reason of the fact he served as a director,
officer, employee or agent of CBTV an "Indemnifiable Event").
(e)
Loss: means all losses, Claims, damages, fines, or penalties,
including, without limitation, any legal or other expenses
(including, without limitation, any legal fees, judgments, fines,
appeal bonds or related expenses) incurred in connection with
defending, investigating or settling any Indemnified Liability.
(f)
2.
Expenses.
Person: means any individual, corporation, firm, partnership, joint
venture, limited liability company, estate, trust, business
association, organization, governmental entity or other entity.
Basic Indemnification Arrangement; Advancement of Indemnifiable
(a)
In the event that the Indemnitee was, is or becomes subject to, a
party to or witness or other participant in, or is threatened to be made subject to, a party
to or witness or other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Liability, the Company shall indemnify the Indemnitee, or cause such
Indemnitee to be indemnified, to the fullest extent permitted by the laws of the State of
California in effect on the date hereof and as amended from time to time, and shall hold
the Indemnitee harmless from and against all Losses that arise by reason of an
Indemnifiable Event; provided, however, that no change in the laws of the State of
California shall have the effect of reducing the benefits available to the Indemnitee
hereunder based on the laws of the State of California as in effect on the date hereof or as
such benefits may improve as a result of amendments after the date hereof. The rights of
the Indemnitee provided in this Section 2 shall include, without limitation, the rights set
forth in the other sections of this Agreement. Payments of Indemnifiable Expenses shall
be made as soon as practicable but in any event no later than twenty (20) calendar days
after written demand is presented to the Company, against any and all Indemnifiable
Expenses.
(b)
Upon request by the Indemnitee, the Company shall advance, or
cause to be advanced, any and all Indemnifiable Expenses incurred by the Indemnitee (an
"Expense Advance") on the terms and subject to the conditions of this Agreement, as
soon as practicable but in any event no later than twenty (20) calendar days after written
demand, together with supporting documentation, is presented to the Company. The
Company shall, in accordance with such request (but without duplication), either (i) pay,
or cause to be paid, such Indemnifiable Expenses on behalf· of· the Indemnitee, or
(ii) reimburse, or cause the reimbursement of, the Indemnitee for such Indemnifiable
Expenses. The Indemnitee's right to an Expense Advance is absolute and shall not be
subject to any condition that the Board of Directors shall not have determined that the
Indemnitee is not entitled to be indemnified under applicable law. However, the
obligation of the Company to make an Expense Advance pursuant to this Section 2(b)
shall be subject to the condition that, if, when and to the extent that a final judicial
determination is made (as to which all rights of appeal therefrom have been exhausted or
lapsed) that the Indemnitee is not entitled to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by the Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid (it being understood and
agreed that the foregoing agreement by the Indemnitee shall be deemed to satisfy any
requirement that the Indemnitee provide the Company with an undertaking to repay any
Expense Advance if it is ultimately determined that the Indemnitee is not entitled to
indemnification under applicable law). The Indemnitee's undertaking to repay such
Expense Advances shall be unsecured and interest-free.
4439.01111051702.3
2
(c)
The indemnification obligations of the Company under Section 2(a)
shall be subject to the condition that the Board of Directors of the Company shall not
have determined that the indemnification of the Indemnitee is not proper in the
circumstances because the Indemnitee is not entitled to be indemnified under applicable
law. If the Board of Directors determines that the Indemnitee is not entitled to be
indemnified in whole or in part under applicable law, the Indemnitee shall have the right
to commence litigation in any court in the State of California having subject matter
jurisdiction thereof and in which venue is proper, seeking an initial determination by the
court or challenging any such determination by the Board of Directors or any aspect
thereof, including the legal or factual bases therefor, and the Company hereby consents to
service of process and to appear in any such proceeding.
(d)
To the extent that the Indemnitee has been successful on the merits
or otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including dismissal
without prejudice, the Indemnitee shall be indemnified against all Indemnifiable
Expenses actually and reasonably incurred in connection therewith, notwithstanding an
earlier determination by the Board of Directors that the Indemnitee is not entitled to
indemnification under applicable law.
(e)
Notwithstanding anything to the contrary herein, the Company
shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee
for any acts or omissions or transactions from which a director, officer, employee or
agent may not be relieved of liability under applicable law.
(f)
Notwithstanding any other provisions contained herein, this
Agreement and the rights and obligations of the parties hereto are subject to the
requirements, limitations and prohibitions set forth in state and federal laws, rules,
regulations, and orders regarding indemnification and prepayment of expenses, legal or
otherwise, and liabilities, including, without limitation, Section 317 of the California
Corporations Code, Section 18(k) of the Federal Deposit Insurance Act and Part 359 of
the Federal Deposit Insurance Corporation's Rules and Regulations and any successor
regulations thereto.
3.
Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
addition to any other rights the Indemnitee may have or had under CBTV's Articles of
Incorporation and Bylaws, the laws ofthe State of California, or otherwise. To the extent
that a change in the laws of the State of California or the interpretation thereof (whether
by statute or judicial decision) permits greater indemnification by agreement than would
be afforded or was afforded under CBTV's Articles of Incorporation and Bylaws, it is the
intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. To the extent that there is a conflict or
inconsistency between the terms of this Agreement and CBTV's Articles of Incorporation
or Bylaws, it is the intent of the parties hereto that the Indemnitee shall enjoy the greater
benefits regardless of whether contained herein, or in CBTV's Articles of Incorporation
or Bylaws.
4439.011/1051702.3
3
4.
Liability Insurance. The Company shall maintain in effect directors' and
officers' liability insurance coverage to the extent required under Section 5.7(b) of the
Merger Agreement.
5.
Amendments, Etc. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both ofthe parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
6.
Subrogation. In the event of payment by the Company under this
Agreement, the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee with respect to any insurance policy. Indemnitee
shall execute all papers reasonably required and shall do everything that may be
reasonably necessary to secure such rights, including the execution of such documents
necessary to enable the Company effectively to bring suit to enforce such rights. The
Company shall pay or reimburse all expenses actually and reasonably incurred by
Indemnitee in connection with such subrogation .
No Duplication of Payments. The Company shall not be liable under this
. 7.
Agreement to make any payment in connection with any Claim made against the
Indemnitee to the extent the Indemnitee has otherwise actually received payment (under
any insurance policy, from any third party, or otherwise) of the amounts otherwise
indemnifiable hereunder.
8.
Binding Effect, Etc. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective successors,
(including any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business and/or assets of the Company), assigns,
spouses, heirs, executors and personal and legal representatives. The Company shall
require and cause any successor(s) (whether directly or indirectly, whether in one or a
series of transactions, and whether by purchase, merger, consolidation, or otherwise) to
all or a significant portion of the business and/or assets of the Company and/or its
subsidiaries (on a consolidated basis), expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place.
9.
Severability. If any provision or provisions of this Agreement shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, (a) the validity,
legality and enforceability of the remaining provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to
the fullest extent possible, the provisions of this Agreement (including, without limitation,
all portions of any paragraph of this Agreement containing any such provision held to be
invalid, illegal or unenforceable) shall be construed so as to give effect to the intent
4439.01111051702.3
4
manifested by the provision held invalid, illegal or unenforceable and to give effect to the
terms of this Agreement.
10.
Specific Performance, Etc. The parties recognize that if any provision of
this Agreement is violated by the parties hereto, the Indemnitee may be without an
adequate remedy at law. Accordingly, in the event of any such violation, the Indemnitee
shall be entitled, if the Indemnitee so elects, to institute proceedings, either in law or at
equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to
obtain any relief or any combination of the foregoing as the Indemnitee may elect to
pursue.
11.
Notices. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a written document
delivered in person or sent by telecopy, nationally recognized overnight courier or
personal delivery, addressed to such party at the address set forth below or such other
address as may hereafter be designated on the signature pages of this Agreement or in
writing by such party to the other parties:
(a)
If to the Company, to:
(b)
AltaPacific Bancorp
3725 Westwind Blvd., Suite 100
Santa Rosa, CA 95403
Attention: Charles Hall
Fax: (707) 543-2703
If to the Indemnitee, to the address set forth on Annex A hereto.
All such notices, requests, consents and other communications shall be deemed to have
been given or made if and when received (including by overnight courier) by the parties
at the above addresses or sent by electronic transmission, with confirmation received, to
the telecopy numbers specified above (or at such other address or telecopy number for a
party as shall be specified by like notice). Any notice delivered by any party hereto to
any other party hereto shall also be delivered to each other party hereto simultaneously
with delivery to the first party receiving such notice.
12.
Counterparts. This Agreement may be executed in counterparts, each of
which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same agreement. Only one such counterpart signed by the party
against whom enforceability is sought needs to be produced to evidence the existence of
this Agreement.
13.
Headings. The headings of the sections and paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction or interpretation thereof.
14.
Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California applicable to contracts
4439.01111051702.3
5
made and to be performed in such state without giving effect to the principles of conflicts
of laws.
[SIGNATURE PAGE FOLLOWS]
4439.01111051702.3
6
IN WI1NESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
ALTAPACIFIC BANCORP
By: --------------------Name:
Title:
The Indemnitee:
[
4439.01111051702.3
A/75285010.1
J
AnnexA
Name and Business Address.
Attn:
Tel: - - - - - - - - - - - Fax: ______________
4439.01111051702.3
Appendix B
CALIFORNIA GENERAL CORPORATION LAW-- CHAPTER 13: DISSENTERS' RIGHTS
§ 1300. Reorganization or short-form merger; dissenting shares; corporate purchase at fair market value;
definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under
subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with
this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market
value shall be determined as of the day of, and immediately prior to, the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the
proposed reorganization or short-form merger, as adjusted for any stock split, reverse stock split, or share dividend
that becomes effective thereafter.
(b) As used in this chapter, “dissenting shares” means shares to which all of the following apply:
(1) That were not, immediately prior to the reorganization or short-form merger, listed on any
national securities exchange certified by the Commissioner of Corporations under subdivision (o) of
Section 25100, and the notice of meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to
any shares with respect to which there exists any restriction on transfer imposed by the corporation or by
any law or regulation; and provided, further, that this provision does not apply to any shares where the
holder of those shares is required, by the terms of the reorganization or short-form merger, to accept for the
shares anything except: (A) shares of any other corporation, which shares, at the time of the reorganization
or short-form merger is effective, are listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100; (B) cash in lieu of fractional shares
described in the foregoing subparagraph (A); or (C) any combination of the shares and cash in lieu of
fractional shares described in the foregoing subparagraphs (A) and (B).
(2) That were outstanding on the date for the determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the reorganization or, (B) if described in paragraph (1)
were voted against the reorganization, or were held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by written consent rather than at a meeting.
(3) That the dissenting shareholder has demanded that the corporation purchase at their fair market
value, in accordance with Section 1301.
(4) That the dissenting shareholder has submitted for endorsement, in accordance with Section
1302.
(c) As used in this chapter, “dissenting shareholder” means the record holder of dissenting shares and includes a
transferee of record.
§ 1301. Notice to holders of dissenting shares in reorganizations; demand for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares
for cash, that corporation shall mail to each of those shareholders a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of that approval, accompanied by a copy of Sections
1300, 1302, 1303, and 1304 and this section, a statement of the price determined by the corporation to represent the
fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder
desires to exercise the shareholder's right under those sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless
they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under
Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase shares shall make written demand upon the corporation for the purchase of those shares and
payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it
APPENDIX B
is received by the corporation or any transfer agent thereof (1) in the case of shares described subdivision (b) of
Section 1300, not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other
case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by the shareholder which the
shareholder demands that the corporation purchase and shall contain a statement of what that shareholder claims to
be the fair market value of those shares as determined pursuant to subdivision (a) of Section 1300. The statement of
fair market value constitutes an offer by the shareholder to sell the shares at that price.
§ 1302. Submission of share certificates for endorsement; uncertificated securities
Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to
subdivision (h) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its
principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the
shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of
the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the
shares.
§ 1303. Payment of agreed price with interest; agreement fixing fair market value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments
from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the
corporation and the holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made
within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to
surrender of the certificates therefor, unless provided otherwise by agreement.
§ 1304. Action to determine whether shares are dissenting shares or fair market value; limitation; joinder;
consolidation; determination of issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree
upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which notice of the approval by the
outstanding shares (Section 152) or notice pursuant to subdivision (h) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to
determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may
intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in
issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court
shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares.
4439.011/1138785.1
B-2
Appendix C