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Bank of Marin markets

Napa: 80,000 population

Marin Co.: 260,000

Napa Co.: 142,000

Sonoma Co.: 500,000

St. Helena: 6,000 (possible future branch)

Yountville: 3,000

Calistoga: 5,000

Healdsburg: 12,000 (Bank of Marin opens a new branch here in August.)

Merger essentials

$51 million acquisition price

All stock deal, about .3 shares of Bank of Marin for each Bank of Napa share

$2.1 billion assets, Bank of Marin

$246 million assets, Bank of Napa

Shareholders vote expected September 2017

Boards of both banks already voted, unanimous yes

Deal expected to close November 2017

Regulators (approval expected, required before deal closes): Office of Comptroller of Currency (Bank Napa); Office of Business Oversight (California agency, Bank of Marin); Federal Deposit Insurance Corporation; Securities and Exchange Commission

Publicly traded community banks, North Bay

Bank of Marin (22 branches, if the deal closes): Napa (3); Petaluma (3); Santa Rosa, Healdsburg, Sonoma, Novato (3), San Rafael (2), Tiburon, Mill Valley, Sausalito, Oakland, Alameda, Greenbrae, Corte Madera, San Francisco.

Exchange Bank (18 branches): Santa Rosa (9 plus 4 ATMs), Petaluma (2), Cloverdale, Cotati, Healdsburg, Sebastopol, Sonoma, Windsor, Rohnert Park. Satellite offices in Roseville, San Jose, Lafayette, San Rafael.

Summit State Bank (5 branches): Santa Rosa (2), Petaluma, Rohnert Park, Healdsburg


Webcast of Bank of Marin CEO Russell Colombo's comments about the Bank of Napa merger.

A bank that seeks growth has two main options: add branches one by one in existing or new markets; or acquire another bank that already has presence in a desired market.

Novato-based Bank of Marin, with some $2.1 billion in assets, on July 31 announced plans to acquire Bank of Napa, which has $246 million in assets. In an all-stock deal valued at $51 million and slated to close by November, Bank of Marin will add two branches to its foothold in Napa.

To close, the deal must gain regulatory approval along with two-thirds yes votes from Bank of Napa shareholders, expected in September or October. Upon approval, Bank of Napa will cease to exist. Bank of Marin will add one director from the dissolved Bank of Napa. That director will be picked by the Bank of Marin board from nominations by the board of Bank of Napa.

Bank of Napa shares traded on over-the-counter bulletin boards at about $13.25 a share before the deal was announced. Three weeks later on Aug. 22, shares traded above $19, up nearly $6. The OTCBB, a minor exchange started in 1990, is an electronic trading service of the National Association of Securities Dealers.

Insolvent Charter Oak purchase

In 2011, Bank of Marin made a very different deal to gain its first Napa branch. After the California Department of Financial Institutions shut down the insolvent Napa-based Charter Oak Bank and appointed the Federal Deposit Insurance Corp. as receiver, Bank of Marin assumed all $105 million in deposits of Charter Oak Bank, which had total assets of $121 million. The bank was reopened as part of Bank of Marin. The branch is located in northeast Napa at 600 Trancas St., and will remain open when the Bank of Napa deal closes.

Bank of Alameda, $34.5 million

In 2013 Bank of Marin acquired Bank of Alameda, which had four branches, in a deal worth $34.5 million. That purchase, at about two-thirds the value of the Bank of Napa acquisition, involved buying NorCal Community Bancorp, parent of Bank of Alameda. The transaction brought $230 million in deposits to Bank of Marin, along with $170 million worth of loans.

Bank of Alameda had brought in private equity money to help resolve some credit issues, according to Russ Colombo, CEO of Bank of Marin.

“Private equity decided it was time to exit,” he said. “That was driven by them. They bid it out to a bunch of people,” including Bank of Marin.

In its first quarter of 2013, Bank of Alameda reported earnings of $6.6 million, though the bank lost $522,000 in the full year of 2012. At the end of November 2013 when the Alameda deal consummated, Bank of Marin’s assets rose to $1.7 billion.

Bank of Marin also has a branch in San Francisco at 345 California Street in the heart of the Financial District between Sansome and Battery streets.

New Healdsburg branch

At the close of the Bank of Napa deal, Bank of Marin will have 23 branches, including one opened in August in Healdsburg. That temporary location, on the second floor of a building, has a Mexican café on the first floor, so business-banking customers can grab a taco while they discuss loan particulars. With that branch, Bank of Marin has six Sonoma County branches. The others are in Petaluma, Sonoma and Santa Rosa.

Bank of Marin markets

Napa: 80,000 population

Marin Co.: 260,000

Napa Co.: 142,000

Sonoma Co.: 500,000

St. Helena: 6,000 (possible future branch)

Yountville: 3,000

Calistoga: 5,000

Healdsburg: 12,000 (Bank of Marin opens a new branch here in August.)

Merger essentials

$51 million acquisition price

All stock deal, about .3 shares of Bank of Marin for each Bank of Napa share

$2.1 billion assets, Bank of Marin

$246 million assets, Bank of Napa

Shareholders vote expected September 2017

Boards of both banks already voted, unanimous yes

Deal expected to close November 2017

Regulators (approval expected, required before deal closes): Office of Comptroller of Currency (Bank Napa); Office of Business Oversight (California agency, Bank of Marin); Federal Deposit Insurance Corporation; Securities and Exchange Commission

Publicly traded community banks, North Bay

Bank of Marin (22 branches, if the deal closes): Napa (3); Petaluma (3); Santa Rosa, Healdsburg, Sonoma, Novato (3), San Rafael (2), Tiburon, Mill Valley, Sausalito, Oakland, Alameda, Greenbrae, Corte Madera, San Francisco.

Exchange Bank (18 branches): Santa Rosa (9 plus 4 ATMs), Petaluma (2), Cloverdale, Cotati, Healdsburg, Sebastopol, Sonoma, Windsor, Rohnert Park. Satellite offices in Roseville, San Jose, Lafayette, San Rafael.

Summit State Bank (5 branches): Santa Rosa (2), Petaluma, Rohnert Park, Healdsburg


Webcast of Bank of Marin CEO Russell Colombo's comments about the Bank of Napa merger.

As the biggest city in the North Bay and a potent business hub, Santa Rosa remains a tough market to crack for Bank of Marin. It has gradually surrounded the city of 175,000 but has only one small branch in a downtown office building. The whole of Sonoma County has population of nearly half a million. Publicly traded Exchange Bank, founded in 1890, has a prevailing presence in the Sonoma County banking market, especially Santa Rosa. The bank, with $2.2 billion in assets, has 18 branches in Cloverdale, Cotati, Healdsburg, Sebastopol, Sonoma, Windsor, Rohnert Park, two in Petaluma and nine in Santa Rosa, with additional ATM sites. Exchange Bank also has a high-producing commercial and SBA lending office in Roseville, and others in San Jose and Lafayette.

Exchange Bank’s CEO and president is Gary Hartwick. Under his leadership, Exchange Bank hit earnings of $13.2 million in the first half of 2017, up 23 percent from $10.7 million in the first half of 2016.

“We have had very good loan production in the Sacramento-Roseville market,” Hartwick told North Bay Business Journal in July. “It’s a business-banking operation, but it’s a full-service bank” that also accepts deposits. About half a dozen employees work out of that office.

The bank plans no new branches in Sonoma County. “As we move forward into 2018, one of our strategic initiatives will be to look at potential geographic diversity outside of Sonoma County,” Hartwick said. Exchange Bank has a business-development office in San Rafael, not far from Bank of Marin’s Novato headquarters. One employee works in Exchange Bank’s San Rafael outpost. “That’s an area we will continue to look at for potential future growth and expansion,” Hartwick said.

Even if Bank of Marin wanted to merge with Exchange Bank, it cannot, as the Exchange Bank charter prohibits such a deal due to its philanthropic mission. More than half, 50.44 percent, of Exchange Bank’s earnings go to the Doyle Trust to support scholarships at Santa Rosa Junior College.

Summit State not ready to sell

Acquiring Summit State Bank would be one way to rapidly gain share in the Sonoma County market. “I know all those people,” Colombo said. “I talk to all of them. With acquisitions, banks are sold, not bought. If they’re interested in selling, great. We would definitely entertain it. If they don’t want to, you can’t force it. We talk. We definitely talk.”

The temporary office in Healdsburg “gets us open there,” Colombo said. “We will look for the permanent location. It’s the farthest north we have ever gone. We have to test it a little bit, going into a market that doesn’t necessarily know us.”

Summit State Bank, a state-chartered bank publicly traded on the Nasdaq, is about a quarter the size of Exchange Bank with assets of $537 million, operating mostly in Sonoma County. Summit State, which started in 1982, has five branches: Petaluma, Rohnert Park, Healdsburg and two in Santa Rosa. Like Exchange Bank, Summit State Bank also holds philanthropy as a high value, as does Bank of Marin.

In 2016, Summit State Bank brought CPA and board member Jim Brush into its CEO position. Marshall Reynolds, 80, a major banking player in West Virginia, owns 14.7 percent of Summit State Bank stock, according to the bank’s proxy statement in June 2017. Reynolds operates out of Huntington, W. Va., a town of about 50,000. He serves as chairman of Premier Financial Bancorp, a multibank holding company that has assets of about $1.5 billion and more than 400 employees.

“Growth certainly is one of the things you measure with,” Reynolds said in a May 2016 interview with North Bay Business Journal. “We’ve got excess capital, with the idea that we were going to acquire something, buy something (another bank). We were not successful.”

Reynolds made a series of banking moves in a long career serving customers in West Virginia, Virginia, Ohio, Maryland, Kentucky and Washington, D.C.

“This bank, this investment, has appreciated very, very slowly,” Reynolds said, “certainly behind the bar curve of most banks. That’s partially my fault. I could have shown some better leadership as the director.”

CEO Brush owns about 50,000 shares compared to 886,000 for Reynolds.

Infill acquisition

Colombo, 64, Bank of Marin’s CEO, president and architect of the Bank of Napa deal, sees it as an infill acquisition — adding depth where Bank of Marin already had an outpost. Colombo, who earned a total of $1.1 million in compensation in 2016, became president and CEO in 2006. His annual salary in 2016 was $438,000 plus a bonus of $274,000 and stock options. As of the most recent proxy, Colombo owned 1.2 percent of the bank.

“When you buy a bank where you’re not in that market,” Colombo said, as in the 2013 Alameda deal, “it’s an education task. Tell everybody about what we are. We’ve done that in Napa already” with the Charter Oak acquisition. “It’s going to be more seamless” adding two more branches within a few miles of the existing branch.

Tom LeMasters, CEO of Bank of Napa and a founding organizer, worked previously as CFO of Bank of Marin from 2000 to 2005. Russ Colombo came to Bank of Marin in 2004, initially not as CEO, so the two bankers had a brief overlap in their careers. “He modeled his bank, in terms of service levels, after Bank of Marin,” Colombo said.

LeMasters started in banking at Napa Valley Bank more than 30 years ago. That bank, opened in 1971, was sold to Westamerica in 2012 when it had assets of about $275 million.

“We’re focused on the business community,” Colombo said of the intended increased presence in Napa. “We have a team of commercial lenders there” in the branch that used to be Charter Oak.

“It was largely Russ and me” negotiating the merger, LeMasters said.

Colombo sees benefits from the acquisition for business customers of Bank of Napa. “We have greater loan capacity. We can make larger loans,” he said. “We have a broader product range. We can cross-sell more products to them.”

Bank of Marin and Bank of Napa have similar community-banking styles. “There’s not going to be a huge change. The signs will be different,” Colombo said.

“It takes us from a position of a relatively small market share” in Napa, Colombo said, where Bank of Marin had roughly 1.5 percent, to a significant position. “When you combine these two banks,” he said, “it is 7 percent market share — from a visibility standpoint, terrific.” Bank of Napa has significantly more presence in the city’s consumer market than Bank of Marin had.

LeMasters explored the possibility of adding branches northward in Napa Valley in towns such as St. Helena, a hefty wine-business center, as well as Yountville and Calistoga. Colombo has no near-term plans to push further north.

“There’s nothing right now,” Colombo said. “We want to consolidate those three. We are going to keep all three” branches in Napa. “There’s a lot of interest for us to go up to St. Helena, center of the wine industry. We haven’t made a decision about that.”

For a bank, the wine industry offers gargantuan flows of money. Last year California wineries sent some 234 million cases of wine worth an estimated $34 billion into U.S. markets.

“You see all the famous large brands in Napa County,” Colombo said. In Sonoma County, “you see things (brands) that aren’t quite as well known, but great wineries showing tremendous growth opportunities. I love Sonoma County. Wineries are smaller, with opportunities for growth.” He describes the business community in Sonoma County as more diverse than that of Napa County, which emphasizes wine.

“We have a number of wineries that we bank in Napa County. These are markets that we want to do more in — Napa and Sonoma. Tough to break into. Sonoma County is really tough. Exchange Bank has a great reputation and they’ve been there a long time,” he said. “It’s hard, but we’re getting there. Santa Rosa is a tough market. We want to do more there.”

Deal launched in January

Colombo and LeMasters had been talking merger for several years. Serious negotiations began in about January 2017. The two bank boards never met about the deal. Colombo and LeMasters engineered its details then presented them to respective boards. “The board is very interested in growth,” Colombo said. “It’s in a market we’re already in. It made perfect sense.”

Negotiations had a flavor of colleagues — far from a hostile takeover. “We’re not pushing anything. If it makes sense, they’ll do it,” Colombo said.

Integrating the Napa acquisition will be top priority for the moment. “They know us in Napa — not well enough, but they know us,” Colombo said, noting that the aftermath of this merger will be easier than the market in Alameda, where the Bank of Marin brand was not present.

“You have to be conscious, pay attention to people,” Colombo said of the always risky period after a merger is announced and before the deal closes. “People can make or break you,” he said. “You want to respect their knowledge.”

The Bank of Napa loan portfolio is exceptionally clean, according to Colombo. “We don’t have to absorb problems. We absorb good transactions, good customers — the ideal situation.”

There are many other bank competitors in Napa, though not community banks. They include Wells Fargo, Bank of America, Westamerica, Bank of the West, Comerica Bank, Mechanics Bank, Umpqua Bank, First Republic, Chase Bank, U.S. Bank, Rabobank and credit unions.

The deal trades 0.307 shares of Bank of Marin stock for each Bank of Napa share.

“They wanted all stock,” Colombo said of the Bank of Napa board. “They’re not selling the bank, they’re reinvesting in Bank of Marin.” When the transaction closes, former Bank of Napa shareholders will own roughly 10 percent of the emerged Bank of Marin, roughly 700,000 shares.

Bank of Napa has about 2.4 million outstanding shares. Multiplied by 0.307, that number becomes 736,800 new shares of Bank of Marin, which will have a new total of nearly 7 million outstanding shares. The transaction results in “broader distribution of our stock, better liquidity, more trading volume,” Colombo said.

Bank of Napa has one large institutional holder of stock — First Manhattan Company, which held 186,532 shares or 7.9 percent as of the end of 2016. “I’m sure they’ll go along” with the deal, Colombo said. No other stockholder holds more than 5 percent, according to the bank proxy statement in May.

CEO LeMasters owned 22,250 shares with options to buy 70,833, for a total of 96,083 shares or nearly 4 percent. Based on a rough stock-price jump of $6 a share since the announcement that Bank of Napa is in play, LeMasters gained — on paper — roughly $575,000.

If the deal falls through under certain circumstances, Bank of Napa agreed to pay Bank of Marin a termination fee of $1.9 million. For example, Bank of Napa could enter an alternative merger considered a “superior proposal” with another acquirer and exit the deal with Bank of Marin.

“We create new shares” in the merger, Colombo said. Despite the dilution effect of new shares, the added earnings “will make it accretive,” he said, potentially boosting earnings per share after a year or so such that the deal will benefit existing owners of Bank of Marin stock.

Approval is required from state and federal regulators: the California Department of Business Oversight, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission. The lead regulators in charge of the deal are the FDIC and state DBO, according to Colombo. “I don’t expect any problems,” he said. “You never know, but I am pretty confident we will get approval. We’re moving very quickly. We have done these deals before.”

After closing, it will take until about April 2018 to integrate back-office computer systems of the two banks.

LeMasters to depart

LeMasters, 60, will remain for a couple of months and have a one-year consulting contract to facilitate transition to Bank of Marin. A few other Bank of Napa positions, such as CFO, will be redundant, and will require layoffs. Employees subjected to layoffs at Bank of Napa may be offered positions in Bank of Marin if opportunities exist, Colombo said. “There will definitely be layoffs,” he said. Bank of Napa currently has 32 employees.

“We have 800 shareholders,” LeMasters said, “almost all from Napa.” When the bank was capitalized, new shareholders only needed $1,500 to buy in, with total capitalization of about $22 million. “A lot of local folks stepped up and wanted to be part of the community bank.” At that time, Vintage Bank (acquired by Umpqua), Napa Community Bank (majority owned by Capitol Bancorp, Michigan, which went bankrupt in 2014; Napa Community sold in 2010 to Rabobank Group) and Charter Oak Bank were all in business. “Those guys are all gone now,” LeMasters said.

He started Bank of Napa in 2006, about a year before the financial crisis that led to the Great Recession of 2008-2009.

“We started at a really good time when the economy was at its zenith,” he said. “Then about a year later, oh, it was very challenging,” he said, shaking his head. “We not only survived, we thrived,” needing no federal funds during the tough times. “It was a lot of stressful nights, weeks and months. I never thought we wouldn’t succeed. We had plenty of capital.”

About 60 percent of the bank’s loan portfolio is real estate. “Our credit quality has always been pristine,” LeMasters said. He bangs a knuckle on his wooden desk. “In a community bank like ours, the loan portfolio is your single biggest risk,” he said. “We spent a lot of time and attention on it. We know Napa County really well.”

LeMasters credits Colombo with initiating the merger with Bank of Marin in late January.

“It’s not easy to find targets,” LeMasters said about the North Bay banking market. “I think it’s a very fair price for Bank of Napa shareholders,” he said. Most of “our employees are needed and wanted” post-merger.

For the six or seven months it took to negotiate the deal, LeMasters worried constantly about keeping the talks secret. “We were negotiating to become partners,” he said. “We weren’t partners at the time. I was trying to protect our employees. At any one point, this deal could have gone the other way,” he said. “It was a very quiet time” in terms of confidentiality.

The final decision occurred “at our board meeting last week” on July 31, LeMasters said. “It was the very 11th hour with all the nuances and details that had to be hammered out.”

He preferred an all-stock transaction, in part because the deal is not taxable for shareholders. They end up with shares of Bank of Marin, about a third as many. As of May 2017, LeMasters owned or had options on some 96,000 shares, nearly 4 percent of the bank. The Bank of Napa’s 10-member board voted unanimously to support the merger.

Customer-facing Bank of Napa employees will be kept if at all possible. “They are the reason you buy it,” Colombo said of the acquisition. “Back-shop people — it’s more difficult,” such as staff members who handle operations.

“Acquisitions are risky. You have to pay attention,” he said. “This is the risk period. We don’t own them yet. Things can happen that you can’t control.

“It’s a good price,” Colombo said of the $51 million deal. “It’s fair” but not a bargain. “You want it to be accretive to earnings.” Once the acquisition closes, the new earnings brought to Bank of Marin by the former Bank of Napa should make earnings per share increase for Bank of Marin shareholders. “We’re a good fit.”

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257.