As filed with the Securities and Exchange Commission on June 19, 2018
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Coastal Financial Corporation
(Exact name of registrant as specified in its charter)
Washington | 6022 | 56-2392007 | ||
State or other jurisdiction of incorporation or organization |
(Primary Standard Industrial Classification Code Number) |
(IRS Employer Identification No.) |
5415 Evergreen Way
Everett, Washington 98203
(425) 257-9000
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Eric M. Sprink
President and Chief Executive Officer
Coastal Financial Corporation
5415 Evergreen Way
Everett, Washington 98203
(425) 257-9000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Frank M. Conner III, Esq. | ||
Michael P. Reed, Esq. | ||
Aaron M. Kaslow, Esq. | Christopher J. DeCresce, Esq. | |
Stephen F. Donahoe, Esq. | Covington & Burling LLP | |
Kilpatrick Townsend & Stockton LLP | One CityCenter | |
607 14th Street, NW, Suite 900 | 850 Tenth Street, NW | |
Washington, DC 20005 | Washington, DC 20001 | |
Telephone: (202) 508-5800 | Telephone: (202) 662-6000 | |
Facsimile (202) 204-5600 | Facsimile: (202) 662-6291 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
Calculation of Registration Fee
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Title of each class of securities to be registered |
Proposed maximum aggregate offering price(1)(2) |
Amount of registration fee | ||
Common Stock, no par value |
$30,000,000.00 | $3,735 | ||
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(1) | Includes the aggregate offering price of additional shares of common stock that the underwriters have the option to purchase from the Registrant. |
(2) | Estimated solely for the purpose of calculating the registration fee in accordance with Regulation 457(o) under the Securities Act of 1933, as amended. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities or accept any offer to buy these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 19, 2018
PRELIMINARY PROSPECTUS
Shares
Common Stock
This is the initial public offering of shares of common stock of Coastal Financial Corporation, the bank holding company for Coastal Community Bank, a Washington state chartered bank. We are offering shares of our common stock and the selling shareholders identified in this prospectus are offering shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.
Prior to this offering, there has been no established public trading market for our common stock. We currently estimate that the initial public offering price of our common stock will be between $ and $ per share. We have applied to list our common stock on the Nasdaq Global Select Market under the symbol CCB.
Investing in our common stock involves risks. See Risk Factors beginning on page 18.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. See Implications of Being an Emerging Growth Company.
Per Share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discounts (1) |
$ | $ | ||||||
Proceeds, before expenses, to us |
$ | $ | ||||||
Proceeds, before expenses, to the selling shareholders |
$ | $ |
(1) | See Underwriting (Conflicts of Interest) for additional information regarding underwriting compensation. |
We have granted the underwriters an option to purchase up to additional shares of our common stock at the initial public offering price, less the underwriting discounts, within 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Our common stock is not a deposit or savings account of our bank subsidiary and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality.
The underwriters expect to deliver the shares of our common stock to purchasers on or about , 2018, subject to customary closing conditions.
Joint Book-Running Managers
Keefe, Bruyette & Woods A Stifel Company |
Hovde Group, LLC |
The date of this prospectus is , 2018
Dedicated to community banking 2017 & 2016 Recipient of the prestigious 5-Star Rating from BauerFinancial, Inc. Everett Herald 2014, 2015, 2016 and 2017 Readers Choice Best Bank Plus... 2016 Best Financial Provider, Best Mortgage Lender and Best Place to Work Stanwood & Camano News Best Bank (5 years in a row) 2013 * 2014 * 2015 * 2016 * 2017 2017 & 2016 SBA Community Lender of the Year Award in some of Washingtons most attractive markets
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GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK |
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F-1 |
About This Prospectus
You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be delivered to you. We, the selling shareholders and the underwriters have not authorized anyone to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. This prospectus relates to an offer to sell only the securities offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. We, the selling shareholders and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document, regardless of its time of delivery or the time of any sales of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Unless we state otherwise or the context otherwise requires, references in this prospectus to we, our, us or the Company refer to Coastal Financial Corporation, a Washington corporation, and our consolidated subsidiary, and references to Coastal Community Bank or the Bank refer to our banking subsidiary, Coastal Community Bank, a Washington state chartered bank.
Unless otherwise indicated, references in this prospectus to common stock refer to our voting common stock, no par value per share, and references to nonvoting common stock include our Class B Nonvoting
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Common Stock, no par value per share, and our Class C Nonvoting Common Stock, no par value per share. References to our common shares include our common stock and nonvoting common stock. Per share amounts presented in this prospectus are based on total common shares outstanding. No shares of our nonvoting common stock are offered hereby.
References in this prospectus to the Seattle MSA refer to the Seattle-Tacoma-Bellevue, Washington metropolitan statistical area. References to the Puget Sound region refer to the Seattle MSA along with the adjacent metropolitan areas of Olympia, Bremerton and Mount Vernon, as well as Island County.
Unless otherwise stated, all information in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares of our common stock and gives effect to a one-for-five reverse stock split of both our common stock and nonvoting common stock completed effective May 4, 2018. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this prospectus.
Any discrepancies included in this prospectus between totals and the sums of the percentages and dollar amounts presented are due to rounding.
You should not interpret the contents of this prospectus or any free writing prospectus that we authorize to be delivered to you to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.
Market and Industry Data
Within this prospectus, we reference certain industry and sector information and statistics. We have obtained this information and statistics from various independent, third-party sources. Nothing in the data used or derived from third-party sources should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and third-party sources. We believe that these third-party sources and estimates are reliable, but have not independently verified them. Statements as to our market position are based on market data currently available to us. Although we are not aware of any misstatements regarding the demographic, economic, employment, industry and market data presented herein, these estimates involve inherent risks and uncertainties and are based on assumptions that are subject to change. See Risk Factors.
Trademarks referred to in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the symbols to identify such trademarks.
Implications of Being an Emerging Growth Company
We are an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
| we may present as few as two years of audited financial statements and as few as two years of related managements discussion and analysis of financial condition and results of operations; |
| we are exempt from the requirement to obtain an attestation report from our auditors on managements assessment of the effectiveness of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; |
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| we may choose not to comply with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditors report providing additional information about the audit and our financial statements; |
| we are permitted to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation; and |
| we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements. |
We will cease to be an emerging growth company upon the earliest of:
| the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; |
| the date on which we become a large accelerated filer (the fiscal year end on which the total market value of our common equity securities held by non-affiliates is $700 million or more as of June 30); |
| the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and |
| the last day of the fiscal year following the fifth anniversary of the completion of this offering. |
We have elected to adopt the reduced disclosure requirements above for purposes of the registration statement of which this prospectus forms a part. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the Securities and Exchange Commission, or the SEC, and proxy statements that we use to solicit proxies from our shareholders.
In addition, Section 107 of the JOBS Act permits us to take advantage of an extended transition period for complying with new or revised accounting standards affecting public companies. However, we have irrevocably opted out of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
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This summary highlights selected information contained elsewhere in this prospectus and may not contain all the information you should consider before investing in our common stock. Before making a decision to purchase our common stock, you should read the entire prospectus carefully, including the sections entitled Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Cautionary Note Regarding Forward-Looking Statements, together with our consolidated financial statements and the related notes to those financial statements that are included elsewhere in this prospectus. Except as otherwise noted, all information in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares of our common stock and gives effect to a one-for-five reverse stock split of our common shares completed effective May 4, 2018. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this prospectus.
Our Company
We are a bank holding company that operates through our wholly owned subsidiary, Coastal Community Bank. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. We focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington. We believe that the size, growth and economic strength of the Puget Sound region provide us with significant opportunities for long-term growth and profitability. We currently operate 13 full-service banking locations, 10 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and three of which are located in neighboring counties (one in King County and two in Island County). As of March 31, 2018, we had total assets of $831.0 million, total loans of $678.5 million, total deposits of $727.3 million and total shareholders equity of $66.9 million.
Our History and Growth
We are a Washington corporation that was formed on July 9, 2003, to become the holding company for Coastal Community Bank, which commenced operations in 1997 and to which we refer in this prospectus as the Bank. The Bank was formed by local business leaders who recognized the opportunity to create a bank that could meet the financial needs of the community, make decisions locally and support the communities it serves.
We have focused on achieving our growth organically, without engaging in mergers or branch acquisitions. Our net income and earnings per share for the three months ended March 31, 2018, were $1.8 million and $0.20, respectively. Including the negative impact of P.L. 115-97, commonly known as the Tax Cuts and Jobs Act, on our earnings in 2017, our net income and earnings per share for fiscal year 2017 were $5.4 million and $0.59, respectively. The following tables illustrate our income and balance sheet growth as of or for the quarter ended March 31, 2018, and the quarter ended March 31, 2017 (with respect to adjusted net income and adjusted earnings per share), and the years ended December 31, 2017, 2016, 2015, 2014 and 2013. (Dollars in millions except per share amounts.)
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Adjusted Net Income (1) | Adjusted Earnings Per Share (1) | |
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Total Assets | Total Loans | |
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Total Deposits | Core Deposits (2) | |
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(1) | Adjusted net income and adjusted earnings per share for the year ended December 31, 2017, exclude the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate as a result of the Tax Cuts and Jobs Act. See our reconciliation of non-GAAP financial measures to our most directly comparable GAAP financial measures in the section entitled GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. See also Selected Historical Consolidated Financial Data. |
(2) | We define core deposits more narrowly than many other banks and institutional data services. For us, core deposits consist of total deposits less all time deposits. |
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Competitive Strengths
We believe the following strengths differentiate us from our competitors and position us to execute our business strategy successfully:
Premier local bank in the Puget Sound region. We are the largest locally headquartered bank in Snohomish County, measured by deposit market share. Our success has made us attractive to lenders who prefer to work in a community bank setting and customers who seek the personal attention of a community bank. As further described in Our Markets below, we believe that our primary market, the Puget Sound region, which is located in northwest Washington, provides us with an advantage over other community banks in Washington in terms of growing our loans and deposits, as well as increasing profitability and building shareholder value. The net proceeds of this offering to us will enable us to serve larger customers through higher legal lending limits. Additionally, having publicly traded common stock will further enhance our ability to attract and retain talented bankers. We intend to continue expanding our physical presence in Snohomish and neighboring counties and believe we can continue to increase our market share in the Puget Sound region and surrounding counties.
Attractive core deposit franchise. We have a valuable deposit franchise supported by a substantial level of core deposits, which we define as total deposits less all time deposits, and a high level of noninterest bearing accounts. As of March 31, 2018, core deposits comprised 87.7% of total deposits and 94.0% of total loans, while noninterest bearing core deposits comprised 34.9% of total deposits, up from 30.6% at December 31, 2013. None of our deposits were brokered or internet-sourced deposits at March 31, 2018. Our core deposit base results from our emphasis on banking relationships over transactional banking. We believe that our robust core deposit generation is powered by our strong personal service, visibility in our communities, broad commercial banking and treasury management product offerings, and convenient services such as remote deposit capture and commercial internet banking. We also employ deposit-focused business development officers to generate deposit relationships.
The following table illustrates the improvement of our core deposit base as a percent of total deposits and as a percent of total loans:
Balance Sheet Funded by Core Deposits (Total Deposits Less Time Deposits)
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Scalable operating model. We have invested in employees and infrastructure to enhance and expand our capabilities and support the growth of our franchise. In particular, we strive to adopt the latest technology to better serve our customer base and improve our operational efficiency. These investments include increasing staffing of our credit administration, finance and information technology departments and developing a full range of commercial and consumer banking services. We offer our retail customers internet and mobile banking with peer-to-peer payments. We offer our commercial customers internet banking, remote deposit capture and online treasury management tools. In addition, we use online tools to streamline the origination of small commercial loans. We believe these investments will support our future growth in a cost-effective manner. Our investments in technology and infrastructure have provided us with a scalable operating platform and organizational infrastructure that will allow us to continue to improve our operating leverage and continue our growth without significant investments in the near term.
Experienced senior management team. Our leadership team consists of experienced banking executives with strong ties to our markets, many of whom have experience working at larger financial institutions.
| Eric M. Sprink, our President and Chief Executive Officer, has over 27 years of experience in the financial services industry, including 12 years in the Puget Sound region. Prior to joining the Company in 2006, Mr. Sprink held leadership positions with several financial institutions in corporate finance, retail banking, commercial lending, private banking and trust management. |
| Joel G. Edwards, our Chief Financial Officer, has over 32 years of experience in the financial services industry, including 23 years in the Puget Sound region. He has served as chief financial officer for both privately held and publicly traded Washington banking institutions. Mr. Edwards joined the Company as Chief Financial Officer in 2012. |
| Russ A. Keithley, our Chief Lending Officer, has over 28 years of experience in the financial services industry, all in the Puget Sound region. Prior to joining the Company in 2012, Mr. Keithley served as chief lending officer and chief credit officer at other financial institutions. |
Diversified loan portfolio. We have an attractive loan mix, with 12.8% commercial and industrial, or C&I, loans, 24.9% owner-occupied commercial real estate, or CRE, loans, 32.8% non-owner-occupied CRE loans and 13.4% one- to four-family residential loans at March 31, 2018. Approximately 37.7% of our loan portfolio is comprised of owner-operated business loans, which includes C&I and owner-occupied CRE loans on a combined basis, and 48.6% of our portfolio consists of loans for investor-owned properties and projects, which includes non-owner-occupied CRE loans, multi-family loans and construction and land development loans on a combined basis. We believe that our knowledgeable and prudent approach to real estate lending results in relatively lower losses caused by defaults, as compared to other types of commercial lending.
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Well positioned for a rising rate environment. In anticipation of a rising rate environment, we have focused our business to emphasize the origination of floating-rate loans in our real estate loan portfolio and limited the number of long-term, fixed-rate loans. As of March 31, 2018, approximately 56.0% of our total loan portfolio had floating or adjustable interest rates. Additionally, we currently fund the majority of our loan portfolio with core deposits, which represented 94.0% of loans as of March 31, 2018, and which we believe will re-price more slowly than our assets. As of March 31, 2018, our one-year cumulative re-pricing gap to total assets of 25% was in the 78th percentile of banks nationwide, according to data obtained through S&P Global Market Intelligence, or S&P Global.
Disciplined underwriting and credit administration. Our management and credit administration team fosters a strong risk management culture supported by comprehensive policies and procedures for credit underwriting, funding, and loan administration and monitoring that we believe has enabled us to establish excellent credit quality. We monitor categories of lending activity within our portfolio and establish sub-limits that we review regularly and adjust in response to changes in our lending strategy and market conditions.
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The positive impact of our disciplined underwriting and credit administration is demonstrated in the graph below, which shows the decrease in our nonperforming assets and our charge-off history as of and for the three months ended March 31, 2018, and the twelve months ended December 31, 2017, 2016, 2015, 2014 and 2013.
Our Business Strategy
We position ourselves as an attractive local community bank alternative to larger, more impersonal financial services companies. We believe that banking industry consolidation and branch rationalizations have led to an underserved base of small and medium sized businesses, many of which prefer to bank with a local financial institution with agile, highly responsive decision-making capabilities. Our management teams experience and established presence in our market area gives us valuable insight into the local market, allowing us to recruit talented lenders and attract high-quality customer relationships. We seek to develop long-term relationships by offering a wide array of deposit and treasury products and services to complement our loan products and by delivering high-quality customer service.
The following is a more detailed description of our business strategy:
Strategically expand. We aim to continuously enhance our customer base, increase loans and deposits and expand our overall market share, and we believe that the Puget Sound region specifically has significant organic growth opportunities. We have pursued measured growth through strategic de novo branch expansion. In the last five years, we have added five branches: two in 2013, two in 2015 and one in 2017. As we identify attractive communities for expansion, we seek branch managers, lenders and business development officers prior to establishing a physical presence in any area. We intend to continue expanding our physical presence in Snohomish and neighboring counties when good opportunities that meet our requirements become available.
While acquisitions have not been a driver of our historic growth, we periodically evaluate opportunities to expand through strategic acquisitions. We believe there are several community banks that could be a natural fit for our franchise and could meaningfully enhance our value, and we follow a disciplined approach when evaluating any acquisition opportunities.
Organically grow our loan portfolio and lending staff. We have successfully expanded our loan portfolio by training and encouraging the growth of our junior lenders and by recruiting additional lenders in our existing and target markets. We believe we will benefit from our commitment to developing the next generation of talented lenders. We have created a culture in which our more seasoned lenders train their junior counterparts, enabling them to generate additional loan relationships as they mature in the business. Additionally, by actively involving junior lenders, our senior lenders gain additional flexibility to expand their own relationships. In addition to
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developing our junior lenders, we seek to hire additional seasoned lending teams. We believe we are an attractive destination for top talent because we offer a platform of sophisticated product and service capabilities as well as the freedom and flexibility to follow customers in our market area without imposing strict territorial limitations on our lenders. Additionally, we believe that having a marketable common stock as the result of this offering will assist us in recruiting talented personnel through our having the ability to offer the possibility of stock-based incentive compensation. We believe that our commitment to the development of our lenders will lead to long-term continuity in personnel and the recruitment and retention of high-quality lenders in our markets.
Fund growth through core deposits. We fund our loan growth primarily through customer deposits, as reflected by our ratios of core deposits to total deposits and core deposits to total loans of 87.7% and 94.0%, respectively, as of March 31, 2018. The strength of our deposit franchise results from our development and maintenance of long-standing customer relationships. Our relationship managers and branch managers actively seek deposit relationships with our loan customers. We also employ business development officers to generate these relationships. We attract deposits from our commercial customers by providing them with personal service, a broad suite of commercial banking and treasury management products and convenient services such as remote deposit capture and commercial internet banking.
Dedication to community banking. We attribute our success to our adherence to the basic principles of community banking: we know our markets and our customers, and we are meaningfully contributing members of our communities. Our employees volunteer with, serve on the boards of and contribute to dozens of local organizations, and, in 2017, we contributed the most volunteer hours per employee of the 75 companies ranked by the Puget Sound Business Journal. We empower our employees of all levels to make appropriate decisions on customer products and services. By creating expectations of high-quality service and enabling our employees to deliver that service, we believe we have created an environment that attracts both employees and customers.
Increase utilization of technology. We actively explore opportunities to use technology to improve efficiency, deliver superior service and drive growth without compromising our underwriting standards. We have installed cash recyclers in every branch, deployed automatic teller machines, automated portions of the origination process for commercial loans and implemented instant issuance of debit and credit cards. We also provide commercial internet banking, remote deposit capture and online treasury management tools, as well as mobile and internet banking and peer-to-peer payment capabilities. We work diligently to make banking easier for small business owners, enabling them to focus on their businesses. Additionally, we actively recognize and monitor the potential impacts that emerging technologies may have on the banking landscape. We periodically evaluate strategic partnerships with technology-focused companies that we believe will benefit our employees, customers and shareholders, generate additional fee income, enhance our product offerings, monitor our enterprise risk, or otherwise enable us to identify process or cost efficiencies.
Our Markets
We define our market broadly as the Puget Sound region in the state of Washington, which encompasses the Seattle MSA, the metropolitan areas of Olympia, Bremerton and Mount Vernon, and Island County. The Seattle MSA includes Snohomish County (which contains the city of Everett), King County (which contains the cities of Seattle and Bellevue) and Pierce County (which contains the city of Tacoma). The Puget Sound region, which comprises over 60% of the population of the state of Washington as well as the number of businesses located therein, according to data obtained through S&P Global, is a growing market, currently with a population of approximately 4.7 million, over 178,000 businesses and $115 billion of deposits. We believe that the Puget Sound region specifically has significant organic growth opportunities.
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The following table shows certain demographic information regarding our market area:
Market Area |
Number of Coastal Branches |
Total Deposits in Market ($ in millions) |
Population | Number of Businesses |
Median Household Income ($) |
April 2018 Unemployment Rate (% ) |
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2018 Estimated |
Growth | |||||||||||||||||||||||||||||||
2013-2018 | 2018-2023 | |||||||||||||||||||||||||||||||
Estimated | Projected | |||||||||||||||||||||||||||||||
Puget Sound Region |
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Seattle-Tacoma-Bellevue MSA |
11 | $ | 104,715 | 3,885,514 | 9.0 | % | 6.7 | % | 150,558 | $ | 82,186 | 3.6 | % | |||||||||||||||||||
King County (Seattle & Bellevue) |
1 | 81,779 | 2,198,918 | 9.7 | % | 7.0 | % | 96,918 | 90,281 | 3.0 | % | |||||||||||||||||||||
Snohomish County (Everett) |
10 | 11,640 | 807,101 | 10.0 | % | 6.8 | % | 23,864 | 83,174 | 3.3 | % | |||||||||||||||||||||
Pierce County (Tacoma) |
0 | 11,296 | 879,495 | 6.6 | % | 6.0 | % | 29,776 | 65,896 | 5.4 | % | |||||||||||||||||||||
Olympia-Tumwater MSA |
0 | 3,539 | 282,330 | 8.0 | % | 6.5 | % | 11,709 | 66,766 | 5.0 | % | |||||||||||||||||||||
Bremerton-Silverdale MSA |
0 | 3,046 | 270,215 | 3.6 | % | 5.0 | % | 10,443 | 72,338 | 5.0 | % | |||||||||||||||||||||
Mount Vernon-Anacortes MSA |
0 | 2,466 | 126,007 | 5.1 | % | 5.1 | % | 5,639 | 60,361 | 5.4 | % | |||||||||||||||||||||
Island County |
2 | 1,134 | 84,841 | 6.0 | % | 5.2 | % | 3,354 | 64,150 | 5.6 | % | |||||||||||||||||||||
Total Puget Sound Region |
13 | $ | 114,900 | 4,648,907 | 8.5 | % | 6.6 | % | 181,703 | - | - |
Sources: S&P Global and the U.S. Bureau of Labor Statistics.
We are the largest locally headquartered bank by deposit market share in Snohomish County, according to data from the Federal Deposit Insurance Corporation, or FDIC, as of June 30, 2017, at which date we had a five percent deposit market share in Snohomish County. We aim to continuously enhance our customer base, increase loans and deposits and expand our overall market share in Snohomish County. In light of our market position and our business strategy, we do not regularly compete for commercial or retail deposits in the city of Seattle, and we believe this strategic decision has enabled us to generate low cost core deposits to fund our loan growth.
The following table shows our market position in Snohomish County:
Institution (Headquarter State) |
Overall Rank |
In-Market HQ Rank |
Deposits in Market ($ in millions) |
Number of Branches |
Deposit Market Share (%) |
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Bank of America Corp. (NC) |
1 | $ | 2,561 | 21 | 22.0 | % | ||||||||||||||
JPMorgan Chase & Co. (NY) |
2 | 1,757 | 25 | 15.1 | % | |||||||||||||||
Wells Fargo & Co. (CA) |
3 | 1,480 | 19 | 12.7 | % | |||||||||||||||
U.S. Bancorp (MN) |
4 | 710 | 12 | 6.1 | % | |||||||||||||||
KeyCorp (OH) |
5 | 583 | 18 | 5.0 | % | |||||||||||||||
Coastal Financial Corp. (WA) |
6 | 1 | 578 | 10 | 5.0 | % | ||||||||||||||
Union Bank of California (CA) |
7 | 545 | 8 | 4.7 | % | |||||||||||||||
Opus Bank (CA) |
8 | 438 | 6 | 3.8 | % | |||||||||||||||
Heritage Financial Corp. (WA) |
9 | 418 | 8 | 3.6 | % | |||||||||||||||
Washington Federal Inc. (WA) |
10 | 416 | 9 | 3.6 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total For Institutions In Market |
25 | 6 | $ | 11,640 | 180 |
Note: Deposits are as of June 30, 2017, the most recent deposit data available from the FDIC.
8
Snohomish County. Our headquarters are located in Everett, Washington, which is the largest city in, and the county seat of, Snohomish County with a population of approximately 113,000 as of January 1, 2018. Snohomish is the third largest county by population in the state of Washington, with an estimated population of approximately 800,000 as of January 1, 2018, and the second largest county by total deposits, with $11.6 billion in total deposits as of June 30, 2017, according to data obtained through S&P Global.
The Snohomish County economy is one of the strongest in the United States, boasting a rapidly growing population with a median annual household income of $83,174, the second highest in Washington and significantly above the national average, as of January 1, 2018, and a low unemployment rate of 3.3% as of April 2018. Snohomish has seen consistent growth in service-providing jobs, which account for more than 72% of the jobs in the county. Jobs related to trade, transportation and utilities, retail, and education and health services are the largest sub-categories of service-providing jobs. The Boeing Company, which employed 34,500 people in 2017, is the largest employer in Snohomish County. The second and third largest employers in Snohomish County, Providence Regional Medical Center and the Tulalip Tribes employed 4,775 and 3,200 full-time employees in 2017, respectively, and the U.S. Navy has a meaningful presence in Everett and was the fourth largest employer in Snohomish County in 2017. In addition, Paine Field in Everett will open to commercial air traffic in 2018, and Southwest Airlines, Alaska Airlines, and United Airlines have announced plans to add routes to and from Paine Field, primarily to and from cities in the western United States. We believe this development will lead to further population growth and increase economic development in Snohomish County.
Snohomish County is a large, addressable market with a lower cost of doing business relative to neighboring King County, which includes the cities of Seattle and Bellevue. Based on available data, we believe that a significant portion of the Snohomish County population consists of a mobile commuter work force with relatively easy access to nearby technology and industrial centers. Our location in Snohomish County enables us to have a lower cost structure and lower cost deposits, compared to banks in King County, while also providing us ready access to its larger economy.
King County. King County borders Snohomish County to the south and is the largest county by population in the state of Washington. It is the 13th largest county in the United States with an estimated population of 2.2 million and total deposits of $82 billion as of June 30, 2017, according to the FDICs Summary of Deposits. Additionally, the population growth of King County was the second fastest in Washington from 2013 to 2018. While we do not have significant physical presence in King County, our locations in Snohomish County enable us to take advantage of the abundant lending and business opportunities there.
King County, which contains the city of Seattle, boasts headquarters to 10 Fortune 500 companies, including Amazon, Costco, Microsoft and Starbucks. Additionally, 31 Fortune 500 companies currently operate research and engineering hubs in Seattle, as compared to seven companies in 2010, according to The Atlantic. Seattle has become a favored location for technology companies and, according to CBRE Group, Inc., is currently one of the top two tech markets in the United States, ranking behind only the San Francisco Bay Area.
Recent Developments
Reverse Stock Split
On May 4, 2018, we effected a one-for-five reverse stock split, whereby every five shares of our common stock and nonvoting common stock were automatically combined into one share of common stock and nonvoting common stock, respectively. Fractional shares were rounded up to the nearest whole share. Except for adjustments that resulted from the treatment of fractional shares, each shareholder held the same percentage of common stock or nonvoting common stock, as the case may be, outstanding after the reverse stock split as that shareholder held immediately prior to the reverse stock split. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this prospectus.
9
Banking Services Agreement with Aspiration Financial, LLC
On May 17, 2018, we entered into an agreement with Aspiration Financial, LLC, or Aspiration, an online investment platform that offers socially-conscious and sustainable banking and investing, pursuant to which we will provide certain banking services for Aspirations new cash management account program that Aspiration intends to launch in the third quarter of 2018. As part of our services to Aspiration, we will serve as the issuing bank for debit cards issued to Aspirations customers and we will establish one or more settlement accounts for the purpose of settling customer transactions in the Aspiration cash management account program. Substantially all of the Aspiration customer cash balances will be distributed to accounts at other depository institutions through a sweep network. We will retain a small portion of Aspiration customer cash balances for the purpose of facilitating settlement of payments and transfers. The agreement with Aspiration has an initial term of three years from the later of July 1, 2018 or the date on which Aspiration begins enrolling customers, and is subject to two automatic renewals for successive 12-month terms. Pursuant to the agreement with Aspiration, we will receive a quarterly fee based on the total deposits in the Aspiration cash management account program (and we must pay interest to Aspiration on the deposits we retain) and Aspiration will reimburse us for certain expenses.
Corporate Information
Our principal executive offices are located at 5415 Evergreen Way, Everett, WA. Our telephone number is (425) 257-9000. Our website is www.coastalbank.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.
Summary Risk Factors
Our business is subject to a number of substantial risks and uncertainties of which you should be aware before making a decision to invest in our common stock. These risks are discussed more fully in the section entitled Risk Factors beginning on page 18. Some of these risks include the following:
| credit risks, including risks related to the significance of commercial real estate loans in our portfolio, our ability to effectively manage our credit risk and the potential deterioration of the business and economic conditions in our market areas; |
| liquidity and funding risks, including the risk that we will not be able to meet our obligations due to risks relating to our funding sources; |
| operational, strategic and reputational risks, including the risk that we may not be able to implement our growth strategy and risks related to cybersecurity, the possible loss of key members of our senior leadership team and maintaining our reputation; |
| legal, accounting and compliance risks, including risks related to the extensive state and federal regulation under which we operate and changes in such regulations; |
| market and interest rate risks, including risks related to interest rate fluctuations and the monetary policies and regulations of the Board of Governors of the Federal Reserve System, or the Federal Reserve; and |
| offering and investment risks, including illiquidity and volatility in the trading of our common stock, limitations on our ability to pay dividends and the dilution that investors in this offering will experience. |
10
THE OFFERING
Common stock offered by us |
shares | |
Common stock offered by the selling shareholders |
shares | |
Underwriters option to purchase additional |
We have granted the underwriters an option to purchase up to an additional shares of our common stock within 30 days after the date of this prospectus. | |
Common shares to be outstanding after this |
shares, which includes common stock and nonvoting common stock (or shares if the underwriters exercise in full their option to purchase additional shares of common stock) | |
Use of proceeds |
Assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts but before payment of estimated offering expenses payable by us, will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares). We intend to use the net proceeds to us from this offering to support our growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of debt and maintenance of our required regulatory capital levels. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders in this offering. See Use of Proceeds. | |
Dividends |
We have not historically declared or paid dividends on our common stock and we do not intend to pay cash dividends on our common stock in the near term. Instead, we anticipate that all of our future earnings will be retained to support our operations and finance the growth and development of our business. Our determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon a number of factors, including our earnings, financial condition, results of operations, capital requirements, regulatory restrictions, and other factors that our board of directors may deem relevant. See Dividend Policy. | |
Investment Agreements |
Prior to this offering, we entered into Investment Agreements with certain of our shareholders that hold 4.9% or more of our outstanding common stock. Among other things, the Investment |
11
Agreements provide such shareholders with certain board representation rights. For a detailed description of the Investment Agreements, see Certain Relationships and Related Party TransactionsCertain Related Party TransactionsInvestment Agreements. | ||
Proposed Nasdaq symbol |
We have applied to list our common stock on the Nasdaq Global Select Market under the symbol CCB. | |
Conflicts of interest |
An affiliate of Hovde Group, LLC, or Hovde Group, an underwriter in this offering, beneficially owns more than 10% of our issued and outstanding common stock. As a result, Hovde Group is deemed to have a conflict of interest within the meaning of Rule 5121 of the Financial Industry Regulatory Authority, Inc., or FINRA. Accordingly, this offering will be conducted in compliance with the applicable requirements of Rule 5121, which include, among other things, that a qualified independent underwriter as defined in Rule 5121 participate in the preparation of, and exercise the usual standards of due diligence with respect to, this prospectus and the registration statement of which this prospectus forms a part. Keefe, Bruyette & Woods, Inc., or Keefe, Bruyette & Woods, has agreed to act as a qualified independent underwriter for this offering. Keefe, Bruyette & Woods will not receive any additional compensation for serving as qualified independent underwriter in connection with this offering. See Underwriting (Conflicts of Interest)Conflicts of Interest. | |
Directed share program |
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of our common stock offered in this offering for sale to certain of our directors, executive officers, employees and other related persons who have expressed an interest in purchasing our shares of common stock in this offering through a directed share program. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See Underwriting (Conflicts of Interest)Directed Share Program for additional information. | |
Risk factors |
Investing in our common stock involves certain risks. See Risk Factors, beginning on page 18, for a discussion of factors that you should carefully consider before investing in our common stock. |
12
Except as otherwise indicated, references in this prospectus to the number of our common shares outstanding after this offering are based on 8,891,859 of shares of common stock and 361,444 shares of nonvoting common stock outstanding as of March 31, 2018. Except as otherwise indicated, all information in this prospectus:
| gives effect to a one-for-five reverse stock split of our common shares completed effective May 4, 2018; |
| does not attribute to any director, executive officer or principal shareholder any purchase of shares of our common stock in this offering, including through the directed share program described in Underwriting (Conflicts of Interest)Directed Share Program; |
| assumes no exercise by the underwriters of their option to purchase additional shares of our common stock; |
| assumes an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus; |
| excludes 784,984 shares of our common stock issuable upon the exercise of stock options, with a weighted average exercise price of $6.27 per share, that were outstanding as of March 31, 2018; and |
| excludes 500,000 additional shares of our common stock that are reserved for future issuance under our 2018 Omnibus Incentive Plan. |
13
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data as of and for the three months ended March 31, 2018, and as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013. The selected balance sheet data as of March 31, 2018 and 2017, and the selected statement of income data for the three months ended March 31, 2018 and 2017, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2017 and 2016, and the selected statement of income data for the years ended December 31, 2017 and 2016, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2015, 2014 and 2013 and the selected statement of income data for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements that are not included in this prospectus. Our historical results are not necessarily indicative of any future performance. The information presented in the following table has been adjusted to give effect to a one-for-five reverse stock split of our common shares completed effective May 4, 2018. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented.
You should read the following financial data in conjunction with the other information contained in this prospectus, including in the sections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and Capitalization, as well as our consolidated financial statements and related notes to those financial statements included elsewhere in this prospectus. The selected historical consolidated financial data presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States and have not been audited. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.
As of or for the Three Months Ended March 31, |
As of or for the Year Ended December 31, |
|||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2018 | 2017 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||
Statement of Income Data: |
||||||||||||||||||||||||||||
Total interest income |
$ | 8,607 | $ | 7,543 | $ | 32,113 | $ | 28,460 | $ | 24,829 | $ | 22,451 | $ | 18,794 | ||||||||||||||
Total interest expense |
829 | 668 | 2,875 | 2,523 | 2,501 | 2,032 | 1,699 | |||||||||||||||||||||
Provision for loan losses |
501 | 439 | 870 | 1,919 | 941 | 1,690 | 1,493 | |||||||||||||||||||||
Net interest income after provision for loan losses |
7,277 | 6,436 | 28,368 | 24,018 | 21,387 | 18,729 | 15,602 | |||||||||||||||||||||
Total noninterest income |
1,107 | 831 | 4,154 | 4,977 | 3,506 | 3,574 | 2,018 | |||||||||||||||||||||
Total noninterest expense |
6,067 | 5,376 | 22,433 | 21,538 | 20,406 | 18,829 | 14,447 | |||||||||||||||||||||
Provision for income taxes |
474 | 578 | 4,653 | 2,454 | 1,483 | 1,127 | 1,130 | |||||||||||||||||||||
Net income |
1,843 | 1,313 | 5,436 | 5,003 | 3,004 | 2,347 | 2,043 | |||||||||||||||||||||
Adjusted net income (1) |
1,843 | 1,313 | 6,731 | 5,003 | 3,004 | 2,347 | 2,043 | |||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||||||||||
Cash and cash equivalents |
94,569 | 104,606 | 89,751 | 86,975 | 84,674 | 80,167 | 38,625 | |||||||||||||||||||||
Investment securities |
37,338 | 34,806 | 38,336 | 34,994 | 16,150 | 13,757 | 14,439 | |||||||||||||||||||||
Loans |
678,515 | 596,219 | 656,788 | 596,128 | 499,186 | 431,119 | 359,317 | |||||||||||||||||||||
Allowance for loan losses |
8,423 | 7,793 | 8,017 | 7,544 | 5,989 | 5,557 | 4,268 | |||||||||||||||||||||
Total assets |
830,962 | 758,377 | 805,753 | 740,611 | 622,678 | 546,475 | 428,860 | |||||||||||||||||||||
Interest-bearing deposits |
473,268 | 436,061 | 460,937 | 424,707 | 370,028 | 333,230 | 256,747 | |||||||||||||||||||||
Noninterest-bearing deposits |
254,000 | 229,016 | 242,358 | 223,955 | 173,554 | 138,931 | 113,337 | |||||||||||||||||||||
Total deposits |
727,268 | 665,077 | 703,295 | 648,662 | 543,582 | 472,161 | 370,084 | |||||||||||||||||||||
Total borrowings |
33,534 | 28,681 | 33,529 | 28,513 | 20,376 | 19,374 | 18,372 | |||||||||||||||||||||
Total shareholders equity |
66,927 | 61,303 | 65,711 | 59,897 | 55,753 | 52,521 | 38,487 |
14
As of or for the Three Months Ended March 31, |
As of or for the Year Ended December 31, |
|||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2018 | 2017 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||
Share and Per Share Data: (2) |
||||||||||||||||||||||||||||
Earnings per sharebasic |
$ | 0.20 | $ | 0.14 | $ | 0.59 | $ | 0.54 | $ | 0.33 | $ | 0.30 | $ | 0.29 | ||||||||||||||
Earnings per sharediluted |
$ | 0.20 | $ | 0.14 | $ | 0.59 | $ | 0.54 | $ | 0.33 | $ | 0.30 | $ | 0.29 | ||||||||||||||
Adjusted earnings per sharediluted (3) |
$ | 0.20 | $ | 0.14 | $ | 0.73 | $ | 0.54 | $ | 0.33 | $ | 0.30 | $ | 0.29 | ||||||||||||||
Dividends per share |
- | - | - | - | - | - | - | |||||||||||||||||||||
Book value per share (4) |
$ | 7.23 | $ | 6.63 | $ | 7.11 | $ | 6.48 | $ | 6.04 | $ | 5.70 | $ | 5.28 | ||||||||||||||
Tangible book value per share (5) |
$ | 7.23 | $ | 6.63 | $ | 7.11 | $ | 6.48 | $ | 6.04 | $ | 5.70 | $ | 5.28 | ||||||||||||||
Weighted average common shares outstandingbasic |
9,242,839 | 9,232,398 | 9,232,398 | 9,226,204 | 9,218,418 | 7,859,830 | 7,148,165 | |||||||||||||||||||||
Weighted average common shares outstandingdiluted |
9,248,428 | 9,235,475 | 9,237,629 | 9,227,216 | 9,220,836 | 7,859,830 | 7,148,165 | |||||||||||||||||||||
Shares outstanding at end of period |
9,253,303 | 9,243,546 | 9,248,901 | 9,238,788 | 9,232,538 | 9,213,204 | 7,289,274 | |||||||||||||||||||||
Performance Ratios: |
||||||||||||||||||||||||||||
Return on average assets (6) |
0.94 | % | 0.73 | % | 0.73 | % | 0.76 | % | 0.52 | % | 0.49 | % | 0.51 | % | ||||||||||||||
Adjusted return on average assets (6)(7) |
0.94 | % | 0.73 | % | 0.90 | % | 0.76 | % | 0.52 | % | 0.49 | % | 0.51 | % | ||||||||||||||
Return on average shareholders equity (6) |
10.96 | % | 7.78 | % | 8.27 | % | 8.56 | % | 5.52 | % | 5.33 | % | 5.56 | % | ||||||||||||||
Adjusted return on average shareholders equity (6)(8) |
10.96 | % | 7.78 | % | 10.24 | % | 8.56 | % | 5.52 | % | 5.33 | % | 5.56 | % | ||||||||||||||
Yield on earnings assets (6) |
4.56 | % | 4.40 | % | 4.48 | % | 4.53 | % | 4.51 | % | 4.93 | % | 4.95 | % | ||||||||||||||
Yield on loans (6) |
5.07 | % | 4.93 | % | 4.98 | % | 5.16 | % | 5.34 | % | 5.60 | % | 5.65 | % | ||||||||||||||
Cost of funds (6) |
0.46 | % | 0.41 | % | 0.42 | % | 0.42 | % | 0.48 | % | 0.47 | % | 0.47 | % | ||||||||||||||
Cost of deposits (6) |
0.37 | % | 0.31 | % | 0.32 | % | 0.36 | % | 0.46 | % | 0.44 | % | 0.43 | % | ||||||||||||||
Net interest margin (6) |
4.12 | % | 4.01 | % | 4.08 | % | 4.13 | % | 4.06 | % | 4.49 | % | 4.50 | % | ||||||||||||||
Noninterest expense to average assets (6) |
3.10 | % | 2.98 | % | 3.00 | % | 3.28 | % | 3.51 | % | 3.92 | % | 3.61 | % | ||||||||||||||
Efficiency ratio (9) |
68.28 | % | 69.76 | % | 67.18 | % | 69.67 | % | 78.99 | % | 78.48 | % | 75.59 | % | ||||||||||||||
Loans to deposits |
93.3 | % | 89.6 | % | 93.4 | % | 91.9 | % | 91.8 | % | 91.3 | % | 97.1 | % | ||||||||||||||
Credit Quality Ratios: |
||||||||||||||||||||||||||||
Nonperforming assets to total assets |
0.20 | % | 0.27 | % | 0.26 | % | 1.11 | % | 1.52 | % | 1.90 | % | 1.24 | % | ||||||||||||||
Nonperforming assets to total loans and OREO |
0.25 | % | 0.34 | % | 0.32 | % | 1.38 | % | 1.89 | % | 2.39 | % | 1.46 | % | ||||||||||||||
Nonperforming loans to total loans |
0.25 | % | 0.34 | % | 0.32 | % | 0.27 | % | 0.54 | % | 0.35 | % | 0.72 | % | ||||||||||||||
Allowance for loan losses to nonperforming loans |
495.76 | % | 379.22 | % | 378.16 | % | 468.28 | % | 221.32 | % | 365.35 | % | 163.90 | % | ||||||||||||||
Allowance for loan losses to total loans |
1.24 | % | 1.31 | % | 1.22 | % | 1.27 | % | 1.20 | % | 1.29 | % | 1.19 | % | ||||||||||||||
Net charge-offs to average loans (6) |
0.06 | % | 0.13 | % | 0.06 | % | 0.07 | % | 0.11 | % | 0.10 | % | 0.33 | % | ||||||||||||||
Capital Ratios: |
||||||||||||||||||||||||||||
Total shareholders equity to total assets |
8.05 | % | 8.08 | % | 8.16 | % | 8.09 | % | 8.95 | % | 9.61 | % | 8.97 | % | ||||||||||||||
Tangible equity to tangible assets (10) |
8.05 | % | 8.08 | % | 8.16 | % | 8.09 | % | 8.95 | % | 9.61 | % | 8.97 | % | ||||||||||||||
Common equity tier 1 capital ratio (11) |
11.37 | % | 11.86 | % | 11.67 | % | 11.60 | % | 11.14 | % | N/A | N/A | ||||||||||||||||
Tier 1 leverage ratio (11) |
10.09 | % | 10.07 | % | 9.94 | % | 10.11 | % | 9.58 | % | 10.10 | % | 9.58 | % | ||||||||||||||
Tier 1 risk-based capital ratio (11) |
11.37 | % | 11.86 | % | 11.67 | % | 11.60 | % | 11.14 | % | 12.46 | % | 11.56 | % | ||||||||||||||
Total risk-based capital ratio (11) |
12.60 | % | 13.11 | % | 12.90 | % | 12.85 | % | 12.31 | % | 13.71 | % | 12.78 | % |
(1) | Adjusted net income is a non-GAAP financial measure that excludes the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act in fiscal year 2017. The most directly comparable GAAP measure is net income. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. |
(2) | Share and per share amounts are based on total common shares outstanding, which includes common stock and nonvoting common stock. |
(3) | Adjusted earnings per share is a non-GAAP financial measure that excludes the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act in fiscal year 2017. The most directly comparable GAAP measure is earnings per share. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. |
(4) | We calculate book value per share as total shareholders equity at the end of the relevant period divided by the outstanding number of our common shares, which includes common stock and nonvoting common stock, at the end of each period. |
15
(5) | Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares, which includes common stock and nonvoting common stock, at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. |
(6) | Ratios for the three months ended March 31, 2018 and 2017, are annualized. |
(7) | Adjusted return on average assets is a non-GAAP financial measure that excludes the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act in fiscal year 2017. The most directly comparable GAAP measure is return on average assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. |
(8) | Adjusted return on average shareholders equity is a non-GAAP financial measure that excludes the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act in fiscal year 2017. The most directly comparable GAAP measure is return on average shareholders equity. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. |
(9) | Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income. |
(10) | Tangible equity to tangible assets is a non-GAAP financial measure. We calculate tangible equity to tangible assets as total shareholders equity at the end of the relevant period, less goodwill and other intangible assets. The most directly comparable GAAP financial measures is total shareholders equity to total assets. We had no goodwill or other intangible assets as of the dates indicated. As a result, tangible equity to tangible assets is the same as total shareholders equity to total assets as of each of the dates indicated. |
(11) | Capital ratios are for the Bank. |
16
GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF
NON-GAAP FINANCIAL MEASURES
Some of the financial measures included in this prospectus are not measures of financial performance recognized by GAAP. Our management uses the non-GAAP financial measures set forth below in its analysis of our performance.
| Adjusted net income is a non-GAAP measure defined as net income increased by the additional income tax expense that resulted from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the recently enacted Tax Cuts and Jobs Act. The most directly comparable GAAP measure is net income. |
| Adjusted earnings per share is a non-GAAP measure defined as net income, plus additional income tax expense, divided by weighted average outstanding shares (diluted). The most directly comparable GAAP measure is earnings per share. |
| Adjusted return on average assets is a non-GAAP measure defined as net income, plus additional income tax expense, divided by average assets. The most directly comparable GAAP measure is return on average assets. |
| Adjusted return on average shareholders equity is a non-GAAP measure defined as net income, plus additional income tax expense, divided by average shareholders equity. The most directly comparable GAAP measure is return on average shareholders equity. |
We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our results of operations. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these measures, this presentation may not be comparable to other similarly titled measures by other companies.
(Dollars in thousands, except share and per share data) | As of and for the Year Ended December 31, 2017 |
|||
Adjusted net income: |
||||
Net income |
$ | 5,436 | ||
Plus: additional income tax expense |
1,295 | |||
Adjusted net income |
$ | 6,731 | ||
Adjusted earnings per sharediluted |
||||
Net income |
$ | 5,436 | ||
Plus: additional income tax expense |
1,295 | |||
Adjusted net income |
$ | 6,731 | ||
Weighted average common shares outstandingdiluted (1) |
9,237,629 | |||
Adjusted earnings per sharediluted (1) |
$ | 0.73 | ||
Adjusted return on average assets |
||||
Net income |
$ | 5,436 | ||
Plus: additional income tax expense |
1,295 | |||
Adjusted net income |
$ | 6,731 | ||
Average assets |
$ | 748,940 | ||
Adjusted return on average assets |
0.90 | % | ||
Adjusted return on average shareholders equity |
||||
Net income |
$ | 5,436 | ||
Plus: additional income tax expense |
1,295 | |||
Adjusted net income |
$ | 6,731 | ||
Average shareholders equity |
$ | 65,720 | ||
Adjusted return on average shareholders equity |
10.24 | % |
(1) | Share and per share information has been adjusted to give effect to a one-for-five reverse stock split of our common shares completed effective May 4, 2018. |
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An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following information about these risks, together with the other information contained in this prospectus. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially and adversely affect us. Many factors, including the risks described below, could result in a significant or material adverse effect on our business, financial condition, earnings and prospects. If this were to happen, the price of our common stock could decline significantly and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to Cautionary Note Regarding Forward-Looking Statements.
Risks Related to Our Business
Our commercial real estate lending activities expose us to increased lending risks and related loan losses.
At March 31, 2018, our commercial real estate loan portfolio totaled $453.9 million, or 66.9% of our total loan portfolio. Our current business strategy is to continue our originations of commercial real estate loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the income stream of the borrowers. These loans involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. To the extent that borrowers have more than one commercial real estate loan outstanding, an adverse development with respect to one loan or one credit relationship could expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. Moreover, if loans that are collateralized by commercial real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and would adversely affect our earnings and financial condition.
Imposition of limits by the bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.
In 2006, the federal banking regulators issued joint guidance entitled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, or the CRE Guidance. Although the CRE Guidance did not establish specific lending limits, it provides that a banks commercial real estate lending exposure could receive increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institutions total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans represented 366.8% of the Banks total risk-based capital at March 31, 2018. However, the increase in the portfolio over the preceding 36 months was less than 50%.
In December 2015, the federal banking regulators released a new statement on prudent risk management for commercial real estate lending, referred to herein as the 2015 Statement. In the 2015 Statement, the federal banking regulators, among other things, indicate the intent to continue to pay special attention to commercial real estate lending activities and concentrations going forward. If the Federal Reserve, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.
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Our commercial business lending activities expose us to additional lending risks.
We make commercial business loans in our market area to a variety of professionals, sole proprietorships, partnerships and corporations. As compared to commercial real estate loans, which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrowers ability to make repayment from the cash flow of the borrowers business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise, may fluctuate in value and may depend on the borrowers ability to collect receivables. We have increased our focus on commercial business lending in recent years and intend to continue to focus on this type of lending in the future.
Our concentration of residential mortgage loans exposes us to increased lending risks.
At March 31, 2018, $90.6 million, or 13.4%, of our loan portfolio was secured by one-to-four family real estate, a significant majority of which is located in the Puget Sound region. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
Our origination of construction loans exposes us to increased lending risks.
We originate commercial construction loans primarily to professional builders for the construction of one-to-four family residences, apartment buildings, and commercial real estate properties. To a lesser degree, we also originate land acquisition loans for the purpose of facilitating the ultimate construction of a home or commercial building. Our construction loans present a greater level of risk than loans secured by improved, occupied real estate due to: (1) the increased difficulty at the time the loan is made of estimating the building costs and the selling price of the property to be built; (2) the increased difficulty and costs of monitoring the loan; (3) the higher degree of sensitivity to increases in market rates of interest; and (4) the increased difficulty of working out loan problems. In addition, construction costs may exceed original estimates as a result of increased materials, labor or other costs. Construction loans also often involve the disbursement of funds with repayment dependent, in part, on the success of the project and the ability of the borrower to sell or lease the property or refinance the indebtedness.
The small to medium-sized businesses that we lend to may have fewer resources to endure adverse business developments than larger firms, which may impair our borrowers ability to repay loans.
We focus our business development and marketing strategy primarily on small to medium-sized businesses. Small to medium-sized businesses frequently have smaller market shares than larger firms, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrowers ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its ability to repay its loan. If our borrowers are unable to repay their loans, our business, financial condition and earnings could be adversely affected.
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our
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outstanding exposure. These risks may be affected by the strength of the borrowers business sector and local, regional and national market and economic conditions. Many of our loans are made to small to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio could lead to unexpected losses and have a material adverse effect on our business, financial condition and results of operations.
If our allowance for loan losses is insufficient to absorb actual loan losses, our results of operations would be negatively affected.
In determining the amount of the allowance for loan losses, we analyze our loss and delinquency experience by loan categories and we consider the effect of existing economic conditions. In addition, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If the actual results are different from our estimates, or our analyses are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance and would decrease our net income. Our emphasis on loan growth and on increasing our portfolio, as well as any future credit deterioration, will require us to increase our allowance further in the future.
In addition, our banking regulators periodically review our allowance for loan losses and could require us to increase our provision for loan losses. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities may have a material adverse effect on our results of operations and financial condition.
Nonperforming assets take significant time and resources to resolve and adversely affect our earnings and financial condition.
Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on other real estate owned, or OREO, or on nonperforming loans, thereby adversely affecting our income and increasing loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in our level of nonperforming assets increases our risk profile and may impact the capital levels regulators believe are appropriate in light of the ensuing risk profile. While we seek to reduce problem assets through loan workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers performance or financial condition, whether or not due to economic and market conditions beyond our control, could have a material effect on our business, financial condition and results of operations. In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities. We may not experience future increases in the value of nonperforming assets.
Our Small Business Administration, or SBA, lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lenders Program, referred to herein as an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the
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lenders SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress or exhaustion of the available funding for SBA programs may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could materially and adversely affect our business, financial condition and earnings.
The SBAs 7(a) Loan Program is the SBAs primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. Generally, we sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales result in premium income for us at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or sell them in the secondary market. Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could materially and adversely affect our business, financial condition and earnings.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.
The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the economy of the Puget Sound region.
While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in the Puget Sound region. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as unemployment, recession, a catastrophic event or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Uncertainties have arisen regarding the potential for a reversal or renegotiation of international trade agreements under the current administration, and the impact such actions and other policies of the current administration may have on economic and market conditions. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China, South Korea and Japan, can impact the economy and financial markets here in the United States. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and commercial activity. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond
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our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects. In addition, decreases in local real estate values caused by economic conditions, recent changes in tax laws or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Further, deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our allowance for loan losses, which in turn could necessitate an increase in our provision for loan losses and a resulting reduction to our earnings and capital.
Economic conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
Prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investment securities, and our ongoing operations, costs and profitability. Further, declines in real estate values and sales volumes and elevated unemployment levels may result in higher loan delinquencies, increases in our nonperforming and classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and earnings. Reduction in problem assets can be slow, and the process can be exacerbated by the condition of the properties securing nonperforming loans and the lengthy foreclosure process in Washington. To the extent that we must work through the resolution of assets, economic problems may cause us to incur losses and adversely affect our capital, liquidity, and financial condition.
Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.
In considering whether to make a loan secured by real property, we generally require 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, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO, and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our OREO, and our allowance for loan losses may not reflect accurate loan impairments. This could have a material adverse effect on our business, financial condition or results of operations. As of March 31, 2018, we did not hold any OREO or repossessed property and equipment.
Ineffective liquidity management could adversely affect our financial condition and earnings.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which are payable on demand or upon several days notice, while by comparison, a substantial majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially
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if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, financial condition and earnings.
Our agreement with Aspiration may produce limited revenue and may expose us to liability for compliance violations by Aspiration.
We have entered into an agreement with Aspiration, an online investment platform that offers socially-conscious and sustainable banking and investing, pursuant to which we will provide certain banking services for Aspirations new cash management account program that Aspiration intends to launch in the third quarter of 2018, including serving as the issuing bank for debit cards issued to Aspirations customers and establishing one or more settlement accounts for the purpose of settling customer transactions in the cash management account program. There can be no assurance that Aspiration will launch its new cash management account program on its planned schedule or achieve customer acceptance. Furthermore, although the agreement with Aspiration has an initial term (subject to two automatic renewals for successive 12-month terms) of three years from the later of July 1, 2018 or the date on which Aspiration begins enrolling customers, it may be earlier terminated by the parties under certain circumstances. If Aspiration is not successful in launching or achieving customer acceptance of its cash management account program or terminates the agreement before the end of its term, our revenue under the agreement may be limited or may cease altogether. In addition, because we will provide banking services with respect to the cash features of Aspirations cash management account program, our bank regulators may hold us responsible for Aspirations activities with respect to the marketing or administration of Aspirations cash management account program, which may result in increased compliance costs for us or potentially compliance violations as a result of Aspirations activities.
Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.
Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in expanding deposit and lending capacity that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence and that require alternative delivery methods. Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in modernizing existing facilities, opening new branches or deploying new services.
We may not be able to implement our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.
Our expansion strategy focuses on organic growth, supplemented by strategic acquisitions and expansion of the Banks banking location network, or de novo branching. We may not be able to execute on aspects of our expansion strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition with other financial institutions, may impede or prohibit the growth of our operations, the opening of new banking locations and the consummation of acquisitions. Further, we may be unable to attract and retain experienced bankers,
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which could adversely affect our growth. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to certain risks in connection with growing through mergers and acquisitions.
It is possible that we could acquire other banking institutions, other financial services companies or branches of banks in the future. Acquisitions typically involve the payment of a premium over book and trading values and, therefore, may result in the dilution of our tangible book value per share and/or our earnings per share. Our ability to engage in future mergers and acquisitions depends on various factors, including: (1) our ability to identify suitable merger partners and acquisition opportunities; (2) our ability to finance and complete transactions on acceptable terms and at acceptable prices; and (3) our ability to receive the necessary regulatory and, when required, shareholder approvals. Our inability to engage in an acquisition or merger for any of these reasons could have an adverse impact on the implementation of our business strategies. Furthermore, mergers and acquisitions involve a number of risks and challenges, including our ability to achieve planned synergies and to integrate the branches and operations we acquire, and the internal controls and regulatory functions into our current operations, as well as the diversion of managements attention from existing operations, which may adversely affect our ability to successfully conduct our business and negatively impact our financial results.
We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.
Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense, and the process of locating key personnel with the combination of skills, attributes and business relationships required to execute our business plan may be lengthy. We may not be successful in retaining our key employees, and the unexpected loss of services of one or more of our key personnel could have an adverse effect on our business because of their skills, knowledge of and business relationships within our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital or make such capital only available on unfavorable terms, including interbank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for
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investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.
We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weakness and disorder and instability in domestic and foreign financial markets. Our interest rate sensitivity profile was asset sensitive as of March 31, 2018, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income. If short-term interest rates continue to remain at their historically low levels for a prolonged period, and assuming longer-term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have an adverse effect on our net interest income and could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely affected by recent changes in U.S. tax laws and regulations.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for residential real estate. Included in this legislation was a reduction of the corporate income tax rate from 35% to 21%. In addition, other changes included: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.
The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their
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loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and earnings.
We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions and cybersecurity breaches could have a material adverse effect on us.
Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We likely will expend additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.
Security breaches and cybersecurity threats could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. While we have established policies and procedures to prevent or limit the impact of cyber-attacks, there can be no assurance that such events will not occur or will be adequately addressed if they do. In addition, we also outsource certain cybersecurity functions, such as penetration testing, to third-party service providers, and the failure of these service providers to adequately perform such functions could increase our exposure to security breaches and cybersecurity threats. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other malicious code and cyber-attacks that could have an impact on information security. Any such breach or attacks could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, financial condition and earnings.
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We must keep pace with technological change to remain competitive.
Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available, as well as related essential personnel. In addition, technology has lowered barriers to entry into the financial services market and made it possible for financial technology companies and other non-bank entities to offer financial products and services traditionally provided by banks. The ability to keep pace with technological change is important, and the failure to do so, due to cost, proficiency or otherwise, could have a material adverse impact on our business and therefore on our financial condition and results of operations.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or outside persons, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulations, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. Although our control testing has not identified any significant deficiencies in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our business, financial condition and earnings.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to opt out of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.
Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with
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us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition and earnings.
We are dependent on the use of data and modeling in our managements decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.
The use of statistical and quantitative models and other quantitative analyses is widespread in bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual stress testing under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.
We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress testing in the future, adverse regulatory scrutiny. Further, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making.
We depend on the accuracy and completeness of information provided to us by our borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and earnings.
In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties, we rely on information furnished to us by, or on behalf of, borrowers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected and we may be subject to regulatory action. Whether a misrepresentation is made by the loan applicant, another third party, or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected, or may not detect all, misrepresented information in our loan originations or from our business clients. Any such misrepresented information could adversely affect our business, financial condition and earnings.
We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.
Because we are a financial institution, employee errors and employee or customer misconduct could subject us in particular to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our
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employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information, each of which can be particularly damaging for financial institutions. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls to mitigate operational risks, including data processing system failures and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses associated with these risks, including losses resulting from any associated business interruption. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect our business, financial condition and earnings.
The building of market share through our branch office strategy, and our ability to achieve profitability on new branch offices, may increase our expenses and negatively affect our earnings.
We believe there are branch expansion opportunities within our market area and adjacent markets and will seek to grow our deposit base by adding branches to our existing network. There are considerable costs involved in opening branch offices, especially in light of the capabilities needed to compete in todays environment. Moreover, new branch offices generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, new branch offices could negatively impact our earnings and may do so for some period of time. Our investments in products and services, and the related personnel required to implement new policies and procedures, take time to earn returns and can be expected to negatively impact our earnings for the foreseeable future. The profitability of our expansion strategy will depend on whether the income that we generate from the new branch offices will offset the increased expenses resulting from operating these branch offices.
Strong competition within our market area could hurt our profits and slow growth.
Our profitability depends upon our continued ability to compete successfully in our market area. We face intense competition both in making loans and attracting deposits. Our competitors for commercial real estate loans include other community banks and commercial lenders, some of which are larger than us and have greater resources and lending limits than we have and offer services that we do not provide. We face stiff competition for one-to-four family residential loans from other financial service providers, including large national residential lenders and local community banks. Other competitors for one-to-four family residential loans include credit unions and mortgage brokers which keep overhead costs and mortgage rates down by selling loans and not holding or servicing them. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. We expect competition to remain strong in the future.
The Washington State Department of Financial Institutions, or Washington DFI, recently entered into a multi-state agreement with six other states that is intended to streamline the licensing process for money service businesses, which include money transmitters and payment service providers. Increasing the relative ease of obtaining a license to operate a money service business within the state of Washington may encourage financial technology, or fintech, companies to offer services in the state, thereby increasing competition for such services.
Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.
As a community bank, our reputation within the communities we serve is critical to our success. We believe we have set ourselves apart from our competitors by building strong personal and professional relationships with our customers and being active members of the communities we serve. As such, we strive to enhance our reputation by recruiting, hiring and retaining employees who share our core values of being an integral part of the
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communities we serve and delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new talent and customers or may lose existing customers, and our business, financial condition and earnings could be adversely affected. Further, negative public opinion can expose us to litigation and regulatory action and delay and impede our efforts to implement our expansion strategy, which could further adversely affect our business, financial condition and earnings.
We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
While we attempt to invest a significant majority of our total assets in loans (our loan-to-asset ratio was 81.7% as of March 31, 2018), we invest a percentage of our total assets (4.5% as of March 31, 2018) in investment securities with the primary objectives of providing a source of liquidity and meeting pledging requirements. As of March 31, 2018, the fair value of our available for sale investment securities portfolio was $36.0 million, which included a net unrealized loss of $2.3 million. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Although we have not recognized other-than-temporary impairment related to our investment portfolio as of March 31, 2018, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and related notes to those financial statements. Our critical accounting policies, which are included in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations in this prospectus, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider critical because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and earnings.
We expect that the implementation of a new accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board, or FASB, has adopted a new accounting standard that will be effective for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which we expect could require us to
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increase our allowance for loan losses, and will likely greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on our financial condition and results of operations.
We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
In the course of our business, we may purchase real estate in connection with our acquisition and expansion efforts, or we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We 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 we 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 we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any significant environmental liabilities could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Industry
Regulation of the financial services industry is intense, and we may be adversely affected by changes in laws and regulations.
We are subject to extensive government regulation, supervision and examination. Such regulation, supervision and examination govern the activities in which we may engage, and are intended primarily for the protection of the deposit insurance fund and the Banks depositors, rather than for shareholders.
In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and increased regulation affecting financial institutions. The Dodd-Frank Act has created a significant shift in the way financial institutions operate. The Dodd-Frank Act also created the Consumer Financial Protection Bureau, or CFPB, to implement consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which occurred in 2008 and 2009. The Dodd-Frank Act has had and may continue to have a material impact on our operations, particularly through increased regulatory burden and compliance costs. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, became law. Among other things, the EGRRCPA changes certain of the regulatory requirements of the Dodd-Frank Act and includes provisions intended to relieve the regulatory burden on community banks. We cannot currently predict the impact of this legislation on us. Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or the value of collateral for loans.
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Future legislative changes could also require changes to business practices and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
Federal regulatory agencies have the ability to take strong supervisory actions against financial institutions that have experienced increased loan production and losses and other underwriting weaknesses or have compliance weaknesses. These actions include entering into formal or informal written agreements and cease and desist orders that place certain limitations on their operations. If we were to become subject to a regulatory action, such action could negatively impact our ability to execute our business plan, and result in operational restrictions, as well as our ability to grow, pay dividends, repurchase stock or engage in mergers and acquisitions. See Supervision and RegulationBank Regulation and SupervisionCapital Adequacy for a discussion of regulatory capital requirements.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
As part of the bank regulatory process, the Federal Reserve and the Washington DFI periodically conduct comprehensive examinations of our business, including compliance with laws and regulations. If, as a result of an examination, either of these banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of our operations had become unsatisfactory, or that our Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. The Federal Reserve may enjoin unsafe or unsound practices or violations of law, require affirmative actions to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in our capital levels, restrict our growth, assess civil monetary penalties against us, the Bank or their respective officers or directors, and remove officers and directors. The FDIC also has authority to review our financial condition, and, if the FDIC were to conclude that the Bank or its directors were engaged in unsafe or unsound practices, that the Bank was in an unsafe or unsound condition to continue operations, or the Bank or the directors violated applicable law, the FDIC could move to terminate the Banks deposit insurance. If we become subject to such regulatory actions, our business, financial condition, earnings and reputation could be adversely affected.
Many of our new activities and expansion plans require regulatory approvals, and failure to obtain these approvals may restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses, and expansion of the Banks banking location network, or de novo branching. Generally, we must receive federal and state regulatory approval before we can acquire a depository institution or related business insured by the FDIC or before we open a de novo branch. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institutions record of compliance under the Community Reinvestment Act, or the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all.
Financial institutions, such as the Bank, face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, and other laws and regulations require
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financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Department of the Treasury, or the Treasury Department, to administer the Bank Secrecy Act, has authority to impose significant civil money penalties for violations of these requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Departments Office of Foreign Assets Control.
In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the inability to obtain regulatory approvals to proceed with certain aspects of our business plans, including acquisitions and de novo branching.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act, or CRA, and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA requires the Federal Reserve to assess the Banks performance in meeting the credit needs of the communities it serves, including low- and moderate-income neighborhoods, and if the Federal Reserve determines that the Bank needs to improve its performance or is in substantial non-compliance with CRA requirements, various adverse regulatory consequences may ensue. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, or CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are unfair, deceptive, or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The ongoing broad rulemaking powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services.
A successful regulatory challenge to an institutions performance under the CRA, fair lending laws or regulations, or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institutions performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered predatory. These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
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The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of noncompliance and subject us to litigation.
We service most of our own loans, and loan servicing is subject to extensive regulation by federal, state and local governmental authorities, as well as various laws and judicial and administrative decisions imposing requirements and restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities, including delaying or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional significant costs to comply with such requirements, which may further adversely affect us. In addition, were we to be subject to regulatory investigation or regulatory action regarding our loan modification and foreclosure practices, our business, financial condition and earnings could be adversely affected.
Our failure to comply with applicable laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could materially and adversely affect us.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under the source of strength doctrine that was codified by the Dodd-Frank Act, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank at times when the bank holding company may not otherwise be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Under the prompt corrective action regime, if the Bank were to become undercapitalized, we would be required to guarantee the Banks plan to restore its capital subject to certain limits. See Supervision and RegulationBank Regulation and SupervisionPrompt Corrective Action. Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at a time when our resources are limited, and we may be required to borrow the funds or raise capital to make the required capital injection. Any loan by a bank holding company to its subsidiary bank is subordinate in right of payment to deposits and certain other indebtedness of such subsidiary bank. In the event of a bank holding companys bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding companys general unsecured creditors, including the holders of any note obligations. Thus, any borrowing by a bank holding company for the purpose of making a capital injection to a subsidiary bank often becomes more difficult and expensive relative to other corporate borrowings.
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and earnings.
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Risks Related to an Investment in our Common Stock and this Offering
There is currently no regular market for our common stock. An active, liquid market for our common stock may not develop or be sustained upon completion of this offering, which may impair your ability to sell your shares.
Prior to this offering, there has been no established public trading market for our common stock. We have applied to list our common stock on the Nasdaq Global Select Market, but an active trading market for our common stock may not develop or be sustained following this offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock. In addition, the market price of our common stock could decline significantly below the initial public offering price. The initial public offering price per share will be determined by negotiation between us and the underwriters and may not be indicative of the market price of our common stock after completion of this offering.
The trading price of our common stock may decline after this offering.
The trading price of our common stock may decline after this offering for many reasons, some of which are beyond our control, including:
| actual or anticipated fluctuations in our operating results, financial condition or asset quality; |
| changes in economic or business conditions; |
| the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; |
| publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; |
| operating and stock price performance of companies that investors deem comparable to us; |
| additional or anticipated sales of our common stock or other securities by us or our existing shareholders; |
| additions or departures of key personnel; |
| perceptions in the marketplace regarding our competitors or us; |
| significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; |
| other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and |
| other news, announcements or disclosures (whether by us or others) related to us, our competitors, our primary markets or the financial services industry. |
In addition, the stock market in general (and financial institutions stocks in particular) has experienced significant volatility that often has been unrelated to the operating performance of particular companies. These market fluctuations could adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result, the trading price of our common stock may be less than the initial public offering price, and you may not be able to sell your shares at or above the price you pay to purchase them.
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Future sales of our common stock may affect the trading price of our common stock and the future exercise of options may lower the price of our common stock.
Sales of a substantial number of shares of our common stock in the public market after completion of this offering, or the perception that such sales could occur, may adversely affect the trading price of our common stock and may make it more difficult for you to sell your shares at a time and price that you determine appropriate. Upon completion of this offering, there will be shares of our common stock (or shares if the underwriters exercise in full their option to purchase additional shares) and shares of our nonvoting common stock outstanding. These amounts do not include the potential issuance, as of March 31, 2018, of 784,984 shares of our common stock subject to issuance upon exercise of outstanding stock options, 500,000 additional shares of our common stock that were reserved for issuance under our 2018 Omnibus Incentive Plan, or shares of Class C Nonvoting Common Stock that are not convertible by the holder, but are convertible on a one-for-one basis into shares of our common stock under certain circumstances. See Description of Capital Stock and Executive Compensation. We, our executive officers and directors, the selling shareholders and certain other shareholders who beneficially own in the aggregate approximately % of our currently outstanding shares of common stock have entered into 180-day lock-up agreements. The lock-up agreements are described in Shares Eligible for Future SaleLock-Up Agreements. An aggregate of shares of our common stock and nonvoting common stock will be subject to these lock-up agreements upon completion of this offering, excluding any shares that may be purchased in this offering by our officers and directors and their respective affiliates through the directed share program described in Underwriting (Conflicts of Interest)Directed Share Program.
Future equity issuances could result in dilution, which could cause the price of our common stock to decline.
We are generally not restricted from issuing additional shares of our common stock or nonvoting common stock, up to the 300,000,000 common shares authorized in our second amended and restated articles of incorporation, or articles of incorporation (subject to Nasdaq shareholder approval rules). We may issue additional shares of our common stock, or securities convertible into or exchangeable for such shares, in subsequent public or private offerings or in connection with future acquisitions. If we choose to raise capital by selling shares of our common stock, the issuance could have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.
Investors in this offering will suffer immediate and substantial dilution.
The initial public offering price per share of our common stock is expected to be significantly higher than the tangible book value per share of our common stock immediately following this offering. Accordingly, if you purchase shares in this offering, you will suffer immediate and substantial dilution of your investment. Based upon the issuance and sale of shares of our common stock at an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and estimated offering expenses payable by us, you will incur immediate dilution of approximately $ in tangible book value per share if you purchase common stock in this offering. See Dilution.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price and trading volume of our common stock could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock could be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, the trading price of our common stock would likely decline. If one or
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more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
We may not pay dividends on our common stock in the future.
Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. We have not historically declared or paid dividends on our common stock and we do not intend to declare or pay dividends on our common stock in the near term. In addition, we are a bank holding company, and our ability to declare and pay dividends is dependent on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organizations expected future needs, asset quality and financial condition. In addition, if required payments on our outstanding junior subordinated debentures are not made or suspended, we may be prohibited from paying dividends on our common stock. We are also subject to certain restrictions on our right to pay dividends on our capital stock in the event we have failed to make any required payment of interest or principal under the terms of our subordinated note. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionBorrowings for further information regarding restrictions under our outstanding junior subordinated debentures and our subordinated note.
Our board of directors, executive officers and principal shareholders have significant control over our business.
As of March 31, 2018, our directors, executive officers and principal shareholders beneficially owned an aggregate of 5,781,581 shares of our common stock, or approximately 65% of our issued and outstanding shares of common stock, excluding 423,373 shares subject to outstanding stock options. Following the completion of this offering, that same group will beneficially own in the aggregate approximately % of our outstanding common stock (or % if the underwriters exercise in full their option to purchase additional shares), excluding any shares that may be purchased in this offering by our directors and executive officers through the directed share program described in Underwriting (Conflicts of Interest)Directed Share Program. Consequently, our directors, executive officers and principal shareholders will be able to significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters. This influence may also have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders, including you.
In addition, pursuant to separate Investment Agreements between us and CJA Private Equity Financial Restructuring Master Fund I LP, Montlake Capital II, L.P. and Montlake Capital II-B, L.P., and Steven D. Hovde, for so long as the investor owns in aggregate 4.9% or more of our outstanding common stock, we are obligated to appoint one representative of the investor to the boards of directors of the Company and the Bank, subject to any required regulatory and shareholder approvals. These designated directors each have the right to be appointed to two committees of each board of directors. We do not expect the governance rights under the Investment Agreements to terminate in connection with this offering. See Certain Relationships and Related Party TransactionsCertain Related Party TransactionsInvestment Agreements for additional information.
We have broad discretion in the use of the net proceeds to us from this offering, and our use of these proceeds may not yield a favorable return on your investment.
We intend to use the net proceeds to us from this offering to support our growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of
37
debt and maintenance of our required regulatory capital levels. We have not specifically allocated the amount of net proceeds to us that will be used for these purposes and our management will have broad discretion over how these proceeds are used and could spend these proceeds in ways with which you may not agree. In addition, we may not use the net proceeds to us from this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the net proceeds to us, and we cannot predict how long it will take to deploy these proceeds. Until we deploy the proceeds of this offering for the uses described herein, we expect to hold such proceeds in short-term investments. Investing the net proceeds to us in short-term investments will provide lower yields than we generally earn on loans, which may have an adverse effect on our profitability. Although we may, from time to time in the ordinary course of business, evaluate potential acquisition opportunities that we believe provide attractive risk-adjusted returns, we do not have any arrangements or understandings relating to any acquisitions, nor are we engaged in negotiations with any potential acquisition targets. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.
The holders of our existing debt obligations, as well as debt obligations that may be outstanding in the future, will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest.
In the event of any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us. As of March 31, 2018, we had outstanding $10.0 million of subordinated debt and $3.6 million in aggregate principal amount of junior subordinated debentures issued to a statutory trust that, in turn, has issued and outstanding $3.5 million of trust preferred securities. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. Our debt obligations are senior to our shares of common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our debt obligations must be satisfied before any distributions can be made to the holders of our common stock. We generally have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of our common stock. To the extent that we issue additional debt obligations or junior subordinated debentures, the additional debt obligations or additional junior subordinated debentures will be of equal rank with, or senior to, our existing debt obligations and senior to our shares of common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our articles of incorporation authorize us to issue up to 25,000,000 shares of one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our common stock at a premium over the market price and materially adversely affect the market price and the voting and other rights of the holders of our common stock.
We are dependent upon the Bank for cash flow, and the Banks ability to make cash distributions is restricted.
Our primary tangible asset is the capital stock of the Bank. As such, we depend upon the Bank for cash distributions (through dividends on the Banks common stock) that we use to pay our operating expenses, satisfy our obligations (including our subordinated debentures and our other debt obligations). Federal statutes, regulations and policies restrict the Banks ability to make cash distributions to us. These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, the Federal Reserve has the ability to restrict the Banks payment of dividends by supervisory action. If the Bank is unable to pay dividends to us, we will not be able to satisfy our obligations.
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We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies immediately after this offering, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if our total annual gross revenues equal or exceed $1.07 billion in a fiscal year. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act of 1933, or the Securities Act, declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have irrevocably opted out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard.
Being a public company will increase our expenses and administrative workload and will expose us to risks relating to evaluation of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act.
As a public company, we will need to comply with additional laws and regulations, including the Sarbanes-Oxley Act, the Dodd-Frank Act, and related rules of the SEC and requirements of the Nasdaq Stock Market. We were not required to comply with these laws and requirements as a private company. Complying with these laws and regulations will require the time and attention of our board of directors and management and will increase our expenses. Among other things, we will need to: design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; prepare and distribute periodic reports in compliance with our obligations under the federal securities laws; establish new internal policies, principally those relating to disclosure controls and procedures and corporate governance; institute a more comprehensive compliance function; and involve to a greater degree our outside legal counsel and accountants in the above activities.
In addition, we also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our board of directors, particularly directors willing to serve on our audit committee.
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We are in the process of evaluating our internal control systems to allow management to report on, and our independent auditors to assess, our internal controls over financial reporting. We plan to perform the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act. We are required to comply with Section 404 in our annual report for the year ending December 31, 2019. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated.
If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements or the trading price of our common stock to decline. If we fail to remediate any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.
As a public company, we will be required to report, among other things, control deficiencies that constitute a material weakness or changes in internal controls that materially affect, or are reasonably likely to materially affect, internal controls over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles that results in more than a remote likelihood that a misstatement of financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Provisions in our executive officers employment agreements could impede an attempt to replace or remove our officers or otherwise effect a change of control, which could diminish the price of our common stock.
We have entered into employment agreements with certain of our executive officers as described in the section entitled Executive CompensationEmployment and Change in Control Agreements with Executive Officers. The agreements with our executive officers provide for substantial payments in the event of certain types of termination of employment following a change in control. These payments may deter any transaction that would result in a change in control, which could diminish the price of our common stock.
Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management.
Our articles of incorporation and our amended and restated bylaws, or bylaws, may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control or a replacement of our incumbent board of directors or management. Our governing documents include provisions that:
| empower our board of directors, without shareholder approval, to issue our preferred stock, the terms of which, including voting power, are to be set by our board of directors; |
| establish a classified board of directors, with directors of each class serving a three-year term upon completion of a phase-in period; |
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| provide that directors may be removed from office without cause only by vote of 80% of the outstanding shares then entitled to vote; |
| eliminate cumulative voting in elections of directors; |
| permit our board of directors to alter, amend or repeal our bylaws or to adopt new bylaws; |
| require the request of holders of at least one-third of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders meeting; |
| require shareholders that wish to bring business before annual meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing; |
| require that certain business combination transactions with a significant shareholder be approved by holders of two-thirds of the shares held by persons other than the significant shareholder; and |
| enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors. |
In addition, certain provisions of Washington law, including a provision which restricts certain business combinations between a Washington corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control. Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect control of an FDIC-insured depository institution or its holding company. These laws include the Bank Holding Company Act of 1956, as amended, or the BHC Act, and the Change in Bank Control Act, or the CBCA. These laws could delay or prevent an acquisition.
Furthermore, our bylaws provide that a state court located within the state of Washington (or, if no state court located within the state of Washington has jurisdiction, the United States District Court for the Western District of Washington) will be the exclusive forum for: (a) any actual or purported derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty by any of our directors or officers; (c) any action asserting a claim against us or our directors or officers arising pursuant to the Washington Business Corporation Act, or WBCA, our articles of incorporation, or our bylaws; or (d) any action asserting a claim against us or our officers or directors that is governed by the internal affairs doctrine. By becoming a shareholder of our Company, you will be deemed to have notice of and have consented to the provisions of our bylaws related to choice of forum. The choice of forum provision in our bylaws may limit our shareholders ability to obtain a favorable judicial forum for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and earnings.
The return on your investment in our common stock is uncertain.
An investor in our common stock may not realize a substantial positive return on his or her investment, or may not realize any positive return at all. Further, as a result of the uncertainty and risks associated with our operations, many of which are described in this Risk Factors section, it is possible that an investor could lose his or her entire investment.
An investment in our common stock is not an insured deposit and is subject to risk of loss.
Any shares of our common stock you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or nonbank subsidiaries and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our managements expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as anticipate, believes, can, could, may, predicts, potential, should, will, estimate, plans, projects, continuing, ongoing, expects, intends and similar words or phrases. Any or all of the forward-looking statements in this prospectus may turn out to be inaccurate. The inclusion of forward-looking information in this prospectus should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption Risk Factors and elsewhere in this prospectus, as well as the following factors:
| the overall health of the local and national real estate market; |
| the credit risk associated with our loan portfolio, and specifically with our commercial real estate loans; |
| business and economic conditions generally and in the financial services industry, nationally and within our market area; |
| our ability to maintain an adequate level of allowance for loan losses; |
| our ability to successfully manage liquidity risk; |
| our ability to implement our growth strategy and manage costs effectively; |
| the composition of our senior leadership team and our ability to attract and retain key personnel; |
| our ability to raise additional capital to implement our business plan; |
| changes in market interest rates and impacts of such changes on our profits and business; |
| the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; |
| interruptions involving our information technology and telecommunications systems or third-party servicers; |
| our ability to maintain our reputation; |
| increased competition in the financial services industry; |
| regulatory guidance on commercial lending concentrations; |
| the effectiveness of our risk management framework; |
| the costs and obligations associated with being a public company; |
| the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; |
| the extensive regulatory framework that applies to us; |
| the impact of recent and future legislative and regulatory changes, including the Tax Cuts and Jobs Act, the EGRRCPA, and other changes in banking, securities and tax laws and regulations, and their application by our regulators; |
| fluctuations in the value of the securities held in our securities portfolio; |
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| governmental monetary and fiscal policies; |
| material weaknesses in our internal control over financial reporting; and |
| our success at managing the risks involved in the foregoing items. |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
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We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase additional shares), based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us of this offering by $ million, or $ million if the underwriters exercise in full their option to purchase additional shares, after deducting underwriting discounts and estimated offering expenses payable by us.
We intend to contribute a substantial portion of the net proceeds to us from this offering to the Bank and to initially retain the remaining net proceeds we will receive from this offering in the Company. We intend to use the net proceeds to us from this offering to support our growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of debt and maintenance of our required regulatory capital levels. Except as described herein, we do not currently have any specific plans for the application of the net proceeds to us and do not have any arrangements or understandings to make any acquisitions or to establish any new branches. Our management will retain broad discretion to allocate the net proceeds of this offering, and the precise amounts and timing of our use of the net proceeds will depend upon market conditions, among other factors. Until we deploy the proceeds of this offering for the uses described above, we expect to hold such proceeds in short-term investments.
We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.
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General
Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. We have not historically declared or paid dividends on our common stock and we do not intend to declare or pay dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination to pay dividends will be made by our board of directors and will depend on a number of factors, including:
| our historic and projected financial condition, liquidity and results of operations; |
| our capital levels and needs; |
| tax considerations; |
| any acquisitions or potential acquisitions that we may pursue; |
| statutory and regulatory prohibitions and other limitations; |
| the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends; |
| general economic conditions; and |
| other factors that our board of directors may deem relevant. |
We are not obligated to pay dividends on our common stock and are subject to certain restrictions on paying dividends on our common stock.
Dividend Restrictions
As a Washington corporation, we are subject to certain restrictions on distributions to shareholders under the WBCA. Generally, a Washington corporation is prohibited from making a distribution to shareholders if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as they become due in the usual course of business or the corporations total assets would be less than the sum of its total liabilities plus, unless its articles of incorporation provide otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. In addition, if required payments on our outstanding junior subordinated debentures are not made or suspended, we may be prohibited from paying dividends on our common stock. We are also subject to certain restrictions on our right to pay dividends on our capital stock in the event we have failed to make any required payment of interest or principal under the terms of our subordinated note.
We are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. Because we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends on our common stock depends, in large part, upon our receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. See Supervision and RegulationBank Regulation and SupervisionPayment of Dividends. The present and future dividend policy of the Bank is subject to the discretion of its board of directors. The Bank is not obligated to pay us dividends.
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The following table sets forth our consolidated capitalization and regulatory capital ratios at March 31, 2018:
| on an actual basis; and |
| on an adjusted basis, after giving effect to the net proceeds from the sale by us of shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us. |
You should read the information in this table in conjunction with the sections entitled Use of Proceeds, Selected Historical Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and Description of Capital Stock and our consolidated financial statements and related notes to those financial statements included elsewhere in this prospectus. The outstanding share and per share data set forth in the following table have been adjusted to give effect to a one-for-five reverse stock split of our common shares completed effective May 4, 2018.
At March 31, 2018 |
||||||||
(Dollars in thousands, except per share data) | Actual | As Adjusted | ||||||
Long-Term Debt: |
||||||||
Subordinated debt |
$ | 9,954 | $ | 9,954 | ||||
Junior subordinated debentures |
3,580 | 3,580 | ||||||
|
|
|
|
|||||
Total long-term debt |
13,534 | 13,534 | ||||||
|
|
|
|
|||||
Shareholders Equity: |
||||||||
Preferred stock, no par value, 25,000,000 shares authorized; none issued and outstanding |
- | - | ||||||
Common stock, no par value, 300,000,000 shares authorized, 8,891,859 voting and 361,444 nonvoting shares issued and outstanding, actual; voting and nonvoting shares issued and outstanding, as adjusted |
52,592 | |||||||
Retained earnings |
16,163 | 16,163 | ||||||
Accumulated other comprehensive loss, net of tax |
(1,828 | ) | (1,828 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
66,927 | |||||||
|
|
|
|
|||||
Total capitalization |
$ | 80,461 | ||||||
Capital Ratios: (1) |
||||||||
Total shareholders equity to total assets |
8.05 | % | ||||||
Tangible equity to tangible assets (2) |
8.05 | % | ||||||
Common equity tier 1 capital ratio |
9.75 | % | ||||||
Tier 1 leverage ratio |
9.07 | % | ||||||
Tier 1 risk-based capital ratio |
10.25 | % | ||||||
Total risk-based capital ratio |
12.90 | % | ||||||
Non-owner occupied CRE/total capital (3) |
366.83 | % | ||||||
Per Share Data: (4) |
||||||||
Book value per share |
$ | 7.23 | ||||||
Tangible book value per share (5) |
$ | 7.23 |
(1) | Except as otherwise noted, capital ratios are for the Company. |
(2) | Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total shareholders equity to total assets. The Company had no goodwill or other |
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intangible assets as of the date indicated. As a result, tangible equity to tangible assets is the same as total shareholders equity to total assets as of the date indicated. |
(3) | Ratio is for the Bank and represents total non-owner-occupied commercial real estate loans, including loans secured by multi-family residential real estate, investor commercial real estate, and construction and land loans, divided by the Banks total risk-based capital. The ratio, as adjusted, assumes that all of the net proceeds to us from this offering will be contributed to the Bank; however, it is not currently known how the proceeds from this offering will be allocated. See Use of Proceeds. |
(4) | Per share amounts are based on total common shares outstanding, which includes common stock and nonvoting common stock. |
(5) | Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. The Company had no goodwill or other intangible assets as of the date indicated. As a result, tangible book value per share is the same as book value per share as of the date indicated. |
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our total shareholders equity and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us.
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If you purchase shares of our common stock in this offering, your ownership interest will experience immediate tangible book value dilution to the extent that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. Tangible book value per share is equal to our total shareholders equity, less goodwill and other intangible assets, divided by the number of outstanding common shares, which includes common stock and nonvoting common stock. The per share data set forth below have been adjusted to give effect to a one-for-five reverse stock split of our common shares effective May 4, 2018.
Our tangible book value at March 31, 2018, was $66.9 million, or $7.23 per share based on the total number of shares of common stock and nonvoting common stock outstanding as of such date. After giving effect to our sale of shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us, our as adjusted tangible book value at March 31, 2018, would have been approximately $ million, or $ per share. Therefore, under those assumptions this offering would result in an immediate increase of $ in the tangible book value per share to our existing shareholders, and immediate dilution of $ in the tangible book value per share to investors purchasing shares of common stock in this offering.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share |
||||||
Tangible book value per share as of March 31, 2018 |
$ | 7.23 | ||||
Increase in tangible book value per share attributable to this offering |
||||||
|
|
|||||
Tangible book value per share after giving effect to this offering |
||||||
| ||||||
Dilution in tangible book value per share to new investors in this offering |
||||||
|
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range on the cover page of this prospectus, would increase (decrease) our tangible book value by $ million, or $ per share, and the dilution to new investors in this offering would increase (decrease) by $ per share, assuming no change to the number of shares of common stock offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.
If the underwriters exercise in full their option to purchase additional shares of common stock from us, our as adjusted tangible book value after giving effect to this offering would be $ per share. This represents an increase in tangible book value of $ per share to existing shareholders and dilution of $ per share to new investors in this offering.
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The following table sets forth information, as of March 31, 2018, regarding the shares of common stock and nonvoting common stock issued to, and consideration paid by, the existing holders of shares of common stock and nonvoting common stock and the shares of common stock to be issued to, and consideration to be paid by, investors in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ per share, which is the midpoint of the price range on the cover page of this prospectus, before deducting underwriting discounts and estimated offering expenses payable by us.
Shares Issued | Total Consideration |
Average Price per Share |
||||||||||||||||||
Number | Percent | Amount | Percent | |||||||||||||||||
Existing shareholders |
9,253,303 | |||||||||||||||||||
New investors in this offering |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100.0 | % | 100.0 | % |
Assuming no shares are sold to existing shareholders in this offering, sales of shares of our common stock by the selling shareholders in this offering will reduce the number of shares of common stock held by existing shareholders to , or approximately % of the total shares of our common stock outstanding after this offering, and will result in new investors holding shares, or approximately % of the total shares of our common stock outstanding after this offering.
The tables and calculations above do not give effect to:
| 784,984 shares of our common stock issuable upon the exercise of stock options, with a weighted average exercise price of $6.27 per share, that were outstanding as of March 31, 2018; and |
| 500,000 additional shares of our common stock that are reserved for future issuance under our 2018 Omnibus Incentive Plan. |
To the extent that any of the outstanding stock options are exercised or other equity awards are issued under our incentive plans, investors participating in this offering will experience further dilution.
49
PRICE RANGE OF OUR COMMON STOCK
Prior to this offering, our common stock has not been traded on an established public trading market and quotations for our common stock were not reported on any market. As a result, there has been no regular trading market for our common stock. Although our shares may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an active market. As of March 31, 2018, there were 575 holders of record of our common stock.
We anticipate that this offering and the listing of our common stock on the Nasdaq Global Select Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See Underwriting (Conflicts of Interest) for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Historical Consolidated Financial Data and our consolidated financial statements and the related notes to those financial statements included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under Cautionary Note Regarding Forward-Looking Statements, Risk Factors and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. Unless otherwise stated, all information in this prospectus gives effect to a one-for-five reverse stock split of our common shares effective May 4, 2018. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented.
Overview
We are a bank holding company that operates through our wholly owned subsidiary, Coastal Community Bank. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. We focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington. We currently operate 13 full-service banking locations, 10 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and three of which are located in neighboring counties (one in King County and two in Island County). As of March 31, 2018, we had total assets of $831.0 million, total loans of $678.5 million, total deposits of $727.3 million and total shareholders equity of $66.9 million.
The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through Coastal Community Bank, the discussion and analysis relate to activities primarily conducted by the Bank.
As a bank holding company that operates through one segment, community banking, we generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is commercial and retail deposits. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank, or FHLB. Our largest expenses are salaries and related employee benefits, occupancy, interest on deposits and borrowings, data processing, and provision for loan losses. Our principal lending products are commercial real estate loans, commercial and industrial loans, and to a lesser extent residential real estate loans and consumer loans.
Key Factors Affecting our Business
Average Balances and Interest Rates
Our operating results depend primarily on our net interest income, which is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets (such as loans and securities) and the interest expense incurred in connection with interest-bearing liabilities (such as deposits and borrowings). Net interest income is primarily a function of the average balances of interest-earning assets and interest-bearing liabilities and the yields and costs with respect to these assets and liabilities. Average balances are influenced by internal considerations such as the types of products we offer and the amount of risk that we are willing to assume as well as external influences such as economic conditions, competition for loans and deposits, and interest rates. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates and, in the case of loans, competition for similar products in our market area. Interest
51
rates are often impacted by the actions of the Federal Reserve. The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by competition and by the actions of the Federal Reserve. The level of net interest income is influenced by movements in interest rates and the pace at which such movements occur, as well as the relationship between short- and long-term interest rates.
Credit Quality
We have well established loan policies and underwriting practices that have resulted in low levels of charge-offs and nonperforming assets. Through our thorough underwriting process, we strive to originate quality loans that will maintain and enhance the overall credit quality of our loan portfolio, and through our careful monitoring of our loan portfolio and prompt attention to delinquencies, we seek to minimize the impact of problem loans. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition.
Operating Efficiency
Our largest noninterest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. Other significant operating expenses include occupancy expense, data processing expense, director and staff expense, marketing expense, and legal and professional fees. Our operating efficiency, as measured by our efficiency ratio, has gradually improved primarily because the growth of our deposits and loans has enabled our net interest income and noninterest income to outpace our expenses. When we open new branches or make substantial investments to increase our operating capacity, our operating efficiency decreases until we generate enough growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the growth necessary to offset the costs of these investments or new branches.
Economic Conditions
Our business and financial performance are affected by economic conditions generally in the United States and more directly in the markets in the Puget Sound region where we operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates. In recent years, the Puget Sound region has experienced significant population gain, fueled in large part by the regions technology industry, low unemployment and rising real estate values, all of which positively impacted our business.
Results of Operations
Net Income
Three Months Ended March 31, 2018, Compared to Three Months Ended March 31, 2017. Net income for the three months ended March 31, 2018, was $1.8 million, or $0.20 per diluted share, compared to $1.3 million, or $0.14 per diluted share, for the three months ended March 31, 2017. The increase in net income over the comparable period in the prior year was attributable to a $903,000 increase in net interest income, primarily arising from increased interest-earning assets from our loan growth initiatives, as well as a $269,000 increase in fee income from raising our deposit service charges and fees and revenue from loan referral fees and $104,000 in lower taxes resulting from the decrease in the corporate tax rate under the Tax Cuts and Jobs Act. These positive factors were partially offset by a $691,000 increase in noninterest expense.
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016. Net income for the year ended December 31, 2017, was $5.4 million, or $0.59 per diluted share, compared to $5.0 million, or $0.54 per diluted share, for the year ended December 31, 2016. Net income for 2017 included the impact of $1.3 million in
52
additional income tax expense that resulted from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act. Adjusted net income, which excludes the effect of the additional income tax expense, for the year ended December 31, 2017, was $6.7 million, or $0.73 per diluted share. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. The increase in net income over the prior year was attributable to a $3.3 million increase in net interest income and a $1.0 million decrease in the provision for loan losses, which were partially offset by an $823,000 decrease in noninterest income and an $895,000 increase in noninterest expense.
Net Interest Income
Three Months Ended March 31, 2018, Compared to Three Months Ended March 31, 2017. Net interest income for the three months ended March 31, 2018, was $7.8 million compared to $6.9 million for the three months ended March 31, 2017, an increase of $903,000, or 13.1%. The increase in net interest income consisted of a $1.1 million, or 14.1%, increase in interest income offset by a $161,000, or 24.1%, increase in interest expense.
The growth in interest income was primarily attributable to a $56.6 million, or 9.5%, increase in average loans outstanding for the three months ended March 31, 2018, compared to the prior year, combined with a 14 basis point increase in the yield on total loans. We have continued to focus on our loan growth initiatives, including the deepening of relationships with existing customers and developing new loan and deposit relationships. We have also focused on organically growing loans through our existing lenders and by adding new lenders to assist with our efforts.
The increase in interest expense for the three months ended March 31, 2018, was primarily related to a 9 basis point increase in the cost of interest-bearing deposits combined with a $39.4 million, or 9.3%, increase in average interest-bearing deposits over the same period in the prior year. The increase in the cost of deposits was primarily due to an increase in the rate paid on NOW and money market accounts and on time deposits, as market interest rates increased over the prior year. The increase in average interest-bearing deposits for the three months ended March 31, 2018, compared to the same period in 2017 is attributable to growth in all deposit categories. The average balance of NOW and money market accounts grew $17.0 million, or 5.5%, the average balance of savings accounts grew $6.6 million, or 16.9%, and the average balance of customer time deposits grew $15.7 million, or 21.4%. We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area. Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.
For the three months ended March 31, 2018, net interest margin (annualized net interest income divided by average total interest-earning assets) and net interest spread (average yield on total interest-earning assets minus average cost of total interest-bearing liabilities) were 4.12% and 3.86%, respectively, compared to 4.01% and 3.78% for the three months ended March 31, 2017.
53
The following table presents an analysis of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $311,000 and $119,000 for the three months ended March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018 and 2017, the amount of interest income not recognized on nonaccrual loans was not material.
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance |
Interest & Dividends |
Yield / Cost (4) |
Average Balance |
Interest & Dividends |
Yield / Cost (4) |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 68,160 | $ | 255 | 1.52 | % | $ | 58,706 | $ | 138 | 0.95 | % | ||||||||||||
Investment securities, available for sale (1) |
38,341 | 146 | 1.54 | 34,634 | 117 | 1.37 | ||||||||||||||||||
Investment securities, held to maturity (1) |
1,376 | 6 | 1.77 | 1,751 | 1 | 0.23 | ||||||||||||||||||
Other investments |
2,912 | 11 | 1.53 | 2,603 | 11 | 1.71 | ||||||||||||||||||
Loans (2) |
654,570 | 8,189 | 5.07 | 597,991 | 7,277 | 4.94 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest earning assets |
765,359 | 8,607 | 4.56 | 695,685 | 7,543 | 4.40 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Allowance for loan losses |
(8,121 | ) | (7,680 | ) | ||||||||||||||||||||
Noninterest earning assets |
37,614 | 44,662 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 794,852 | $ | 732,667 | ||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 464,219 | 646 | 0.56 | % | $ | 424,852 | 494 | 0.47 | |||||||||||||||
FHLB advances and other fed funds |
667 | 4 | 2.43 | 500 | 2 | 1.62 | ||||||||||||||||||
Subordinated debt |
9,952 | 144 | 5.87 | 9,938 | 144 | 5.88 | ||||||||||||||||||
Junior subordinated debentures |
3,579 | 35 | 3.97 | 3,578 | 28 | 3.17 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
478,417 | 829 | 0.70 | 438,868 | 668 | 0.62 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Noninterest bearing deposits |
245,273 | 222,416 | ||||||||||||||||||||||
Other liabilities |
2,971 | 2,918 | ||||||||||||||||||||||
Total shareholders equity |
68,191 | 68,465 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 794,852 | $ | 732,667 | ||||||||||||||||||||
Net interest income |
$ | 7,778 | $ | 6,875 | ||||||||||||||||||||
Net interest spread |
3.86 | 3.78 | ||||||||||||||||||||||
Net interest margin (3) |
4.12 | 4.01 |
(1) | For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. |
(2) | Includes nonaccrual loans. |
(3) | Net interest margin represents annualized net interest income divided by average total interest-earning assets. |
(4) | Yields and rates are annualized. |
54
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.
Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017 |
||||||||||||
Increase (Decrease) Due to |
Total Increase (Decrease) |
|||||||||||
(Dollars in thousands) | Volume | Rate | ||||||||||
Interest income: |
||||||||||||
Interest-bearing deposits |
$ | 35 | $ | 82 | $ | 117 | ||||||
Investment securities, available for sale |
13 | 16 | 29 | |||||||||
Investment securities, held to maturity |
(2 | ) | 7 | 5 | ||||||||
Other investments |
1 | (1 | ) | - | ||||||||
Loans |
708 | 205 | 913 | |||||||||
|
|
|
|
|
|
|||||||
Total increase (decrease) in interest income |
755 | 309 | 1,064 | |||||||||
Interest expense: |
||||||||||||
Interest-bearing deposits |
55 | 97 | 152 | |||||||||
FHLB advances |
1 | 1 | 2 | |||||||||
Subordinated debt |
- | 1 | 1 | |||||||||
Junior subordinated debentures |
- | 7 | 7 | |||||||||
|
|
|
|
|
|
|||||||
Total increase (decrease) in interest expense |
56 | 106 | 162 | |||||||||
Increase (decrease) in net interest income |
$ | 699 | $ | 203 | $ | 902 | ||||||
|
|
|
|
|
|
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016. Net interest income for the year ended December 31, 2017, was $29.2 million compared to $26.0 million for the year ended December 31, 2016, an increase of $3.2 million, or 12.3%. The increase in net interest income consisted of a $3.7 million, or 12.8%, increase in interest income offset by a $352,000, or 14.0%, increase in interest expense.
The growth in interest income was primarily attributable to a $84.3 million, or 15.8%, increase in average loans outstanding for the year ended December 31, 2017, compared to the prior year, partially offset by an 18 basis point decrease in the yield on total loans. The increase in average loans outstanding was primarily due to our dual strategies of focusing on deepening relationships with existing borrowers and actively calling on new customers. The hiring of additional lenders also contributed to loan growth, as new lenders were able to transition many of their existing customers and pending transactions to the Bank. The decline in the yield on total loans reflects the competitive nature of the markets in which we operate, as well as the decline in interest income on our construction, land, and land development loans, which is one of our highest yielding loan categories. In 2017, the robust real estate market in the Puget Sound region resulted in newly constructed homes selling quickly, enabling builders to repay their loans more quickly and resulting in our maintaining a lower balance of construction and development loans.
The increase in interest expense for the year ended December 31, 2017, was primarily related to a $47.1 million, or 12.2%, increase in average interest-bearing deposits over the prior year. The majority of this increase is attributable to growth in core deposit accounts, which we define as deposits excluding all time deposits. Noninterest bearing deposits (such as demand or checking accounts) grew $18.4 million, or 8.2%, in 2017. Savings, interest bearing checking, and money market accounts grew $22.7 million, or 6.5%, in 2017, while customer time deposits grew $13.5 million, or 17.5%. We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area. Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.
55
For the year ended December 31, 2017, net interest margin and net interest spread were 4.08% and 3.83%, respectively, compared to 4.13% and 3.90% for the year ended December 31, 2016.
The following table presents an analysis of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $542,000 and $725,000 for the years ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, the amount of interest income not recognized on nonaccrual loans was not material.
For the Year Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance |
Interest & Dividends |
Yield / Cost |
Average Balance |
Interest & Dividends |
Yield / Cost |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 58,418 | $ | 666 | 1.14 | % | $ | 57,810 | $ | 402 | 0.70 | % | ||||||||||||
Investment securities, available for sale (1) |
35,808 | 512 | 1.43 | 30,908 | 324 | 1.05 | ||||||||||||||||||
Investment securities, held to maturity (1) |
1,640 | 22 | 1.34 | 2,023 | 40 | 1.98 | ||||||||||||||||||
Other investments |
2,886 | 138 | 4.78 | 2,697 | 124 | 4.60 | ||||||||||||||||||
Loans (2) |
618,452 | 30,775 | 4.98 | 534,186 | 27,570 | 5.16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest earning assets |
717,204 | 32,113 | 4.48 | 627,624 | 28,460 | 4.53 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Allowance for loan losses |
(7,849 | ) | (6,739 | ) | ||||||||||||||||||||
Noninterest earning assets |
39,585 | 36,512 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 748,940 | $ | 657,397 | ||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 431,628 | 2,139 | 0.50 | % | $ | 384,566 | 2,118 | 0.55 | % | ||||||||||||||
FHLB advances and other fed funds |
1,761 | 27 | 1.53 | 5,814 | 51 | 0.88 | ||||||||||||||||||
Subordinated debt |
9,943 | 587 | 5.90 | 4,244 | 252 | 5.94 | ||||||||||||||||||
Junior subordinated debentures |
3,578 | 122 | 3.41 | 3,569 | 102 | 2.86 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
446,910 | 2,875 | 0.64 | 398,193 | 2,523 | 0.63 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Noninterest bearing deposits |
233,054 | 197,779 | ||||||||||||||||||||||
Other liabilities |
3,256 | 2,989 | ||||||||||||||||||||||
Total shareholders equity |
65,720 | 58,436 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 748,940 | $ | 657,397 | ||||||||||||||||||||
Net interest income |
$ | 29,238 | $ | 25,937 | ||||||||||||||||||||
Net interest spread |
3.83 | 3.90 | ||||||||||||||||||||||
Net interest margin (3) |
4.08 | 4.13 |
(1) | For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. |
(2) | Includes nonaccrual loans. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
56
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 |
||||||||||||
Increase (Decrease) Due to |
Total Increase (Decrease) |
|||||||||||
(Dollars in thousands) | Volume | Rate | ||||||||||
Interest income: |
||||||||||||
Interest-bearing deposits |
$ | 7 | $ | 257 | $ | 264 | ||||||
Investment securities, available for sale |
58 | 130 | 188 | |||||||||
Investment securities, held to maturity |
(5 | ) | (13 | ) | (18 | ) | ||||||
Other investments |
9 | 5 | 14 | |||||||||
Loans |
4,193 | (988 | ) | 3,205 | ||||||||
|
|
|
|
|
|
|||||||
Total increase (decrease) in interest income |
4,262 | (609 | ) | 3,653 | ||||||||
Interest expense: |
||||||||||||
Interest-bearing deposits |
233 | (212 | ) | 21 | ||||||||
FHLB advances |
(62 | ) | 38 | (24 | ) | |||||||
Subordinated debt |
336 | (1 | ) | 335 | ||||||||
Junior subordinated debentures |
- | 20 | 20 | |||||||||
|
|
|
|
|
|
|||||||
Total increase (decrease) in interest expense |
507 | (155 | ) | 352 | ||||||||
Increase (decrease) in net interest income |
$ | 3,755 | $ | (454 | ) | $ | 3,301 | |||||
|
|
|
|
|
|
Provision for Loan Losses
The provision for loan losses is an expense we incur to maintain an allowance for loan losses at a level that is deemed appropriate by management to absorb inherent losses on existing loans. For a description of the factors taken into account by our management in determining the allowance for loan losses see Financial ConditionAllowance for Loan Losses.
Three Months Ended March 31, 2018, Compared to Three Months Ended March 31, 2017. The provision for loan losses for the three months ended March 31, 2018, was $501,000, compared to $439,000 for the three months ended March 31, 2017. The increase of $62,000 was primarily due to loan growth. The allowance for loan losses as a percentage of loans was 1.24% at March 31, 2018, compared to 1.31% at March 31, 2017. The lower allowance that resulted from stronger credit quality reduced the amount of provision needed for 2018.
Net charge-offs for the three months ended March 31, 2018, totaled $95,000, or 0.06% (annualized) of total average loans, as compared to net charge-offs of $190,000, or 0.13% (annualized) of total average loans, for the three months ended March 31, 2017. Net charge-offs for both periods were low, and demonstrate the strong credit quality of our loan portfolio and a healthy economic environment in our market area.
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016. The provision for loan losses for the year ended December 31, 2017, was $870,000, compared to $1.9 million for the year ended December 31, 2016. The decrease of $1.0 million was primarily due to loan growth totaling $60.7 million in 2017 compared to $96.9 million in 2016, as well as improved credit quality. The allowance for loan losses as a percentage of loans was 1.22% at December 31, 2017, compared to 1.27% at December 31, 2016. The lower allowance that resulted from stronger credit quality reduced the amount of provision needed for 2017.
57
Net charge-offs for the year ended December 31, 2017, totaled $397,000, or 0.06% of total average loans, as compared to net charge-offs of $364,000, or 0.07% of total average loans, for the year ended December 31, 2016. Net charge-offs for both years were consistent on a percentage basis and were only slightly higher in 2017 as a result of higher loan balances.
Noninterest Income
Our primary sources of recurring noninterest income are deposit account service charges, loan referral fees, mortgage broker fees, and sublease and lease income. Noninterest income does not include loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
For the three months ended March 31, 2018, noninterest income totaled $1.1 million, an increase of $276,000, or 33.2%, compared to $831,000 for the three months ended March 31, 2017. For the year ended December 31, 2017, noninterest income totaled $4.2 million, a decrease of $823,000, or 16.5%, compared to $5.0 million for the year ended December 31, 2016.
The following table presents, for the periods indicated, the major categories of noninterest income:
Three Months Ended March 31, |
Increase (Decrease) |
Percent Change |
Year Ended December 31, |
Increase (Decrease) |
Percent Change |
|||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2017 | 2016 | ||||||||||||||||||||||||||||
Deposit service charges and fees |
$ | 687 | $ | 548 | $ | 139 | 25.4 | % | $ | 2,617 | $ | 2,123 | $ | 494 | 23.3 | % | ||||||||||||||||
Loan referral fees |
130 | - | 130 | N/M | 439 | 423 | 16 | 3.8 | ||||||||||||||||||||||||
Mortgage broker fees |
37 | 41 | (4 | ) | (9.8 | ) | 255 | 346 | (91 | ) | (26.3 | ) | ||||||||||||||||||||
Sublease and lease income |
57 | 56 | 1 | 1.8 | 222 | 234 | (12 | ) | (5.1 | ) | ||||||||||||||||||||||
Gain on sale of loans, net |
64 | 26 | 38 | 146.2 | 102 | 790 | (688 | ) | (87.1 | ) | ||||||||||||||||||||||
Gain on sale of securities, net |
- | - | - | - | - | 160 | (160 | ) | (100.0 | ) | ||||||||||||||||||||||
Other |
132 | 160 | (28 | ) | (17.5 | ) | 519 | 901 | (382 | ) | (42.4 | ) | ||||||||||||||||||||
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Total noninterest income |
$ | 1,107 | $ | 831 | $ | 276 | 33.2 | % | $ | 4,154 | $ | 4,977 | $ | (823 | ) | (16.5 | )% | |||||||||||||||
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Deposit Service Charges and Fees. Deposit fees, which are fees from our customers for deposit-related services, constitute the largest component of our noninterest income. Service charges on deposit accounts were $687,000 for the three months ended March 31, 2018, an increase of $139,000, or 25.4%, over the same period in the prior year. Service charges on deposit accounts were $2.6 million for the year ended December 31, 2017, an increase of $494,000, or 23.3%, over the prior year. The increases in deposit account service charges in these periods were primarily the result of a fee income initiative to adjust the pricing of fees, types of fees, and features of our deposit accounts, as well as growth in deposit balances. We were able to increase fees without losing customers.
Loan Referral Fees. We earn loan referral fees when we originate a variable rate loan and the borrower enters into an interest rate swap agreement with a third party to fix the interest rate for an extended period, usually 20 or 25 years. We recognize the loan referral fee for arranging the interest rate swap. By facilitating interest rate swaps to our clients, we are able to provide them with a long-term, fixed interest rate without the assuming the interest rate risk. Loan referral fees were $130,000 for the three months ended March 31, 2018, compared to no such fees in the same period in the prior year. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps. The recognition of loan referral fees fluctuate in response to these market conditions and as a result we may not recognize any loan referral fees in some periods. Loan referral fees were $439,000 for the year ended December 31, 2017, an increase of $16,000, or 3.8%, over the prior year.
Mortgage Broker Fees. We earn mortgage broker fees for residential mortgage loans that we broker through Quicken Loans. Mortgage broker fees decreased $4,000 in the three months ended March 31, 2018, compared to
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the same period in 2017 as a result of higher mortgage interest rates and lower inventory of housing in our key markets, which decreased the demand for new mortgages. Mortgage broker fees declined $91,000 in 2017 compared to 2016 as a result of lower volume.
Gain on Sale of Loans. We typically sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and United States Department of Agriculture loans that we originate. Gain on sale of loans increased $38,000 to $64,000 in the three months ended March 31, 2018, compared to the same period in 2017 as a result of increased focus on production after restructuring our SBA loan program in 2017. Gain on sale of loans declined to $102,000 in 2017 from $790,000 in 2016 as we reduced staff and restructured our underwriting and administration of this program, while reducing our focus on originating loans for sale. In 2017, we originated $4.8 million of SBA loans, compared to $7.4 million in 2016. We intend to add one or more experienced SBA lenders and increase our origination activity in 2018.
Other. This category includes a variety of other income-producing activities, annuity broker fees, and SBA servicing fees. Other noninterest income decreased $28,000 in the three months ended March 31, 2018, compared to the same period in 2017 as a result of lower SBA servicing revenue and lower annuity broker fees. Other noninterest income decreased $382,000, or 42.4%, in 2017 compared to 2016 due primarily to a one-time $325,000 break-up fee that was recognized in 2016 in connection with a transaction that was terminated in 2015.
Noninterest Expense
Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expense, data processing expense, director and staff expense, marketing expense, and legal and professional fees.
For the three months ended March 31, 2018, noninterest expense totaled $6.1 million, an increase of $691,000, or 12.9%, compared to $5.4 million for the three months ended March 31, 2017. For the year ended December 31, 2017, noninterest expense totaled $22.4 million, an increase of $895,000, or 4.2%, compared to $21.5 million for the year ended December 31, 2016.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Three Months Ended March 31, |
Increase (Decrease) |
Percent Change |
Year Ended December 31, |
Increase (Decrease) |
Percent Change |
|||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2017 | 2016 | ||||||||||||||||||||||||||||
Salaries and employee benefits |
$ | 3,735 | $ | 3,282 | $ | 453 | 13.8 | % | $ | 13,383 | $ | 11,988 | $ | 1,395 | 11.6 | % | ||||||||||||||||
Occupancy |
823 | 729 | 94 | 12.9 | 3,037 | 2,694 | 343 | 12.7 | ||||||||||||||||||||||||
Data processing |
479 | 401 | 78 | 19.5 | 1,777 | 1,995 | (218 | ) | (10.9 | ) | ||||||||||||||||||||||
Director and staff expenses |
144 | 141 | 3 | 2.1 | 561 | 543 | 18 | 3.3 | ||||||||||||||||||||||||
Excise taxes |
124 | 113 | 11 | 9.7 | 459 | 357 | 102 | 28.6 | ||||||||||||||||||||||||
Marketing |
57 | 67 | (10 | ) | (14.9 | ) | 446 | 437 | 9 | 2.1 | ||||||||||||||||||||||
Legal and professional fees |
80 | 90 | (10 | ) | (11.1 | ) | 355 | 380 | (25 | ) | (6.6 | ) | ||||||||||||||||||||
FDIC assessments |
85 | 103 | (18 | ) | (17.5 | ) | 331 | 367 | (36 | ) | (9.8 | ) | ||||||||||||||||||||
Business development |
88 | 67 | 21 | 31.3 | 294 | 294 | - | - | ||||||||||||||||||||||||
OREO and repossessed assets operations, net |
(2 | ) | 4 | (6 | ) | N/M | (23 | ) | 342 | (365 | ) | N/M | ||||||||||||||||||||
Other |
454 | 379 | 75 | 19.8 | 1,813 | 2,141 | (328 | ) | (15.3 | ) | ||||||||||||||||||||||
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Total noninterest expense |
$ | 6,067 | $ | 5,376 | $ | 691 | 12.9 | % | $ | 22,433 | $ | 21,538 | $ | 895 | 4.2 | % | ||||||||||||||||
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Salaries and Employee Benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $3.7 million for the three months ended March 31, 2018, an increase of $453,000, or 13.8%, compared to $3.3 million for the three months ended March 31, 2017. The increase was primarily due to hiring additional staff for our Woodinville branch, which opened in October 2017, and hiring additional staff for our ongoing growth initiatives. Salaries and employee benefits were $13.4 million for the year ended December 31, 2017, an increase of $1.4 million, or 11.6%, compared to $12.0 million for the year ended December 31, 2016. The increase was primarily due to an increase in staffing to support our growth objectives, including hiring additional staff for our Woodinville branch, and to enhance our compliance infrastructure. As of March 31, 2018, we had 159 full-time equivalent employees, compared to 156 at December 31, 2017, and 142 at December 31, 2016.
Occupancy Expenses. Occupancy expenses were $823,000 for the three months ended March 31, 2018, compared to $729,000 for the three months ended March 31, 2017. Occupancy expenses were $3.0 million for the year ended December 31, 2017, compared to $2.7 million for the year ended December 31, 2016. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $254,000 and $230,000 for the three months ended March 31, 2018 and 2017, respectively, and $993,000 and $895,000 for years ended December 31, 2017 and 2016, respectively. The increase of $94,000, or 12.9%, in occupancy expenses for the three months ended March 31, 2018, compared to the same period in the prior year was primarily due to opening our Woodinville branch in October 2017 and higher building maintenance costs. The increase of $343,000, or 12.7%, in occupancy expenses for 2017 compared to 2016 was primarily due to increased lease costs and higher building maintenance. We opened our 13th branch in Woodinville in the fall of 2017. This new branch increased our lease, depreciation, maintenance, and utility costs for 2017.
Data Processing. Data processing costs were $479,000 for the three months ended March 31, 2018, compared to $401,000 for the three months ended March 31, 2017. Data processing costs were $1.8 million for the year ended December 31, 2017, compared to $2.0 million for the year ended December 31, 2016. Data processing costs include all of our customer processing, computer processing, and network costs. In 2016, we upgraded our core customer processing system and achieved costs savings that enabled us to grow deposits, loans, and customers without increasing our data processing costs in 2017. We anticipate that our data processing costs will increase proportionately as we grow our customer base and deposits and loans.
Other. This category includes dues and subscriptions, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officers insurance, donations, provision for unfunded commitments, and miscellaneous other expenses.
Other noninterest expense increased to $454,000 for the three months ended March 31, 2018, compared to $379,000 for the three months ended March 31, 2017. The increase was primarily due to costs associated with supporting the communities we serve through memberships and sponsorships and slight increases in office supplies and losses on deposit accounts. Other noninterest expense decreased to $1.8 million for the year ended December 31, 2017, compared to $2.1 million for the year ended December 31, 2016, a decrease of $328,000, or 15.3%. The decrease was primarily due to decreased loan expenses as we benefitted from stronger credit quality, lower mail service expenses, and lower directors and officers insurance expense.
Income Tax Expense
The amount of income tax expense we incur is impacted by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized.
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Three Months Ended March 31, 2018, Compared to Three Months Ended March 31, 2017. For the three months ended March 31, 2018, income tax expense totaled $474,000, compared to $578,000 for the three months ended March 31, 2017. Our effective tax rates for the three months ended March 31, 2018 and 2017, were 20.5% and 30.6%, respectively. The lower tax rate in 2018 was the result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act.
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016. For the year ended December 31, 2017, income tax expense totaled $4.7 million, compared to $2.5 million for the year ended December 31, 2016. The income tax expense for 2017 included $1.3 million in additional expense that resulted from the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act. Excluding the effect of the charge for revaluation of our deferred tax assets, our effective tax rates for the years ended December 31, 2017 and 2016, were 33.3% and 32.9%, respectively.
Financial Condition
Our total assets increased $25.2 million, or 3.1%, to $831.0 million as of March 31, 2018, from $805.8 million as of December 31, 2017. Our asset growth in the first quarter of 2018 was primarily due to $21.7 million in loan growth and a $4.8 million increase in cash and cash equivalents, offset by a decrease of $1.0 million in investment securities. Our growth was primarily funded by $24.0 million in deposit growth during the first quarter. Our total assets increased $65.2 million, or 8.8%, to $805.8 million as of December 31, 2017, from $740.6 million as of December 31, 2016. Our asset growth in 2017 was primarily due to $60.7 million in loan growth, which we funded primarily through growth in customer deposits.
Loan Portfolio
Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in the Puget Sound region. Our loan portfolio represents the highest yielding component of our earning assets.
As of March 31, 2018, loans totaled $678.5 million, an increase of $21.7 million, or 3.3%, compared to December 31, 2017. As of December 31, 2017, loans totaled $656.8 million, an increase of $60.7 million, or 10.2%, compared to $596.1 million as of December 31, 2016. These increases were primarily due to our efforts to increase income by building a diversified loan portfolio while maintaining strong credit quality.
Loans as a percentage of deposits were 93.3% as of March 31, 2018, 93.4% as of December 31, 2017, and 91.9% as of December 31, 2016. We are focused on serving our communities and markets by growing loans and funding those loans with customer deposits.
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The following table summarizes our loan portfolio by type of loan as of the dates indicated:
As of March 31, 2018 |
As of December 31, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Commercial and industrial loans |
$ | 86,719 | 12.8 | % | $ | 88,688 | 13.5 | % | $ | 71,397 | 12.0 | % | ||||||||||||
Real estate loans: |
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Construction, land and land development |
44,970 | 6.6 | 41,641 | 6.3 | 55,565 | 9.3 | ||||||||||||||||||
Residential real estate |
90,624 | 13.4 | 87,031 | 13.3 | 77,361 | 13.0 | ||||||||||||||||||
Commercial real estate |
453,927 | 66.9 | 437,717 | 66.6 | 391,046 | 65.5 | ||||||||||||||||||
Consumer and other loans |
2,558 | 0.3 | 2,058 | 0.3 | 1,276 | 0.2 | ||||||||||||||||||
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Gross loans |
678,798 | 100.0 | % | 657,135 | 100.0 | % | 596,645 | 100.0 | % | |||||||||||||||
Net deferred origination fees |
(283 | ) | (347 | ) | (517 | ) | ||||||||||||||||||
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Loans |
$ | 678,515 | $ | 656,788 | $ | 596,128 | ||||||||||||||||||
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As of December 31, | ||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Commercial and industrial loans |
$ | 68,347 | 13.7 | % | $ | 51,088 | 11.8 | % | $ | 37,511 | 10.4 | % | ||||||||||||
Real estate loans: |
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Construction, land and land development |
44,522 | 8.9 | 37,397 | 8.7 | 29,565 | 8.2 | ||||||||||||||||||
Residential real estate |
82,750 | 16.5 | 53,925 | 12.5 | 54,140 | 15.0 | ||||||||||||||||||
Commercial real estate |
302,747 | 60.6 | 286,698 | 66.4 | 236,729 | 65.8 | ||||||||||||||||||
Consumer and other loans |
1,299 | 0.3 | 2,638 | 0.6 | 2,065 | 0.6 | ||||||||||||||||||
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Gross loans |
499,595 | 100.0 | % | 431,746 | 100.0 | % | 360,010 | 100.0 | % | |||||||||||||||
Net deferred origination fees |
(409 | ) | (627 | ) | (693 | ) | ||||||||||||||||||
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Loans |
$ | 499,186 | $ | 431,119 | $ | 359,317 | ||||||||||||||||||
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Commercial and Industrial Loans. Commercial and industrial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and effectively. These loans are primarily made based on the borrowers ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.
Commercial and industrial loans decreased $2.0 million, or 2.3%, to $86.7 million as of March 31, 2018, from $88.7 million as of December 31, 2017. The decrease was due to seasonal runoff in our loan portfolio. Commercial and industrial loans increased $17.3 million, or 24.2%, to $88.7 million as of December 31, 2017, from $71.4 million as of December 31, 2016. The increase was due, in part, to our diversification strategy, which includes sourcing loans from strong markets with good returns and risk characteristics to supplement growth in our existing markets. In 2017, we purchased $9.9 million of high-quality medical equipment loans made to doctors. The loans were individually underwritten to the Banks standards before being funded. We may purchase additional loans of various types in the future to support the diversification of our loan portfolio and to invest excess liquidity. We may consider additional purchases of medical equipment loans after we assess the performance of our initial purchase of these loans.
Construction, Land and Land Development Loans. Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties.
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Construction, land and land development loans increased $3.4 million, or 8.2%, to $45.0 million as of March 31, 2018, from $41.6 million as of December 31, 2017. The increase was primarily due to favorable weather conditions for building in our market area. Unfunded loan commitments for construction, land and land development loans increased to $39.2 million at March 31, 2018, from $30.8 million at December 31, 2017. Construction, land and land development loans decreased $14.0 million, or 25.2%, to $41.6 million as of December 31, 2017, from $55.6 million as of December 31, 2016, as the robust real estate market in the Puget Sound region resulted in newly constructed homes selling quickly, enabling builders to repay their loans more quickly. As of December 31, 2017, we had a number of construction loans that have been approved, primarily for residential projects, where the contractor/developer had not requested the funds, resulting in our unfunded construction and development commitments to grow to $30.8 million at December 31, 2017, from $18.9 million at December 31, 2016. Because of the strong residential real estate market in the Puget Sound region, we expect to see construction and development loans continue to pay off more quickly than we have experienced historically.
Residential Real Estate Loans. We originate one-to-four family adjustable rate mortgage loans for our own loan portfolio and as a mortgage broker for Quicken Loans. Loans that we originate as a broker are not funded by us and do not appear on our balance sheet. From time to time, we purchase residential mortgages originated by other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. As of March 31, 2018, purchased residential real estate loans totaled $37.9 million. We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans. As of March 31, 2018, residential real estate loans made to investors and business owners totaled $34.9 million. In addition, we originate home equity lines of credit and home equity term loans for our portfolio.
Our residential loans increased $3.6 million, or 4.1%, to $90.6 million as of March 31, 2018, from $87.0 million as of December 31, 2017. Our residential loans increased $9.6 million, or 12.4%, to $87.0 million as of December 31, 2017, from $77.4 million as of December 31, 2016. The increases were primarily a result of our diversification strategy to supplement existing loan growth with purchased loans individually underwritten to our credit standards. Most of the one-to-four family loans that we purchase are from other lenders in the Puget Sound region or in California.
Commercial Real Estate Loans. We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores and gas stations, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. Commercial real estate loans represented 66.9% of our loan portfolio at March 31, 2018, and are our largest source of revenue.
Commercial real estate loans increased $16.2 million, or 3.7%, to $453.9 million as of March 31, 2018, from $437.7 million as of December 31, 2017. Commercial real estate loans increased $46.7 million, or 11.9%, to $437.7 million as of December 31, 2017, from $391.0 million as of December 31, 2016. These increases, which occurred across the various segments of our portfolio, were due to our commitment to grow this portfolio in the Puget Sound region. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans.
Consumer and Other Loans. Our consumer and other loans are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans. Consumer and other loans increased $500,000, or 23.8%, to $2.6 million as of March 31, 2018, from $2.1 million as of December 31, 2017. Consumer and other loans increased $782,000, or 61.3%, to $2.1 million as of December 31, 2017, from $1.3 million as of December 31, 2016. The increases in these loans were primarily a result of strong consumer confidence and economic strength in the Puget Sound region.
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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of date indicated are summarized in the following tables:
As of March 31, 2018 | ||||||||||||||||
(Dollars in thousands) | Due in One Year or Less |
Due After One Year Through Five Years |
Due After Five Years |
Gross Loans | ||||||||||||
Commercial and industrial loans |
$ | 24,099 | $ | 44,354 | $ | 18,266 | $ | 86,719 | ||||||||
Real estate loans: |
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Construction, land and land development |
31,348 | 11,500 | 2,122 | 44,970 | ||||||||||||
Residential real estate |
13,907 | 19,037 | 57,680 | 90,624 | ||||||||||||
Commercial real estate |
24,727 | 140,997 | 288,203 | 453,927 | ||||||||||||
Consumer and other loans |
817 | 1,426 | 315 | 2,558 | ||||||||||||
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Total |
$ | 94,898 | $ | 217,314 | $ | 366,586 | $ | 678,798 | ||||||||
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As of December 31, 2017 | ||||||||||||||||
(Dollars in thousands) | Due in One Year or Less |
Due After One Year Through Five Years |
Due After Five Years |
Gross Loans | ||||||||||||
Commercial and industrial loans |
$ | 26,863 | $ | 41,744 | $ | 20,081 | $ | 88,688 | ||||||||
Real estate loans: |
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Construction, land and land development |
33,030 | 7,499 | 1,112 | 41,641 | ||||||||||||
Residential real estate |
17,294 | 18,347 | 51,390 | 87,031 | ||||||||||||
Commercial real estate |
29,878 | 117,637 | 290,202 | 437,717 | ||||||||||||
Consumer and other loans |
603 | 1,136 | 319 | 2,058 | ||||||||||||
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Total |
$ | 107,668 | $ | 186,363 | $ | 363,104 | $ | 657,135 | ||||||||
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The following table sets forth all loans at March 31, 2018, that are due after March 31, 2019, and have either fixed interest rates or floating or adjustable interest rates:
(Dollars in thousands) | Fixed Rates | Floating or Adjustable Rates |
Total | |||||||||
Commercial and industrial loans |
$ | 46,757 | $ | 15,863 | $ | 62,620 | ||||||
Real estate loans: |
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Construction, land and land development |
8,800 | 4,822 | 13,622 | |||||||||
Residential real estate |
16,222 | 60,495 | 76,717 | |||||||||
Commercial real estate |
172,284 | 256,916 | 429,200 | |||||||||
Consumer and other loans |
1,585 | 156 | 1,741 | |||||||||
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Total |
$ | 245,648 | $ | 338,252 | $ | 583,900 | ||||||
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The following table sets forth all loans at December 31, 2017, that are due after December 31, 2018, and have either fixed interest rates or floating or adjustable interest rates:
(Dollars in thousands) | Fixed Rates |
Floating or Adjustable Rates |
Total | |||||||||
Commercial and industrial loans |
$ | 45,168 | $ | 16,657 | $ | 61,825 | ||||||
Real estate loans: |
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Construction, land and land development |
7,499 | 1,112 | 8,611 | |||||||||
Residential real estate |
16,584 | 53,154 | 69,738 | |||||||||
Commercial real estate |
136,273 | 271,566 | 407,839 | |||||||||
Consumer and other loans |
1,356 | 99 | 1,455 | |||||||||
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Total |
$ | 206,880 | $ | 342,588 | $ | 549,468 | ||||||
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Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in managements opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by applicable regulations. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal balance. Loans are returned to accrual status if we believe that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual status.
We believe our conservative lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss.
We had $1.7 million in nonperforming assets, including performing troubled debt restructurings, or TDRs, as of March 31, 2018, compared to $2.1 million as of December 31, 2017, and we had $1.7 million in nonperforming loans as of March 31, 2018, compared to $2.1 million as of December 31, 2017. The decrease in nonperforming assets was the result of a decline in nonperforming commercial real estate loans. We had $2.1 million in nonperforming assets, including performing TDRs, as of December 31, 2017, compared to $8.2 million as of December 31, 2016, and we had $2.1 million in nonperforming loans as of December 31, 2017, compared to $1.6 million as of December 31, 2016. The decrease in nonperforming assets was the result of the sale of our remaining real estate owned property and the payoff of our remaining TDRs in 2017.
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The following table presents information regarding nonperforming assets at the dates indicated:
As of March 31, 2018 |
As of December 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 396 | $ | 372 | $ | 28 | $ | 1,297 | $ | 59 | $ | 7 | ||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Construction, land and land development |
- | - | - | - | - | 46 | ||||||||||||||||||
Residential real estate |
88 | 88 | 98 | - | - | 133 | ||||||||||||||||||
Commercial real estate |
1,303 | 1,660 | 1,363 | 1,409 | 1,462 | 2,418 | ||||||||||||||||||
Consumer and other loans |
- | - | - | - | - | - | ||||||||||||||||||
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Total non-accrual loans |
1,699 | 2,120 | 1,489 | 2,706 | 1,521 | 2,604 | ||||||||||||||||||
Accruing loans past due 90 days or more: |
||||||||||||||||||||||||
Commercial and industrial loans |
- | - | - | - | - | - | ||||||||||||||||||
Real estate loans: |
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Construction, land and land development |
- | - | 122 | - | - | - | ||||||||||||||||||
Residential real estate |
- | - | - | - | - | - | ||||||||||||||||||
Commercial real estate |
- | - | - | - | - | - | ||||||||||||||||||
Consumer and other loans |
- | - | - | - | - | - | ||||||||||||||||||
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Total accruing loans past due 90 days or more |
- | - | 122 | - | - | - | ||||||||||||||||||
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Total nonperforming loans |
1,699 | 2,120 | 1,611 | 2,706 | 1,521 | 2,604 | ||||||||||||||||||
Real estate owned |
- | - | 1,297 | 1,231 | 3,059 | 1,903 | ||||||||||||||||||
Repossessed assets |
- | - | - | 100 | 350 | 790 | ||||||||||||||||||
Troubled debt restructurings, accruing |
- | - | 5,326 | 5,416 | 5,467 | - | ||||||||||||||||||
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Total nonperforming assets |
$ | 1,699 | $ | 2,120 | $ | 8,234 | $ | 9,453 | $ | 10,397 | $ | 5,297 | ||||||||||||
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Total nonperforming loans to total loans |
0.25 | % | 0.32 | % | 0.27 | % | 0.54 | % | 0.35 | % | 0.72 | % | ||||||||||||
Total nonperforming assets to total assets |
0.20 | % | 0.26 | % | 1.11 | % | 1.52 | % | 1.90 | % | 1.24 | % | ||||||||||||
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Potential Problem Loans
From a credit risk standpoint, we classify loans in one of five categories: pass, other loans especially mentioned, substandard, doubtful or loss. Within the pass category, we classify loans into one of the following five subcategories based on perceived credit risk, including repayment capacity and collateral security: minimal risk; low risk; modest risk; average risk; and acceptable risk. The classifications of loans reflect a judgment about the risks of default and loss given default. We review the risk ratings of our credits on an annual basis, or more frequently if circumstances warrant. Risk ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated other loans especially mentioned show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political
66
nature, or important weaknesses in the collateral for the loan. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated as doubtful have weaknesses of substandard assets that are sufficient to make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.
Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.
The following table summarizes the internal ratings of our loans as of the dates indicated:
As of March 31, 2018 | ||||||||||||||||||||
(Dollars in thousands) | Pass | Other Loans Especially Mentioned |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 85,194 | $ | 392 | $ | 1,133 | $ | - | $ | 86,719 | ||||||||||
Real estate loans: |
||||||||||||||||||||
Construction, land and land development |
42,417 | 2,553 | - | - | 44,970 | |||||||||||||||
Residential real estate |
90,146 | 126 | 352 | - | 90,624 | |||||||||||||||
Commercial real estate |
450,316 | 2,308 | 1,303 | - | 453,927 | |||||||||||||||
Consumer and other loans |
2,558 | - | - | - | 2,558 | |||||||||||||||
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Total |
$ | 670,631 | $ | 5,379 | $ | 2,788 | $ | - | $ | 678,798 | ||||||||||
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As of December 31, 2017 | ||||||||||||||||||||
(Dollars in thousands) | Pass | Other Loans Especially Mentioned |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 87,247 | $ | 376 | $ | 902 | $ | 163 | $ | 88,688 | ||||||||||
Real estate loans: |
||||||||||||||||||||
Construction, land and land development |
39,081 | 2,560 | - | - | 41,641 | |||||||||||||||
Residential real estate |
86,464 | 479 | 88 | - | 87,031 | |||||||||||||||
Commercial real estate |
434,421 | 1,636 | 1,315 | 345 | 437,717 | |||||||||||||||
Consumer and other loans |
2,058 | - | - | - | 2,058 | |||||||||||||||
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Total |
$ | 649,271 | $ | 5,051 | $ | 2,305 | $ | 508 | $ | 657,135 | ||||||||||
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As of December 31, 2016 | ||||||||||||||||||||
(Dollars in thousands) | Pass | Other Loans Especially Mentioned |
Substandard | Doubtful | Total | |||||||||||||||
Commercial and industrial loans |
$ | 68,606 | $ | 1,890 | $ | 901 | - | $ | 71,397 | |||||||||||
Real estate loans: |
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Construction, land and land development |
54,324 | 1,119 | 122 | - | 55,565 | |||||||||||||||
Residential real estate |
77,057 | - | 304 | - | 77,361 | |||||||||||||||
Commercial real estate |
384,892 | 811 | 5,343 | - | 391,046 | |||||||||||||||
Consumer and other loans |
1,276 | - | - | - | 1,276 | |||||||||||||||
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Total |
$ | 586,155 | $ | 3,820 | $ | 6,670 | - | $ | 596,645 | |||||||||||
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67
Allowance for Loan Losses
We maintain an allowance for loan losses that represents managements best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors. See Critical Accounting PoliciesAllowance for Loan Losses.
In connection with the review of our loan portfolio, we consider risk elements applicable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
| for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, professional or agricultural enterprise, the borrowers business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral; |
| for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type; |
| for residential mortgage loans, the borrowers ability to repay the loan, including a consideration of the debt-to-income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and |
| for construction, land and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan-to-value ratio. |
As of March 31, 2018, the allowance for loan losses totaled $8.4 million, or 1.24% of total loans. Our allowance for loan losses as of March 31, 2018, increased by $406,000, or 5.1%, compared to December 31, 2017, primarily due to growth in our loan portfolio. As of December 31, 2017, the allowance for loan losses totaled $8.0 million, or 1.22% of total loans. Our allowance for loan losses as of December 31, 2017, increased by $473,000, or 6.3%, compared to December 31, 2016, primarily due to the organic growth of our loan portfolio.
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The following tables present, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
As of or for the Three Months Ended March 31, 2018 |
As of or for the Year Ended December 31, |
|||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
Allowance at beginning of period |
$ | 8,017 | $ | 7,544 | $ | 5,989 | $ | 5,557 | $ | 4,268 | $ | 3,845 | ||||||||||||
Provision for loan losses |
501 | 870 | 1,919 | 941 | 1,690 | 1,493 | ||||||||||||||||||
Charge-offs: |
||||||||||||||||||||||||
Commercial and industrial loans |
9 | 81 | 128 | 637 | - | 100 | ||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Construction, land and land development |
- | - | - | - | 15 | - | ||||||||||||||||||
Residential real estate |
- | - | 79 | 25 | 280 | 881 | ||||||||||||||||||
Commercial real estate |
84 | 408 | 150 | - | 200 | 293 | ||||||||||||||||||
Consumer and other loans |
5 | 11 | 10 | 3 | 3 | 144 | ||||||||||||||||||
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Total charge-offs |
98 | 500 | 367 | 665 | 498 | 1,318 | ||||||||||||||||||
Recoveries: |
||||||||||||||||||||||||
Commercial and industrial loans |
1 | 3 | 2 | 7 | - | - | ||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Construction, land and land development loans |
- | 95 | - | - | 15 | - | ||||||||||||||||||
Residential real estate |
- | - | - | 141 | 77 | 244 | ||||||||||||||||||
Commercial real estate |
- | - | - | 8 | - | - | ||||||||||||||||||
Consumer and other loans |
2 | 5 | 1 | - | 5 | 4 | ||||||||||||||||||
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Total recoveries |
3 | 103 | 3 | 156 | 97 | 248 | ||||||||||||||||||
Net charge-offs |
(95 | ) | (397 | ) | (364 | ) | (509 | ) | (401 | ) | (1,070 | ) | ||||||||||||
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Allowance at end of period |
$ | 8,423 | $ | 8,017 | $ | 7,544 | $ | 5,989 | $ | 5,557 | $ | 4,268 | ||||||||||||
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Allowance to nonperforming loans |
495.76 | % | 378.16 | % | 468.28 | % | 221.32 | % | 365.35 | % | 163.90 | % | ||||||||||||
Allowance to total loans |
1.24 | % | 1.22 | % | 1.27 | % | 1.20 | % | 1.29 | % | 1.19 | % | ||||||||||||
Net charge-offs to average loans (1) |
0.06 | % | 0.06 | % | 0.07 | % | 0.11 | % | 0.10 | % | 0.33 | % | ||||||||||||
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(1) | Ratio for the three months ended March 31, 2018, is annualized. |
Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. If the Puget Sound region experiences an economic downturn, our asset quality could deteriorate or if we are successful in continuing to grow our loan portfolio, our allowance may become inadequate and material additional provisions for loan losses could be necessary.
69
The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
As of March 31, 2018 |
As of December 31, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(Dollars in thousands) | Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
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Commercial and industrial loans |
$ | 2,028 | 12.8 | % | $ | 1,864 | 13.5 | % | $ | 1,606 | 12.0 | % | ||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Construction, land and land development |
1,133 | 6.6 | 1,063 | 6.3 | 1,398 | 9.3 | ||||||||||||||||||
Residential real estate |
1,328 | 13.4 | 1,343 | 13.2 | 1,495 | 13.0 | ||||||||||||||||||
Commercial real estate |
2,088 | 66.9 | 2,014 | 66.6 | 1,474 | 65.5 | ||||||||||||||||||
Consumer and other loans |
53 | 0.3 | 43 | 0.4 | 26 | 0.2 | ||||||||||||||||||
Unallocated |
1,793 | n/a | 1,690 | n/a | 1,545 | n/a | ||||||||||||||||||
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Total allowance for loan losses |
$ | 8,423 | 100.0 | % | $ | 8,017 | 100.0 | % | $ | 7,544 | 100.0 | % | ||||||||||||
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As of December 31, | ||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
Allowance Allocated to Loan Portfolio |
Loan Category as a % of Total Loans |
||||||||||||||||||
Commercial and industrial loans |
$ | 1,311 | 13.7 | % | $ | 1,028 | 11.8 | % | $ | 391 | 10.4 | % | ||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Construction, land and land development |
1,031 | 8.9 | 1,231 | 8.7 | 299 | 8.2 | ||||||||||||||||||
Residential real estate |
1,744 | 16.5 | 925 | 12.5 | 616 | 15.0 | ||||||||||||||||||
Commercial real estate |
1,509 | 60.6 | 2,107 | 66.4 | 2,744 | 65.8 | ||||||||||||||||||
Consumer and other loans |
35 | 0.3 | 39 | 0.6 | 18 | 0.6 | ||||||||||||||||||
Unallocated |
359 | n/a | 227 | n/a | 200 | n/a | ||||||||||||||||||
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Total allowance for loan losses |
$ | 5,989 | 100.0 | % | $ | 5,557 | 100.0 | % | $ | 4,268 | 100.0 | % | ||||||||||||
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Securities
We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledge for public deposits or other business purposes. At March 31, 2018, 87.3% of our investment portfolio consisted of U.S. Treasury securities. The remainder of our securities portfolio was invested in U.S. Government
70
agency securities, agency collateralized mortgage obligations and mortgage-backed securities, and municipal bonds. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At March 31, 2018, our loan-to-deposit ratio was 93.3% and our securities portfolio represented less than 5% of assets. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.
As of March 31, 2018, the carrying amount of our investment securities totaled $37.3 million, a decrease of $1.0 million, or 2.6%, compared to $38.3 million as of December 31, 2017. The decrease in the securities portfolio was primarily the result of the decline in fair value and pay-downs on mortgage-backed securities. As of December 31, 2017, the carrying amount of our investment securities totaled $38.3 million, an increase of $3.3 million, or 9.4%, compared to $35.0 million as of December 31, 2016. The increase in the securities portfolio was due primarily to the investment of excess cash and cash equivalent balances. Investment securities represented 4.8% and 4.7% of total assets as of December 31, 2017 and 2016, respectively.
Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders equity.
The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:
As of March 31, 2018 |
As of December 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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Securities available-for-sale: |
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U.S. Treasury securities |
$ | 34,803 | $ | 32,550 | $ | 34,794 | $ | 33,396 | $ | 29,746 | $ | 28,248 | $ | 5,991 | $ | 5,986 | ||||||||||||||||
U.S. government securities |
3,000 | 2,948 | 3,000 | 2,970 | 4,000 | 3,961 | 7,001 | 6,976 | ||||||||||||||||||||||||
U.S. Agency collateralized mortgage obligations |
215 | 210 | 224 | 221 | 290 | 289 | 382 | 380 | ||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
50 | 51 | 79 | 80 | 119 | 121 | 159 | 162 | ||||||||||||||||||||||||
Municipal bonds |
261 | 257 | 261 | 260 | 490 | 487 | 495 | 496 | ||||||||||||||||||||||||
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Total available-for-sale securities |
38,329 | 36,016 | 38,358 | 36,927 | 34,645 | 33,106 | 14,028 | 14,000 | ||||||||||||||||||||||||
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Securities held-to-maturity: |
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U.S. Agency residential mortgage-backed securities |
1,323 | 1,256 | 1,409 | 1,374 | 1,888 | 1,816 | 2,150 | 2,076 | ||||||||||||||||||||||||
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Total held-to-maturity securities |
1,323 | 1,256 | 1,409 | 1,374 | 1,888 | 1,816 | 2,150 | 2,076 | ||||||||||||||||||||||||
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Total investment securities |
$ | 39,652 | $ | 37,272 | $ | 39,767 | $ | 38,301 | $ | 36,533 | $ | 34,922 | $ | 16,178 | $ | 16,076 | ||||||||||||||||
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All of our mortgage-backed securities and collateralized mortgage obligations are U.S. Government agency securities. As of March 31, 2018, we did not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in our investment portfolio.
Our management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
71
As of March 31, 2018, and December 31, 2017 and 2016, we did not own securities of any one issuer, other than the U.S. Government and its agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders equity.
The following table sets forth the amortized cost of held to maturity securities and the fair value of available for sale securities, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of our securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.
As of March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | One Year or Less | More than One Year to Five Years |
More than Five Years to Ten Years |
More than Ten Years |
Total | |||||||||||||||||||||||||||||||||||
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
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Securities available-for-sale: |
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U.S. Treasury securities |
- | - | $ | 4,995 | 1.15 | % | $ | 29,809 | 1.58 | % | - | - | $ | 34,803 | 1.52 | % | ||||||||||||||||||||||||
U.S. Government securities |
- | - | 3,000 | 1.50 | - | - | - | - | 3,000 | 1.50 | ||||||||||||||||||||||||||||||
U.S. Agency collateralized mortgage obligations |
- | - | - | - | - | - | 215 | 2.93 | % | 215 | 2.93 | |||||||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | - | - | 50 | 1.72 | - | - | 50 | 1.72 | ||||||||||||||||||||||||||||||
Municipal bonds |
- | - | - | - | 261 | 2.05 | - | - | 261 | 2.05 | ||||||||||||||||||||||||||||||
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Total available-for-sale |
- | - | 7,995 | 1.28 | 30,120 | 1.59 | 215 | 2.93 | 38,329 | 1.53 | ||||||||||||||||||||||||||||||
Securities held to maturity: |
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U.S. Agency residential mortgage-backed securities |
- | - | - | - | - | - | 1,323 | 2.23 | 1,323 | 2.23 | ||||||||||||||||||||||||||||||
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Total held to maturity |
- | - | - | - | - | - | 1,323 | 2.23 | 1,323 | 2.23 | ||||||||||||||||||||||||||||||
Total investment securities |
- | - | $ | 7,995 | 1.28 | % | $ | 30,120 | 1.59 | % | $ | 1,538 | 2.33 | % | $ | 39,652 | 1.55 | % | ||||||||||||||||||||||
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As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
One Year or Less | More than One Year to Five Years |
More than Five Years to Ten Years |
More than Ten Years |
Total | |||||||||||||||||||||||||||||||||||
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
Carrying Value |
Weighted Average Yield |
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Securities available-for-sale: |
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U.S. Treasury securities |
- | - | $ | 4,995 | 1.15 | % | $ | 29,799 | 1.58 | % | - | - | $ | 34,794 | 1.52 | % | ||||||||||||||||||||||||
U.S. Government securities |
- | - | 3,000 | 1.50 | - | - | - | - | 3,000 | 1.50 | ||||||||||||||||||||||||||||||
U.S. Agency collateralized mortgage obligations |
- | - | - | - | - | - | 224 | 2.11 | % | 224 | 2.11 | |||||||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | - | - | 79 | 3.77 | - | - | 79 | 3.77 | ||||||||||||||||||||||||||||||
Municipal bonds |
- | - | - | - | 261 | 2.05 | - | - | 261 | 2.05 | ||||||||||||||||||||||||||||||
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Total available-for-sale |
- | - | 7,995 | 1.28 | 30,139 | 1.59 | 224 | 2.11 | 38,358 | 1.53 | ||||||||||||||||||||||||||||||
Securities held to maturity: |
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U.S. Agency residential mortgage-backed securities |
- | - | - | - | - | - | 1,409 | 1.76 | 1,409 | 1.76 | ||||||||||||||||||||||||||||||
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Total held to maturity |
- | - | - | - | - | - | 1,409 | 1.76 | 1,409 | 1.76 | ||||||||||||||||||||||||||||||
Total investment securities |
- | - | $ | 7,995 | 1.28 | % | $ | 30,139 | 1.59 | % | $ | 1,633 | 1.81 | % | $ | 39,767 | 1.54 | % | ||||||||||||||||||||||
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Deposits
We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels, and personalized service to attract and retain these deposits.
Total deposits as of March 31, 2018, were $727.3 million, an increase of $24.0 million, or 3.4%, compared to $703.3 million as of December 31, 2017. Total deposits as of December 31, 2017, were $703.3 million, an increase of $54.6 million, or 8.4%, compared to $648.7 million as of December 31, 2016. The increases were primarily related to our successful execution of our strategy of deepening relationships with existing customers and actively seeking new customers.
Noninterest-bearing deposits as of March 31, 2018, were $254.0 million, an increase of $11.6 million, or 4.8%, compared to $242.4 million as of December 31, 2017. Noninterest-bearing deposits as of December 31, 2017, were $242.4 million, an increase of $18.4 million, or 8.2%, compared to $224.0 million as of December 31, 2016. The increases were due to the collaboration of our branch managers, business development offices and lenders to grow core deposits. As a team, we actively pursue the business of new customers.
Total interest-bearing account balances as of March 31, 2018, were $383.8 million, an increase of $13.5 million, or 3.6% from $370.3 million as of December 31, 2017. Total interest-bearing account balances as of December 31, 2017, were $370.3 million, an increase of $22.7 million, or 6.5% from $347.6 million as of December 31, 2016. The increases were due to our team focusing on growing core deposits.
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Total time deposit balances as of March 31, 2018, were $89.5 million, a decrease of $1.1 million, or 1.2%, from $90.6 million as of December 31, 2017. The decrease in total deposits during the period was primarily a result of a more conservative pricing strategy during the quarter and reduced promotion of time deposits. Total time deposit balances as of December 31, 2017, were $90.6 million, an increase of $13.5 million, or 17.5%, from $77.1 million as of December 31, 2016.
The following table sets forth deposit balances at the dates indicated.
As of March 31, 2018 |
As of December 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent of Total Deposits |
Amount | Percent of Total Deposits |
Amount | Percent of Total Deposits |
Amount | Percent of Total Deposits |
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Demand, noninterest bearing |
$ | 254,000 | 34.9 | % | $ | 242,358 | 34.5 | % | $ | 223,955 | 34.5 | % | $ | 173,554 | 31.9 | % | ||||||||||||||||
NOW and money market |
335,823 | 46.2 | 326,412 | 46.4 | 308,934 | 47.6 | 245,659 | 45.2 | ||||||||||||||||||||||||
Savings |
47,945 | 6.6 | 43,876 | 6.2 | 38,650 | 6.0 | 32,650 | 6.0 | ||||||||||||||||||||||||
Time deposits less than $100,000 |
26,659 | 3.7 | 27,059 | 3.8 | 28,929 | 4.5 | 36,038 | 6.6 | ||||||||||||||||||||||||
Time deposits $100,000 and over |
62,841 | 8.6 | 63,590 | 9.0 | 48,194 | 7.4 | 55,681 | 10.2 | ||||||||||||||||||||||||
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Total |
$ | 727,268 | 100.0 | % | $ | 703,295 | 100.0 | % | $ | 648,662 | 100.0 | % | $ | 543,582 | 100.0 | % | ||||||||||||||||
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The following table sets forth the Companys time deposits of $100,000 or more by time remaining until maturity as of the dates indicated:
(Dollars in thousands) | As of March 31, 2018 |
As of December 31, 2017 |
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Maturity Period: |
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Three months or less |
$ | 8,206 | $ | 6,510 | ||||
Over three through six months |
6,443 | 8,324 | ||||||
Over six through 12 months |
14,387 | 14,185 | ||||||
Over 12 months |
33,805 | 34,571 | ||||||
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Total |
$ | 62,841 | $ | 63,590 | ||||
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Average deposits for the three months ended March 31, 2018, were $709.5 million, an increase of $62.2 million, or 9.6%, compared to the three months ended March 31, 2017. Average deposits for the year ended December 31, 2017, were $664.7 million, an increase of $82.4 million, or 14.2%, compared to the year ended December 31, 2016. The increases in average deposits were primarily due to our continued growth in our primary market areas and the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by our business development officers, branch managers and lenders.
The average rate paid on total interest-bearing deposits was 0.56% for the three months ended March 31, 2018, compared to 0.47% for the three months ended March 31, 2017. The average rate paid on total interest-bearing deposits was 0.50% for the year ended December 31, 2017, compared to 0.55% for the year ended December 31, 2016.
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The following table presents the average balances and average rates paid on deposits for the periods indicated:
For the Three Months Ended March 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2017 | 2016 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance |
Average Rate |
Average Balance |
Average Rate |
Average Balance |
Average Rate |
Average Balance |
Average Rate |
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Demand, noninterest bearing |
$ | 245,273 | - | $ | 222,416 | - | $ | 233,054 | - | $ | 197,780 | - | ||||||||||||||||||||
NOW and money market |
329,038 | 0.45 | % | 312,013 | 0.38 | % | 312,573 | 0.40 | % | 265,880 | 0.44 | % | ||||||||||||||||||||
Savings |
46,002 | 0.03 | 39,353 | 0.03 | 41,844 | 0.03 | 35,929 | 0.07 | ||||||||||||||||||||||||
Time deposits less than $100,000 |
26,546 | 1.01 | 28,358 | 0.82 | 26,851 | 0.84 | 32,175 | 0.90 | ||||||||||||||||||||||||
Time deposits $100,000 and over |
62,633 | 1.39 | 45,128 | 1.24 | 50,360 | 1.29 | 50,582 | 1.25 | ||||||||||||||||||||||||
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Total deposits |
$ | 709,492 | 0.37 | % | $ | 647,268 | 0.31 | % | $ | 664,682 | 0.32 | % | $ | 582,346 | 0.36 | % | ||||||||||||||||
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The ratio of average noninterest-bearing deposits to average total deposits for the three months ended March 31, 2018 and 2017, was 34.6% and 34.4%, respectively. The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2017 and 2016, was 35.1% and 34.0%, respectively.
Factors affecting the cost of funding interest-bearing assets include the volume of noninterest- and interest-bearing deposits, changes in market interest rates and economic conditions in the Puget Sound region and their impact on interest paid on deposits, as well as the ongoing execution of our growth strategies. Cost of total interest-bearing liabilities is calculated as total interest expense divided by average total interest-bearing deposits plus average total borrowings. Our cost of total interest-bearing liabilities was 0.70%, 0.64% and 0.63% for the three months ended March 31, 2018, and the years ended December 31, 2017 and 2016, respectively. The decrease in our cost of deposits in 2017 was primarily due to pricing tactics used in the latter part of 2016 to lower our deposit costs prior to interest rates increasing. Our last rate reduction was in December 2016. In 2017, we limited our deposit rates increases and received almost a full year savings on the rate reductions we deployed in 2016.
Borrowings
We have the ability to utilize short-term to long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
Federal Home Loan Bank (FHLB) Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2018, and December 31, 2017 and 2016, total borrowing capacity of $69.7 million, $59.3 million and $60.2 million, respectively, was available under this arrangement. As of March 31, 2018, and December 31, 2017, FHLB advances totaled $20.0 million, compared to $15.0 million at December 31, 2016.
Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I, or the Trust, of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trusts only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of March 31, 2018, and December 31, 2017 and 2016, was 4.22%, 3.69% and 3.06%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the trusts preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trusts preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We
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unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust Securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.
Subordinated Debt. In 2016, the Company issued a subordinated note to a commercial bank in the amount of $10.0 million. The note matures on August 1, 2026, and bears interest at the rate of 5.65% per year for five years and, thereafter, at a rate equal to The Wall Street Journal prime rate plus 2.50%. Principal payments of $500,000 per quarter commence November 1, 2021. We may redeem the subordinated note, in whole or in part, without premium or penalty after July 29, 2021, subject to any required regulatory approvals.
As of and for the Three Months Ended March 31, |
As of or for the Year Ended December 31, |
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(Dollars in thousands) | 2018 | 2017 | 2017 | 2016 | 2015 | |||||||||||||||
Maximum amount outstanding at any month-end during period: |
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FHLB advances |
$ | 20,000 | $ | 15,000 | $ | 20,000 | $ | 15,800 | $ | 16,800 | ||||||||||
Average balance outstanding during period: |
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FHLB advances |
$ | 667 | $ | 500 | $ | 1,752 | $ | 5,791 | $ | 7,123 | ||||||||||
Weighted average interest rate during period: |
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FHLB advances |
1.88 | % | 1.12 | % | 1.34 | % | 0.84 | % | 0.86 | % | ||||||||||
Balance outstanding at end of period: |
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FHLB advances |
$ | 20,000 | $ | 15,000 | $ | 20,000 | $ | 15,000 | $ | 16,800 | ||||||||||
Weighted average interest rate at end of period: |
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FHLB advances |
1.91 | % | 1.06 | % | 1.63 | % | 0.81 | % | 0.55 | % |
Liquidity and Capital Resources
Liquidity Management
Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Banks liquidity risk profile and are considered in the assessment of liquidity management.
We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Banks liquidity risk management process.
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Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and wholesale deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks and the issuance of debt or equity securities. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.
The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Companys main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs for the next two or three years. In addition, the Bank can declare and pay dividends to the Company to meet the Companys debt and operating expenses. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs. For contingency purposes, the Company maintains a minimum level of cash to fund one years projected operating cash flow needs and the Bank manages to a minimum liquidity ratio of 10% of assets. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Banks liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing capacity, the Bank has access to funds if needed in a liquidity emergency.
Capital Adequacy
Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institutions financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank level. The Company will become subject to regulatory capital requirements once its consolidated assets exceed a certain threshold. That threshold is currently $1.0 billion, but the EGRRCPA requires the Federal Reserve to lift the threshold to $3.0 billion by November 21, 2018. See Supervision and RegulationBank Regulation and SupervisionCapital Adequacy for additional discussion regarding the regulatory capital requirements applicable to the Bank.
As of each of March 31, 2018, and December 31, 2017 and 2016, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as well capitalized for purposes of the Federal Reserves prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.
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The following table presents the Banks regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by Federal Reserve regulations to maintain well-capitalized status:
(Dollars in thousands) | Actual | Minimum Regulatory Requirement |
Minimum Regulatory Requirement for Well-Capitalized Institution under Prompt Corrective Action |
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Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2018 |
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Common Equity Tier 1 risk-based capital ratio (to risk-weighted assets) |
$ | 79,977 | 11.37 | % | $ | 31,642 | 4.50 | % | $ | 45,706 | 6.50 | % | ||||||||||||
Leverage Capital (to average assets) |
79,977 | 10.09 | 31,719 | 4.00 | 39,649 | 5.00 | ||||||||||||||||||
Tier 1 Capital ( to risk-weighted assets) |
79,977 | 11.37 | 42,190 | 6.00 | 56,253 | 8.00 | ||||||||||||||||||
Total Capital (to risk-weighted assets) |
88,611 | 12.60 | 56,253 | 8.00 | 70,317 | 10.00 | ||||||||||||||||||
As of December 31, 2017 |
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Common Equity Tier 1 risk-based capital ratio (to risk-weighted assets) |
77,756 | 11.67 | 29,984 | 4.50 | 43,311 | 6.50 | ||||||||||||||||||
Leverage Capital (to average assets) |
77,756 | 9.94 | 31,280 | 4.00 | 39,099 | 5.00 | ||||||||||||||||||
Tier 1 Capital ( to risk-weighted assets) |
77,756 | 11.67 | 39,979 | 6.00 | 53,306 | 8.00 | ||||||||||||||||||
Total Capital (to risk-weighted assets) |
85,983 | 12.90 | 53,306 | 8.00 | 66,632 | 10.00 | ||||||||||||||||||
As of December 31, 2016 |
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Common Equity Tier 1 risk-based capital ratio (to risk-weighted assets) |
71,525 | 11.60 | 27,748 | 4.50 | 40,081 | 6.50 | ||||||||||||||||||
Leverage Capital (to average assets) |
71,525 | 10.11 | 28,293 | 4.00 | 35,366 | 5.00 | ||||||||||||||||||
Tier 1 Capital ( to risk-weighted assets) |
71,525 | 11.60 | 36,998 | 6.00 | 49,330 | 8.00 | ||||||||||||||||||
Total Capital (to risk-weighted assets) |
79,233 | 12.85 | 49,330 | 8.00 | 61,663 | 10.00 |
Contractual Obligations
The following table summarizes contractual obligations and other commitments to make future payments (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations, as of March 31, 2018, and December 31, 2017.
As of March 31, 2018 | ||||||||||||||||||||
Payments Due by Period | ||||||||||||||||||||
(Dollars in thousands) | Total | Less than 1 Year |
1 to 2 Years |
2 to 5 Years |
More than 5 Years |
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Contractual Cash Obligations |
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Time deposits |
$ | 89,500 | $ | 44,357 | $ | 31,271 | $ | 13,872 | $ | - | ||||||||||
FHLB advances |
20,000 | 20,000 | - | - | - | |||||||||||||||
Subordinated note |
10,000 | - | - | 2,500 | 7,500 | |||||||||||||||
Junior subordinated debentures |
3,609 | - | - | - | 3,609 | |||||||||||||||
Deferred compensation |
1,767 | 175 | 175 | 526 | 891 | |||||||||||||||
Operating lease payments |
8,226 | 1,154 | 1,164 | 3,258 | 2,650 | |||||||||||||||
Capital lease payments |
121 | 66 | 55 | - | - |
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As of December 31, 2017 | ||||||||||||||||||||
Payments Due by Period | ||||||||||||||||||||
(Dollars in thousands) | Total | Less than 1 Year |
1 to 2 Years |
2 to 5 Years |
More than 5 Years |
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Contractual Cash Obligations |
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Time deposits |
$ | 90,649 | $ | 44,473 | $ | 32,957 | $ | 13,219 | $ | - | ||||||||||
FHLB advances |
20,000 | 20,000 | - | - | - | |||||||||||||||
Subordinated note |
10,000 | - | - | 2,500 | 7,500 | |||||||||||||||
Junior subordinated debentures |
3,609 | - | - | - | 3,609 | |||||||||||||||
Deferred compensation |
1,811 | 175 | 350 | 526 | 760 | |||||||||||||||
Operating lease payments |
6,856 | 995 | 1,970 | 1,826 | 2,065 | |||||||||||||||
Capital lease payments |
137 | 66 | 71 | - | - |
For a discussion of our borrowings, see Financial ConditionBorrowings.
We believe that will we be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Our commitments associated with outstanding commitments to extend credit and standby and commercial letters of credit are summarized below. Since commitments associated with commitments to extend credit and letters of credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
As of March 31, 2018 |
As of December 31, | |||||||||||
(Dollars in thousands) |
2017 | 2016 | ||||||||||
Commitments to extend credit: |
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Residential real estate |
$ | 12,772 | $ | 12,488 | $ | 11,436 | ||||||
Constructionresidential real estate |
21,651 | 27,447 | 12,488 | |||||||||
Constructioncommercial real estate |
17,531 | 3,343 | 6,367 | |||||||||
Commercial and industrial |
44,204 | 38,958 | 29,352 | |||||||||
Other |
6,415 | 5,603 | 8,007 | |||||||||
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Total commitments to extend credit |
$ | 102,573 | $ | 87,839 | $ | 67,650 | ||||||
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Standby letters of credit |
$ | 2,116 | $ | 2,004 | $ | 611 |
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 many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on managements credit evaluation of the customer.
Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the
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underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers.
Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a decrease in current fair market values. Our objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Asset Liability Committee, or ALCO, of the Bank and reviewed by the Asset Liability and Investment Committee of our board of directors in accordance with policies approved by our board of directors. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, ALCO reviews liquidity, cash flows, maturities of deposits and consumer and commercial deposit activity. Management employs various methodologies to manage interest rate risk including an analysis of relationships between interest-earning assets and interest-bearing liabilities and interest rate simulations using a model. The Asset Liability and Investment Committee of our board of directors meets quarterly to review the Banks interest rate risk profile, liquidity position, including contingent liquidity, and investment portfolio.
We use interest rate risk simulation models to test interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on historical decay rates and assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the models simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
On a quarterly basis, we run multiple simulations under two different premises of which one is a static balance sheet and the other is a dynamic growth balance sheet. The static balance sheet approach produces results that show the interest risk currently inherent in our balance sheet at that point in time. The dynamic balance sheet includes our projected growth levels going forward and produces results that shows how net income, net interest
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income, and interest risk change based on our projected growth. These simulations test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic approaches, rates are shocked instantaneously and ramped over a 12-month horizon assuming parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulations are also conducted and involve analysis of interest income and expense under various changes in the shape of the yield curve including a forward curve, flat curve, steepening curve, and an inverted curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one- and two-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, 20% for a 300 basis point shift, and 25% for a 400 basis point shift.
The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:
Estimated Increase (Decrease) in Net Interest Income |
||||||||||||
Change in Market Interest Rates |
Twelve Months Ended March 31, 2018 |
Twelve Months Ended December 31, 2017 |
Twelve Months Ended December 31, 2016 |
|||||||||
Immediate Shifts |
||||||||||||
+400 basis points |
11.4 | % | 13.2 | % | 16.0 | % | ||||||
+300 basis points |
8.4 | 9.7 | 11.8 | |||||||||
+200 basis points |
5.6 | 6.4 | 7.8 | |||||||||
+100 basis points |
2.8 | 3.2 | 3.9 | |||||||||
-100 basis points |
(2.0 | ) | (2.8 | ) | (2.9 | ) | ||||||
-200 basis points |
(8.1 | ) | (8.1 | ) | (6.5 | ) | ||||||
-300 basis points |
(10.3 | ) | (10.4 | ) | (8.8 | ) | ||||||
Dynamic Balance Sheet and Rate Shifts |
||||||||||||
+400 basis points |
16.1 | 16.1 | 17.5 | |||||||||
+300 basis points |
11.9 | 11.9 | 12.9 | |||||||||
+200 basis points |
7.9 | 7.8 | 8.5 | |||||||||
+100 basis points |
4.0 | 3.9 | 4.2 | |||||||||
-100 basis points |
(3.2 | ) | (3.6 | ) | (3.4 | ) | ||||||
-200 basis points |
(10.4 | ) | (9.8 | ) | (7.5 | ) | ||||||
-300 basis points |
(13.5 | ) | (12.5 | ) | (9.9 | ) |
The results illustrate that the Bank is asset sensitive and generally performs better in an increasing interest rate environment. The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the models simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes to those financial statements included elsewhere in this prospectus have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of
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inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.
Critical Accounting Policies
Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in Note 1 to our consolidated financial statements included elsewhere is this prospectus. We believe that of our accounting policies, the following may involve a higher degree of judgment and complexity:
Securities
Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value. Unrealized gains and losses are excluded from earnings and reported in other comprehensive income. Securities within the available for sale portfolio may be used as part of our asset/liability strategy and may be sold in response to changes in interest rate risk, prepayment risk or other similar economic factors. Securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts.
Interest earned on these assets is included in interest income. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates debt securities for other-than-temporary impairment, or OTTI, on at least an annual basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement, and (2) OTTI related to other factors, which is recognized in other comprehensive income, net of applicable taxes. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.
Loans Held for Investment
Loans held for investment are those that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Loans are typically secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income using a level yield methodology and a method approximating the level yield methodology.
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual
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impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Companys loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including managements assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Companys loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from managements assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Companys allowance, and therefore the Companys financial position, liquidity or results of operations.
Transfers of Financial Assets
Management accounts for the transfers of financial assets as sales when control over the assets has been surrendered. Control is surrendered when the assets have been isolated, a transferee obtains the right to pledge or exchange the transferred assets and there is no agreement to repurchase the assets before their maturity. Management believes the loan participations sold subject to this guidance met the condition to be treated as a sale. For securities sold under agreements to repurchase, these do not meet the sale criteria and are included in securities available for sale and repurchase agreements are reflected on the consolidated balance sheets.
Stock-based Compensation
We grant stock options and restricted stock to our employees and directors. We record the related compensation expense based on the grant date fair value calculated in accordance with the authoritative guidance issued by FASB. We recognize these compensation costs on a straight-line basis over the requisite service period of the award. We estimate the grant date fair value of stock options using the Black-Scholes valuation model. Stock-based compensation expense related to awards of restricted stock is based on the fair value at the grant date.
The determination of fair value using the Black-Scholes model is affected by the price of our common stock, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and our stock price volatility. As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, based on our board of directors assessment of objective and subjective factors that it believed were relevant. The factors considered by our board of directors included the prices of known transactions in our common stock, the book value per share of our common stock, and our board of directors understanding of pricing multiples for comparable financial institutions that are not publicly traded.
The assumptions underlying these valuations represented managements best estimate, which involved inherent uncertainties and the application of managements judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.
Emerging Growth Company
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have decided not
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to take advantage of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Recently Issued Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of March 31, 2018, see Note 1 of our unaudited consolidated financial statements as of and for the three months ended March 31, 2018 and 2017, and Note 1 of our audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016, included elsewhere in this prospectus.
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Our Company
We are a bank holding company that operates through our wholly owned subsidiary, Coastal Community Bank. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. We focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington. We believe that the size, growth and economic strength of the Puget Sound region provide us with significant opportunities for long-term growth and profitability. We currently operate 13 full-service banking locations, 10 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and three of which are located in neighboring counties (one in King County and two in Island County). As of March 31, 2018, we had total assets of $831.0 million, total loans of $678.5 million, total deposits of $727.3 million and total shareholders equity of $66.9 million.
Our History and Growth
We are a Washington corporation that was formed on July 9, 2003, to become the holding company for Coastal Community Bank, which commenced operations in 1997 and to which we refer in this prospectus as the Bank. The Bank was formed by local business leaders who recognized the opportunity to create a bank that could meet the financial needs of the community, make decisions locally and support the communities it serves.
We have focused on achieving our growth organically, without engaging in mergers or branch acquisitions. Our net income and earnings per share for the three months ended March 31, 2018, were $1.8 million and $0.20, respectively. Including the negative impact of P.L. 115-97, commonly known as the Tax Cuts and Jobs Act, on our earnings in 2017, our net income and earnings per share for fiscal year 2017 were $5.4 million and $0.59, respectively. The following tables illustrate our income and balance sheet growth as of or for the quarter ended March 31, 2018, and the quarter ended March 31, 2017 (with respect to adjusted net income and adjusted earnings per share), and the years ended December 31, 2017, 2016, 2015, 2014 and 2013. (Dollars in millions except per share amounts.)
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(1) | Adjusted net income and adjusted earnings per share for the year ended December 31, 2017, exclude the impact of the revaluation of our deferred tax assets as a result of the reduction in the corporate income tax rate as a result of the Tax Cuts and Jobs Act. See our reconciliation of non-GAAP financial measures to our most directly comparable GAAP financial measures in the section entitled GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. See also Selected Historical Consolidated Financial Data. |
(2) | We define core deposits more narrowly than many other banks and institutional data services. For us, core deposits consist of total deposits less all time deposits. |
Competitive Strengths
We believe the following strengths differentiate us from our competitors and position us to execute our business strategy successfully:
Premier local bank in the Puget Sound region. We are the largest locally headquartered bank in Snohomish County, measured by deposit market share. Our success has made us attractive to lenders who prefer to work in a community bank setting and customers who seek the personal attention of a community bank. As further described in Our Markets below, we believe that our primary market, the Puget Sound region, which is located in northwest Washington, provides us with an advantage over other community banks in Washington in terms of growing our loans and deposits, as well as increasing profitability and building shareholder value. The net proceeds of this offering to us will enable us to serve larger customers through higher legal lending limits. Additionally, having publicly traded common stock will further enhance our ability to attract and retain talented bankers. We intend to continue expanding our physical presence in Snohomish and neighboring counties and believe we can continue to increase our market share in the Puget Sound region and surrounding counties.
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Attractive core deposit franchise. We have a valuable deposit franchise supported by a substantial level of core deposits, which we define as total deposits less all time deposits, and a high level of noninterest bearing accounts. As of March 31, 2018, core deposits comprised 87.7% of total deposits and 94.0% of total loans, while noninterest bearing core deposits comprised 34.9% of total deposits, up from 30.6% at December 31, 2013. None of our deposits were brokered or internet-sourced deposits at March 31, 2018. Our core deposit base results from our emphasis on banking relationships over transactional banking. We believe that our robust core deposit generation is powered by our strong personal service, visibility in our communities, broad commercial banking and treasury management product offerings, and convenient services such as remote deposit capture and commercial internet banking. We also employ deposit-focused business development officers to generate deposit relationships.
The following table illustrates the improvement of our core deposit base as a percent of total deposits and as a percent of total loans:
Balance Sheet Funded by Core Deposits (Total Deposits Less Time Deposits)
Scalable operating model. We have invested in employees and infrastructure to enhance and expand our capabilities and support the growth of our franchise. In particular, we strive to adopt the latest technology to better serve our customer base and improve our operational efficiency. These investments include increasing staffing of our credit administration, finance and information technology departments and developing a full range of commercial and consumer banking services. We offer our retail customers internet and mobile banking with peer-to-peer payments. We offer our commercial customers internet banking, remote deposit capture and online treasury management tools. In addition, we use online tools to streamline the origination of small commercial loans. We believe these investments will support our future growth in a cost-effective manner. Our investments in technology and infrastructure have provided us with a scalable operating platform and organizational infrastructure that will allow us to continue to improve our operating leverage and continue our growth without significant investments in the near term.
Experienced senior management team. Our leadership team consists of experienced banking executives with strong ties to our markets, many of whom have experience working at larger financial institutions.
| Eric M. Sprink, our President and Chief Executive Officer, has over 27 years of experience in the financial services industry, including 12 years in the Puget Sound region. Prior to joining the Company in 2006, Mr. Sprink held leadership positions with several financial institutions in corporate finance, retail banking, commercial lending, private banking and trust management. |
| Joel G. Edwards, our Chief Financial Officer, has over 32 years of experience in the financial services industry, including 23 years in the Puget Sound region. He has served as chief financial officer for both privately held and publicly traded Washington banking institutions. Mr. Edwards joined the Company as Chief Financial Officer in 2012. |
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| Russ A. Keithley, our Chief Lending Officer, has over 28 years of experience in the financial services industry, all in the Puget Sound region. Prior to joining the Company in 2012, Mr. Keithley served as chief lending officer and chief credit officer at other financial institutions. |
Diversified loan portfolio. We have an attractive loan mix, with 12.8% C&I loans, 24.9% owner-occupied CRE loans, 32.8% non-owner-occupied CRE loans and 13.4% one- to four-family residential loans at March 31, 2018. Approximately 37.7% of our loan portfolio is comprised of owner-operated business loans, which includes C&I and owner-occupied CRE loans on a combined basis, and 48.6% of our portfolio consists of loans for investor-owned properties and projects, which includes non-owner-occupied CRE loans, multi-family loans and construction and land development loans on a combined basis. We believe that our knowledgeable and prudent approach to real estate lending results in relatively lower losses caused by defaults, as compared to other types of commercial lending.
Well positioned for a rising rate environment. In anticipation of a rising rate environment, we have focused our business to emphasize the origination of floating-rate loans in our real estate loan portfolio and limited the number of long-term, fixed-rate loans. As of March 31, 2018, approximately 56.0% of our total loan portfolio had floating or adjustable interest rates. Additionally, we currently fund the majority of our loan portfolio with core deposits, which represented 94.0% of loans as of March 31, 2018, and which we believe will re-price more slowly than our assets. As of March 31, 2018, our one-year cumulative re-pricing gap to total assets of 25% was in the 78th percentile of banks nationwide, according to data obtained through S&P Global.
Disciplined underwriting and credit administration. Our management and credit administration team fosters a strong risk management culture supported by comprehensive policies and procedures for credit underwriting, funding, and loan administration and monitoring that we believe has enabled us to establish excellent credit quality. We monitor categories of lending activity within our portfolio and establish sub-limits that we review regularly and adjust in response to changes in our lending strategy and market conditions.
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The positive impact of our disciplined underwriting and credit administration is demonstrated in the graph below, which shows the decrease in our nonperforming assets and our charge-off history as of and for the three months ended March 31, 2018, and the twelve months ended December 31, 2017, 2016, 2015, 2014 and 2013.
Our Business Strategy
We position ourselves as an attractive local community bank alternative to larger, more impersonal financial services companies. We believe that banking industry consolidation and branch rationalizations have led to an underserved base of small and medium sized businesses, many of which prefer to bank with a local financial institution with agile, highly responsive decision-making capabilities. Our management teams experience and established presence in our market area gives us valuable insight into the local market, allowing us to recruit talented lenders and attract high-quality customer relationships. We seek to develop long-term relationships by offering a wide array of deposit and treasury products and services to complement our loan products and by delivering high-quality customer service.
The following is a more detailed description of our business strategy:
Strategically expand. We aim to continuously enhance our customer base, increase loans and deposits and expand our overall market share, and we believe that the Puget Sound region specifically has significant organic growth opportunities. We have pursued measured growth through strategic de novo branch expansion. In the last five years, we have added five branches: two in 2013, two in 2015 and one in 2017. As we identify attractive communities for expansion, we seek branch managers, lenders and business development officers prior to establishing a physical presence in any area. We intend to continue expanding our physical presence in Snohomish and neighboring counties when good opportunities that meet our requirements become available.
While acquisitions have not been a driver of our historic growth, we periodically evaluate opportunities to expand through strategic acquisitions. We believe there are several community banks that could be a natural fit for our franchise and could meaningfully enhance our value, and we follow a disciplined approach when evaluating any acquisition opportunities.
Organically grow our loan portfolio and lending staff. We have successfully expanded our loan portfolio by training and encouraging the growth of our junior lenders and by recruiting additional lenders in our existing and target markets. We believe we will benefit from our commitment to developing the next generation of talented lenders. We have created a culture in which our more seasoned lenders train their junior counterparts, enabling them to generate additional loan relationships as they mature in the business. Additionally, by actively involving junior lenders, our senior lenders gain additional flexibility to expand their own relationships. In addition to developing our junior lenders, we seek to hire additional seasoned lending teams. We believe we are an attractive destination for top talent because we offer a platform of sophisticated product and service capabilities as well as the freedom and flexibility to follow customers in our market area without imposing strict territorial limitations on our lenders. Additionally, we believe that having a marketable common stock as the result of this offering will
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assist us in recruiting talented personnel through our having the ability to offer the possibility of stock-based incentive compensation. We believe that our commitment to the development of our lenders will lead to long-term continuity in personnel and the recruitment and retention of high-quality lenders in our markets.
Fund growth through core deposits. We fund our loan growth primarily through customer deposits, as reflected by our ratios of core deposits to total deposits and core deposits to total loans of 87.7% and 94.0%, respectively, as of March 31, 2018. The strength of our deposit franchise results from our development and maintenance of long-standing customer relationships. Our relationship managers and branch managers actively seek deposit relationships with our loan customers. We also employ business development officers to generate these relationships. We attract deposits from our commercial customers by providing them with personal service, a broad suite of commercial banking and treasury management products and convenient services such as remote deposit capture and commercial internet banking.
Dedication to community banking. We attribute our success to our adherence to the basic principles of community banking: we know our markets and our customers, and we are meaningfully contributing members of our communities. Our employees volunteer with, serve on the boards of and contribute to dozens of local organizations, and, in 2017, we contributed the most volunteer hours per employee of the 75 companies ranked by the Puget Sound Business Journal. We empower our employees of all levels to make appropriate decisions on customer products and services. By creating expectations of high-quality service and enabling our employees to deliver that service, we believe we have created an environment that attracts both employees and customers.
Increase utilization of technology. We actively explore opportunities to use technology to improve efficiency, deliver superior service and drive growth without compromising our underwriting standards. We have installed cash recyclers in every branch, deployed automatic teller machines, automated portions of the origination process for commercial loans and implemented instant issuance of debit and credit cards. We also provide commercial internet banking, remote deposit capture and online treasury management tools, as well as mobile and internet banking and peer-to-peer payment capabilities. We work diligently to make banking easier for small business owners, enabling them to focus on their businesses. Additionally, we actively recognize and monitor the potential impacts that emerging technologies may have on the banking landscape. We periodically evaluate strategic partnerships with technology-focused companies that we believe will benefit our employees, customers and shareholders, generate additional fee income, enhance our product offerings, monitor our enterprise risk, or otherwise enable us to identify process or cost efficiencies.
Our Markets
We define our market broadly as the Puget Sound region in the state of Washington, which encompasses the Seattle MSA, the metropolitan areas of Olympia, Bremerton and Mount Vernon, and Island County. The Seattle MSA includes Snohomish County (which contains the city of Everett), King County (which contains the cities of Seattle and Bellevue) and Pierce County (which contains the city of Tacoma). The Puget Sound region, which comprises over 60% of the population of the state of Washington as well as the number of businesses located therein, according to data obtained through S&P Global, is a growing market, currently with a population of approximately 4.7 million, over 178,000 businesses and $115 billion of deposits. We believe that the Puget Sound region specifically has significant organic growth opportunities.
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The following table shows certain demographic information regarding our market area:
Market Area |
Number of Coastal Branches |
Total Deposits in Market ($ in millions) |
Population | Number of Businesses |
Median Household Income ($) |
April 2018 Unemployment Rate (% ) |
||||||||||||||||||||||||||
2018 Estimated |
Growth | |||||||||||||||||||||||||||||||
2013-2018 | 2018-2023 | |||||||||||||||||||||||||||||||
Estimated | Projected | |||||||||||||||||||||||||||||||
Puget Sound Region |
||||||||||||||||||||||||||||||||
Seattle-Tacoma-Bellevue MSA |
11 | $ | 104,715 | 3,885,514 | 9.0 | % | 6.7 | % | 150,558 | $ | 82,186 | 3.6 | % | |||||||||||||||||||
King County (Seattle & Bellevue) |
1 | 81,779 | 2,198,918 | 9.7 | % | 7.0 | % | 96,918 | 90,281 | 3.0 | % | |||||||||||||||||||||
Snohomish County (Everett) |
10 | 11,640 | 807,101 | 10.0 | % | 6.8 | % | 23,864 | 83,174 | 3.3 | % | |||||||||||||||||||||
Pierce County (Tacoma) |
0 | 11,296 | 879,495 | 6.6 | % | 6.0 | % | 29,776 | 65,896 | 5.4 | % | |||||||||||||||||||||
Olympia-Tumwater MSA |
0 | 3,539 | 282,330 | 8.0 | % | 6.5 | % | 11,709 | 66,766 | 5.0 | % | |||||||||||||||||||||
Bremerton-Silverdale MSA |
0 | 3,046 | 270,215 | 3.6 | % | 5.0 | % | 10,443 | 72,338 | 5.0 | % | |||||||||||||||||||||
Mount Vernon-Anacortes MSA |
0 | 2,466 | 126,007 | 5.1 | % | 5.1 | % | 5,639 | 60,361 | 5.4 | % | |||||||||||||||||||||
Island County |
2 | 1,134 | 84,841 | 6.0 | % | 5.2 | % | 3,354 | 64,150 | 5.6 | % | |||||||||||||||||||||
Total Puget Sound Region |
13 | $ | 114,900 | 4,648,907 | 8.5 | % | 6.6 | % | 181,703 | - | - |
Sources: S&P Global and the U.S. Bureau of Labor Statistics.
We are the largest locally headquartered bank by deposit market share in Snohomish County, according to data from the FDIC as of June 30, 2017, at which date we had a five percent deposit market share in Snohomish County. We aim to continuously enhance our customer base, increase loans and deposits and expand our overall market share in Snohomish County. In light of our market position and our business strategy, we do not regularly compete for commercial or retail deposits in the city of Seattle, and we believe this strategic decision has enabled us to generate low cost core deposits to fund our loan growth.
The following table shows our market position in Snohomish County:
Institution (Headquarter State) |
Overall Rank |
In-Market HQ Rank |
Deposits in Market ($ in millions) |
Number of Branches |
Deposit Market Share (%) |
|||||||||||||||
Bank of America Corp. (NC) |
1 | $ | 2,561 | 21 | 22.0 | % | ||||||||||||||
JPMorgan Chase & Co. (NY) |
2 | 1,757 | 25 | 15.1 | % | |||||||||||||||
Wells Fargo & Co. (CA) |
3 | 1,480 | 19 | 12.7 | % | |||||||||||||||
U.S. Bancorp (MN) |
4 | 710 | 12 | 6.1 | % | |||||||||||||||
KeyCorp (OH) |
5 | 583 | 18 | 5.0 | % | |||||||||||||||
Coastal Financial Corp. (WA) |
6 | 1 | 578 | 10 | 5.0 | % | ||||||||||||||
Union Bank of California (CA) |
7 | 545 | 8 | 4.7 | % | |||||||||||||||
Opus Bank (CA) |
8 | 438 | 6 | 3.8 | % | |||||||||||||||
Heritage Financial Corp. (WA) |
9 | 418 | 8 | 3.6 | % | |||||||||||||||
Washington Federal Inc. (WA) |
10 | 416 | 9 | 3.6 | % | |||||||||||||||
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Total For Institutions In Market |
25 | 6 | $ | 11,640 | 180 |
Note: Deposits are as of June 30, 2017, the most recent deposit data available from the FDIC.
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Snohomish County. Our headquarters are located in Everett, Washington, which is the largest city in, and the county seat of, Snohomish County with a population of approximately 113,000 as of January 1, 2018. Snohomish is the third largest county by population in the state of Washington, with an estimated population of approximately 800,000 as of January 1, 2018, and the second largest county by total deposits, with $11.6 billion in total deposits as of June 30, 2017, according to data obtained through S&P Global.
The Snohomish County economy is one of the strongest in the United States, boasting a rapidly growing population with a median annual household income of $83,174, the second highest in Washington and significantly above the national average, as of January 1, 2018, and a low unemployment rate of 3.3% as of April 2018. Snohomish has seen consistent growth in service-providing jobs, which account for more than 72% of the jobs in the county. Jobs related to trade, transportation and utilities, retail, and education and health services are the largest sub-categories of service-providing jobs. The Boeing Company, which employed 34,500 people in 2017, is the largest employer in Snohomish County. The second and third largest employers in Snohomish County, Providence Regional Medical Center and the Tulalip Tribes employed 4,775 and 3,200 full-time employees in 2017, respectively, and the U.S. Navy has a meaningful presence in Everett and was the fourth largest employer in Snohomish County in 2017. In addition, Paine Field in Everett will open to commercial air traffic in 2018, and Southwest Airlines, Alaska Airlines, and United Airlines have announced plans to add routes to and from Paine Field, primarily to and from cities in the western United States. We believe this development will lead to further population growth and increase economic development in Snohomish County.
Snohomish County is a large, addressable market with a lower cost of doing business relative to neighboring King County, which includes the cities of Seattle and Bellevue. Based on available data, we believe that a significant portion of the Snohomish County population consists of a mobile commuter work force with relatively easy access to nearby technology and industrial centers. Our location in Snohomish County enables us to have a lower cost structure and lower cost deposits, compared to banks in King County, while also providing us ready access to its larger economy.
King County. King County borders Snohomish County to the south and is the largest county by population in the state of Washington. It is the 13th largest county in the United States with an estimated population of 2.2 million and total deposits of $82 billion as of June 30, 2017, according to the FDICs Summary of Deposits. Additionally, the population growth of King County was the second fastest in Washington from 2013 to 2018. While we do not have significant physical presence in King County, our locations in Snohomish County enable us to take advantage of the abundant lending and business opportunities there.
King County, which contains the city of Seattle, boasts headquarters to 10 Fortune 500 companies, including Amazon, Costco, Microsoft and Starbucks. Additionally, 31 Fortune 500 companies currently operate research and engineering hubs in Seattle, as compared to seven companies in 2010, according to The Atlantic. Seattle has become a favored location for technology companies and, according to CBRE Group, Inc., is currently one of the top two tech markets in the United States, ranking behind only the San Francisco Bay Area.
Our Banking Services
Lending Activities
We focus primarily on commercial lending, with an emphasis on commercial real estate. We offer a variety of loans to business owners, including commercial and industrial loans and commercial real estate loans secured by owner-occupied commercial properties. We also offer non-owner occupied commercial real estate loans, multi-family loans, and construction and development loans to investors and developers. To a lesser extent, we also offer residential real estate loans and consumer loans.
Commercial and Industrial Loans. We make commercial and industrial loans, including term loans, Small Business Administration, or SBA, loans, commercial lines of credit, working capital loans, equipment financing,
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borrowing base loans, and other loan products, that are underwritten on the basis of the borrowers ability to service the debt from income. We take as collateral a lien on general business assets including, among other things, available real estate, accounts receivable, inventory and equipment and generally obtain a personal guaranty from the borrower or principal. Our commercial lines of credit typically have a term of one year and have variable interest rates that adjust monthly based on the prime rate. Other commercial and industrial loans generally have fixed interest rates and terms that typically range from one to five years depending on factors such as the type and size of the loan, the financial strength of the borrower/guarantor and the age, type and value of the collateral. Terms greater than five years may be appropriate in some circumstances, based upon the useful life of the underlying asset being financed or if some form of credit enhancement, such as an SBA guarantee, is obtained. As of March 31, 2018, we had $86.7 million of commercial and industrial loans. These loans had a weighted average maturity of approximately 3.4 years.
We participate in the SBA 7(a) program in order to meet the needs of our small business community. As an approved participant in the SBA Preferred Lenders Program, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBAs 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program. We typically sell in the secondary market the SBA-guaranteed portion (generally 75% of the principal balance) of the SBA loans we originate. As of March 31, 2018, we had $17.2 million of SBA loans in our portfolio, of which $2.5 million was guaranteed by the SBA.
Commercial and industrial loans are often larger and involve greater risks than other types of lending. Because payments on commercial loans are often dependent on the operating cash flows of the borrowers business, repayment of these loans is often more sensitive to adverse conditions in the general economy, which in turn increases repayment risk. We also face the risk that losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations due to the larger average size of commercial loans as compared with other loans, such as residential loans, as well as collateral that is generally less readily marketable than collateral for consumer loans, such as residential real estate and automobiles.
Commercial Real Estate. We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. Loans secured by owner-occupied real estate comprised 24.9% of our commercial real estate portfolio at March 31, 2018. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores and gas stations, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10-to-25 year period with balloon payments at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent Federal Home Loan Bank rates. At March 31, 2018, approximately 38.0% of the commercial real estate loan portfolio consisted of fixed rate loans. Loan amounts generally do not exceed 75% of the lesser of the appraised value or the purchase price.
We make loans under the SBA 504 program to small businesses to provide funding for the purchase of real estate. Under this program, we provide up to 90% financing of the total purchase cost, represented by two loans to the borrower. The first lien loan is generally a long-term, fully amortizing, fixed-rate loan made in the amount of 50% of the total purchase cost. The second lien loan is a short-term, interest only, adjustable rate loan made in the amount of 40% of the total purchase cost, which is generally paid off within three to six months after full receipt of loan proceeds from a certified development corporation that provides long-term financing directly to the borrower. At March 31, 2018, we held $12.2 million in first lien SBA 504 loans.
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Our multi-family residential loan portfolio is comprised of loans secured by apartment buildings, residential mixed-use buildings and, to a lesser extent, senior living centers.
Commercial real estate lending with respect non-owner occupied properties typically involves higher loan principal amounts and the repayment is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. We require our commercial real estate loans to investors to be secured by well-managed properties with adequate margins and generally obtain a guaranty from responsible parties.
Construction, Land and Land Development Loans. We make loans to established builders to construct residential properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single family homes in our market areas. We also make loans for the acquisition of undeveloped land. Construction loans are typically disbursed as construction progresses and carry either fixed or variable interest rates. Our construction and development loans typically have terms that range from six months to two years depending on factors such as the type and size of the development and the financial strength of the borrower/guarantor. Loans are typically structured with an interest only construction period and mature at the completion of construction.
Construction and land development loans typically involve more risk than other types of lending products because repayment of these loans is dependent, in part, on the sale or refinance of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. Moreover, these loans are typically based on future estimates of value and economic circumstances, which may differ from actual results or be affected by unforeseen events. If the actual circumstances differ from the estimates made at the time of approval of these loans, we face the risk of having inadequate security for the repayment of the loan. Further, if we foreclose on the loan, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
Residential Real Estate. We originate adjustable-rate mortgage, or ARM, loans for our portfolio and operate as a mortgage broker for Quicken Loans for customers who want a 15-year to 30-year, fixed-rate mortgage loan. Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate. We also originate home equity lines of credit and home equity term loans for our portfolio. Home equity lines of credit have variable interest rates, while home equity term loans are fixed for up to 5-1/2 years but can be amortized up to a maximum of 180 months with a balloon payment at maturity.
We purchase residential mortgages originated by other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. These loans purchased typically have a fixed rate with a term of 15 to 30 years, and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards. As of March 31, 2018, we held $37.9 million in purchased residential real estate mortgage loans.
Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.
Consumer and Other Loans. We make a variety of loans to individuals for personal and household purposes, including auto, boat and recreational vehicle loans and secured term loans. We also offer unsecured lines of
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credit including overdraft protection. Consumer loans are underwritten based on the individual borrowers income, current debt level, past credit history and the value of any available collateral. The terms of consumer loans vary considerably based upon the loan type, nature of collateral and size of the loan.
Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than residential real estate mortgage loans. Consumer loan collections are dependent on the borrowers continuing financial stability and are therefore more likely to be affected by adverse personal circumstances, such as a loss of employment, divorce, or unexpected medical costs.
Credit Administration and Loan Review
We control credit risk both through disciplined underwriting of each transaction, as well as active credit management processes and procedures to manage risk and minimize loss throughout the life of a loan. We seek to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in which our business customers are engaged. We have developed tailored underwriting criteria and credit management processes for each of the various loan product types we offer our customers.
Underwriting. In evaluating each potential loan relationship, we adhere to a disciplined underwriting evaluation process that includes the following:
| understanding the customers financial condition and ability to repay the loan; |
| verifying that the primary and secondary sources of repayment are adequate in relation to the amount and structure of the loan; |
| observing appropriate loan-to-value guidelines for collateral secured loans; |
| maintaining our targeted levels of diversification for the loan portfolio, both as to type of borrower and type of collateral; and |
| ensuring that each loan is properly documented with perfected liens on collateral. |
Loan Approval Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. We have established several levels of lending authority that have been delegated by the board of directors to our management credit committee, Chief Executive Officer, Chief Credit Officer and other personnel in accordance with our loan policy. Authority limits are based on the total exposure of the borrower and are conditioned on the loan conforming to the policies contained in the loan policy. Any loan policy exceptions are fully disclosed to the approving authority.
Ongoing Credit Risk Management. In addition to the tailored underwriting process described above, we perform ongoing risk monitoring and review processes for credit exposures. Although we grade and classify our loans internally, we engage an independent third-party professional firm to perform regular loan reviews and confirm loan classifications. We strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before they create a loss. We record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses incurred in the loan portfolio.
In general, whenever a particular loan or overall borrower relationship is downgraded from a pass grade to a watch or substandard grade based on one or more standard loan grading factors, our relationship manager (who is typically the loan officer) and credit team members engage in active evaluation of the asset to determine the appropriate resolution strategy. Management regularly reviews the status of the watch list and classified assets portfolio as well as the larger credits in the portfolio.
Concentrations of Credit Risk
Most of our lending activity is conducted with businesses and individuals in our market area. As of March 31, 2018, approximately 86% of the loans in our loan portfolio (measured by dollar amount) were secured by real
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estate, or made to borrowers who live or conduct business, in the Puget Sound region. As a result, a substantial majority of our loan portfolio is dependent upon the economic environment of the Puget Sound region. We have a limited number of loans secured by properties located outside of the Puget Sound region, most of which are made to borrowers who are well-known to us because they are headquartered or reside within our market area.
Our total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans represented 366.8% of the Banks total risk-based capital at March 31, 2018. Interagency guidance on commercial real estate concentrations describe sound risk management practices, which include board and management oversight, portfolio management, management information systems, market analysis, portfolio stress testing and sensitivity analysis, credit underwriting standards, and credit risk review functions. We believe we have adequately implemented these practices in order to monitor concentrations in commercial real estate in our loan portfolio.
Lending Limits
Our lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal lending limit on loans to a single borrower based on the Banks capital level. The dollar amounts of the Banks lending limit increases or decreases as the Banks capital increases or decreases. The Bank is able to sell participations in its larger loans to other financial institutions, which allows it to better manage the risk and exposure involved with larger loans and to meet the lending needs of its customers requiring extensions of credit in excess of Bank or regulatory limits.
The Banks legal lending limit as of March 31, 2018, on loans to a single borrower was $17.6 million, and is expected to increase following the completion of this offering.
Our loan policies provide general guidelines for loan-to-value ratios that restrict the size of loans to a maximum percentage of the value of the collateral securing the loans, which percentage varies by the type of collateral. Our internal loan-to-value limitations also follow all limits established by applicable law.
Deposit Products
Our deposits serve as the primary funding source for lending, investing and other general banking purposes. We provide a full range of deposit products, including a variety of checking and savings accounts, time deposits, and money market accounts. We also provide a wide range of deposit services, including debit cards, remote deposit capture, online banking, mobile banking, and direct deposit services. We also offer business accounts and cash management services, including business checking and savings accounts and treasury services. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community-focused marketing. We emphasize obtaining deposit relationships at loan origination. Our focus on relationship banking combined with our robust business banking services has led to approximately 77% of our loan customers having deposit relationships with us as of March 31, 2018.
Investments
As of March 31, 2018, the fair value of our investment portfolio, which represented 4.5% of assets, totaled $37.3 million and had an average effective yield of 1.55% and an estimated duration of approximately 5.7 years. The primary objectives of the investment portfolio are to provide a source of liquidity and provide collateral that can be readily sold or pledge for public deposits or other business purposes. At March 31, 2018, 87.3% of our investment portfolio consisted of U.S. Treasury securities. The remainder of our securities portfolio is invested in U.S. Government agency securities, agency collateralized mortgage obligations and mortgage-backed securities, and municipal bonds. We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell or pledge investment securities from time to time to adjust our exposure to interest rates or to provide liquidity to meet loan demand.
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Competition
We operate in a highly competitive industry and in a highly competitive market. Commercial real estate lending in the Puget Sound region attracts keen competition from large banking institutions with national operations, as well as mid-sized regional banking institutions. We compete with other community banks, savings and loan associations, credit unions, mortgage companies, insurance companies, finance companies and other financial intermediaries. The primary factors driving competition for deposits are customer service, interest rates, fees charged, branch locations and hours, online and mobile banking functionality, and the range of products offered. The primary factors driving competition for our lending products are customer service, range of products offered, price, reputation, and quality of execution. We believe the Bank is a strong competitor in our markets, however other competitors have certain advantages over us. Among them, many large institutions have the ability to finance extensive advertising campaigns, maintain extensive branch networks and make larger technology investments, and to offer services which we do not offer. The higher capitalization of the larger banking institutions permits them to have higher lending limits than those of the Bank. Some of our competitors have other advantages, such as tax exemption in the case of credit unions, and to some extent, lesser regulation in the case of mortgage companies and finance companies.
According to the FDIC, we are the 19th largest insured depository institution in the Seattle MSA and the sixth largest insured depository institution in Snohomish County, as measured by deposits as of June 30, 2017.
Information Technology Systems
We have made and continue to make significant investments in our information technology systems and staff for our banking and lending operations and treasury management activities. We believe this investment will support our continued growth and enable us to enhance our capabilities to offer new products and overall customer experience, and to provide scale for future growth and acquisitions. We utilize a nationally recognized software vendor, and their support allows us to outsource our data processing. Our internal network and e-mail systems are outsourced to a third party and we have a back-up site in Glendale, Arizona. This back-up site provides for redundancy and disaster recovery capabilities.
The majority of our other systems including our electronic funds transfer, transaction processing and our online banking services are hosted by third-party service providers. The scalability of this infrastructure will support our growth strategy. In addition, the tested capability of these vendors to automatically switch over to standby systems should allow us to recover our systems and provide business continuity quickly in case of a disaster.
Our Employees
As of March 31, 2018, we had 159 full-time equivalent employees. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
Legal Proceedings
From time to time we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any currently pending legal proceedings will have a material adverse effect on our business, financial condition or earnings.
Our Properties
Our corporate headquarters is located at 5415 Evergreen Way, Everett, WA 98203. In addition to our corporate headquarters, which includes our Evergreen branch, we operated 12 other branch offices as of March 31, 2018. We own our corporate headquarters and three of our other branch offices and lease the remainder of our branch offices. The leases on our branch offices expire in 2021 through 2029. We believe that these facilities and additional or alternative space available to us are adequate to meet our needs for the foreseeable future.
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General
Insured banks, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Washington DFI, the Board of Governors of the Federal Reserve, the FDIC and the CFPB. Furthermore, tax laws administered by the Internal Revenue Service, or IRS, and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the Treasury Department and mortgage related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and Urban Development and agencies such as Ginnie Mae and Freddie Mac, and SBA regulations with respect to small business loans, have an impact on our business. The effect of these statutes, regulations, regulatory policies and rules are significant to our operations and results, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of insured banks, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than their shareholders. These federal and state laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can impact the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, sensitivity to market risk and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to us and the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
Bank Holding Company Regulation
Since we own all of the capital stock of the Bank, we are a bank holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act. As a result, we are primarily subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve.
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserves prior approval before:
| acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will, directly or indirectly, own or control 5% or more of the banks voting shares; |
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| acquiring all or substantially all of the assets of any bank; or |
| merging or consolidating with any other bank holding company. |
Additionally, the BHC Act provides that the Federal Reserve may not approve any of the above transactions if such transaction would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserves consideration of financial resources includes a focus on capital adequacy, which is discussed in the section entitled Bank Regulation and SupervisionCapital Adequacy. The Federal Reserve also considers the effectiveness of the institutions in combating money laundering, including a review of the anti-money laundering program of the acquiring bank holding company and the anti-money laundering compliance records of a bank to be acquired as part of the transaction. Finally, the Federal Reserve takes into consideration the extent to which the proposed transaction would result in greater or more concentrated risks to the stability of the U.S. banking or financial system.
Under the BHC Act, if well-capitalized and well-managed, we or any other bank holding company located in Washington may purchase a bank located outside of Washington without regard to whether such transaction is prohibited under state law. Conversely, a well-capitalized and well-managed bank holding company located outside of Washington may purchase a bank located inside Washington without regard to whether such transaction is prohibited under state law. In each case, however, restrictions may be placed under state law on the acquisition of a bank that has only been in existence for a limited amount of time or will result in concentrations of deposits exceeding limits specified by statute. For example, Washington law currently prohibits a bank holding company from acquiring control of a Washington-based financial institution until the target financial institution has been in operation for at least five years.
Change in Bank Control
Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any persons or companys acquiring control of a bank holding company. Under a rebuttable presumption established by the Federal Reserve pursuant to the Change in Bank Control Act, the acquisition of 10% or more of a class of voting stock of a bank holding company would constitute acquisition of control of the bank holding company if no other person will own, control, or hold the power to vote a greater percentage of that class of voting stock immediately after the transaction or the bank holding company has registered securities under the Exchange Act. In addition, any person or group of persons acting in concert must obtain the approval of the Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding voting stock of a bank holding company, the right to control in any manner the election of a majority of the companys directors, or otherwise obtaining control or a controlling influence over the bank holding company.
Permitted Activities
Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of the voting shares of any company engaged in the following activities:
| banking or managing or controlling banks; and |
| any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking. |
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:
| factoring accounts receivable; |
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| making, acquiring, brokering or servicing loans and usual related activities in connection with the foregoing; |
| leasing personal or real property under certain conditions; |
| operating a non-bank depository institution, such as a savings association; |
| engaging in trust company functions in a manner authorized by state law; |
| financial and investment advisory activities; |
| discount securities brokerage activities; |
| underwriting and dealing in government obligations and money market instruments; |
| providing specified management consulting and counseling activities; |
| performing selected data processing services and support services; |
| acting as an agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and |
| performing selected insurance underwriting activities. |
The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding companys continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.
In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, thereby permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The BHC Act expressly lists the following activities as financial in nature:
| lending, exchanging, transferring, investing for others, or safeguarding money or securities; |
| insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state; |
| providing financial, investment, or economic advisory services; |
| issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; |
| underwriting, dealing in or making a market in securities; |
| engaging in other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks; |
| engaging in the United States in activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking or other financial operations abroad; |
| merchant banking through securities or insurance affiliates; and |
| insurance company portfolio investments. |
For us to qualify to become a financial holding company, we must be well-capitalized and well-managed. In addition, the Bank and any other depository institution subsidiary we control must be well-capitalized and well-managed and must have a CRA rating of at least satisfactory. Additionally, we must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. We have not elected to become a financial holding company at this time.
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Support of Subsidiary Institutions
The Federal Deposit Insurance Act and a Federal Reserve regulation require a bank holding company to serve as a source of financial and managerial strength to its bank subsidiaries. In addition, where a bank holding company has more than one FDIC-insured bank or thrift subsidiary, each of the bank holding companys subsidiary FDIC-insured depository institutions is responsible for any losses to the FDIC as a result of an affiliated depository institutions failure. As a result of a bank holding companys source of strength obligation, a bank holding company may be required to provide funds to a bank subsidiary in the form of subordinate capital or other instruments which qualify as capital under bank regulatory rules.
Repurchase or Redemption of Securities
A bank holding company that is not well capitalized or well managed, or that is subject to any unresolved supervisory issues, is required to give the Federal Reserve prior written notice of any purchase or redemption of its own then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the companys consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve.
Bank Regulation and Supervision
The Bank is subject to extensive federal and state banking laws and regulations that impose restrictions on and provide for general regulatory oversight of the operations of the Bank. These laws and regulations are generally intended to protect the safety and soundness of the Bank and the Banks depositors, rather than our shareholders. The following discussion describes the material elements of the regulatory framework that applies to the Bank.
Since the Bank is a commercial bank chartered under the laws of the state of Washington and is a member of the Federal Reserve System, it is primarily subject to the supervision, examination and reporting requirements of the Federal Reserve and the Washington DFI. The Federal Reserve and the Washington DFI regularly examine the Banks operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to take enforcement action to prevent the development or continuance of unsafe or unsound banking practices or other violations of law. The Banks deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous federal and state statutes and regulations that affect its business, activities and operations.
Branching
Under current Washington law, the Bank may open branch offices throughout Washington with the prior approval of the Washington DFI. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Washington. Under federal law, the Bank may establish branch offices with the prior approval of the Federal Reserve. Federal law allows a bank to branch into a new state by setting up a new branch if, under the laws of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch.
FDIC Insurance and Other Assessments
The Banks deposits are insured by the FDIC to the full extent provided in the Federal Deposit Insurance Act (currently $250,000 per deposit account), and the Bank pays assessments to the FDIC for that coverage. Under the FDICs risk-based deposit insurance assessment system, an insured institutions deposit insurance premium is computed by multiplying the institutions assessment base by the institutions assessment rate. An institutions
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assessment base equals the institutions average consolidated total assets during a particular assessment period, minus the institutions average tangible equity capital (that is, Tier 1 capital) during such period. For banks with less than $10.0 billion in total consolidated assets, the assessment rate is calculated using a financial ratios method based on a statistical model estimating the banks probability of failure over three years utilizing seven financial ratios (leverage ratio; net income before taxes/total assets; nonperforming loans and leases/gross assets; other real estate owned/gross assets; brokered deposit ratio; one year asset growth; and loan mix index) and a weighted average of supervisory ratings components. The current rule fixes the range of assessment rates from 1.5 basis points for an institution posing the least risk, to 30 basis points for an institution posing the most risk; and will further lower the range of assessment rates if the reserve ratio of the Deposit Insurance Fund increases to 2% or more. Banks with over $10.0 billion in total consolidated assets are required to pay a surcharge of 4.5 basis points on their assessment basis, subject to certain adjustments. The FDIC may also impose special assessments from time to time.
In addition to its risk-based insurance assessments, the FDIC also imposes Financing Corporation, or FICO, assessments to help pay the $780 million in annual interest payments on the approximately $8 billion of bonds issued in the late 1980s as part of the government rescue of the savings and loan industry. For the fourth quarter of 2017, the banks FICO assessment was equal to 0.11%, or 0.44% annually, per $100 of assessment base. FICO assessments will continue until all outstanding bonds mature in 2019.
Termination of Deposit Insurance
The FDIC may terminate its insurance of deposits of a bank if it finds that the bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act
The CRA requires that, in connection with examinations of insured depository institutions within their respective jurisdictions, the federal banking agencies will evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. The Federal Reserves evaluation of the Banks record of performance under the CRA is publicly available. A banks CRA performance is also considered in evaluating applications seeking approval for mergers, acquisitions, and new offices or facilities. Failure to adequately meet these criteria could result in additional requirements and limitations being imposed on the bank. Additionally, we must publicly disclose the terms of certain CRA-related agreements. The Bank received a Satisfactory rating at its most recent evaluation dated September 25, 2017.
Interest Rate Limitations
Interest and other charges collected or contracted for by the Bank are subject to applicable state usury laws and federal laws concerning interest rates.
Federal Laws Applicable to Consumer Credit and Deposit Transactions
The Banks loan and deposit operations are subject to a number of federal consumer protection laws, including:
| the Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers; |
| the Real Estate Settlement Procedures Act, imposing requirements on the settlement and servicing of residential mortgage loans; |
| the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities it serves; |
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| the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions; |
| the Fair Credit Reporting Act, or FCRA, governing the use and provision of information to credit reporting agencies; |
| the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by debt collectors; |
| the Service Members Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; |
| the Gramm-Leach-Bliley Act, governing the disclosure and safeguarding of sensitive non-public personal information of our clients; |
| the Right to Financial Privacy Act, imposing a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| the Electronic Funds Transfer Act governing automatic deposits to and withdrawals from deposit accounts and clients rights and liabilities arising from the use of automated teller machines and other electronic banking services; and |
| the rules and regulations of the CFPB and various federal agencies charged with the responsibility of implementing these federal laws. |
Capital Adequacy
The Federal Reserve has adopted risk-based and leverage capital adequacy requirements, pursuant to which they assess the adequacy of capital in examining and supervising banks and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. The federal banking regulators have adopted regulations implementing the Basel Capital Adequacy Accord, or Basel III, which had been approved by the Basel member central bank governors in 2010 as an agreement among the countries central banks and bank regulators on the amount of capital banks and their holding companies must maintain as a cushion against losses and insolvency. The U.S. Basel III rules minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. Bank holding companies with assets of less than $1.0 billion that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC, such as the Company, are exempt from the Federal Reserves risk-based-capital and leverage rules. Under the EGRRCPA, the Federal Reserve is required to increase this asset threshold to $3.0 billion by November 21, 2018.
In order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must maintain a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. Phase-in of the capital conservation buffer requirements began on January 1, 2016, and the requirements will be fully phased in on January 1, 2019. The capital conservation buffer requirement for 2018 is 1.875%. A banking organization with a buffer greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. A banking organization also would be prohibited from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. Effectively, the Basel III framework will require the Bank to meet minimum risk-based capital ratios of (i) 7% for common equity Tier 1 capital, (ii) 8.5% Tier 1 capital, and (iii) 10.5% total capital, once it is fully
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phased in. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organizations quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. When the rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action, or PCA, well-capitalized thresholds, which are described below under Prompt Corrective Action.
The U.S. Basel III rule includes stringent criteria for capital instruments to qualify as Tier 1 or Tier 2 capital. For instance, the rule effectively disallows newly-issued trust preferred securities as a component of a holding companys Tier 1 capital. However, depository institution holding companies with less than $15 billion in total assets may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. At March 31, 2018, the Company had $3.5 million of non-qualifying instruments includable in Tier 1 capital that were issued prior to May 19, 2010.
The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a banking institution could subject the institution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized insured depository institutions. Under this system, the federal banking regulators have established five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into which all insured depository institutions are placed. The federal banking agencies have specified by regulation the relevant capital thresholds and other qualitative requirements for each of those categories. For an insured depository institution to be well-capitalized under the PCA framework, it must have a common equity Tier 1 capital ratio of 6.5%, Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0%, and a leverage ratio of 5.0%, and must not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal regulator to meet and maintain a specific capital level for any capital measure. At March 31, 2018, the Bank qualified for the well-capitalized category.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. An undercapitalized institution has a capital ratio below any one of four thresholds: a common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, or a leverage ratio of 4.0%. The severity of the action depends upon the capital category in which the institution is placed. For example, institutions in all three undercapitalized categories are automatically restricted from paying distributions and management fees, whereas only an institution that is significantly undercapitalized or critically undercapitalized is restricted in its compensation paid to senior executive officers. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
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An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. Such a plan must include a guarantee from the institutions bank holding company that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the four consecutive calendar quarters. The holding companys obligation to fund a capital restoration plan is limited to the lesser of (i) 5% of an undercapitalized subsidiary institutions assets at the time it became undercapitalized and (ii) the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with Federal Reserve approval.
The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
Liquidity
Financial institutions are subject to significant regulatory scrutiny regarding their liquidity positions. This scrutiny has increased during recent years, as the economic downturn that began in the late 2000s negatively affected the liquidity of many financial institutions. Various bank regulatory publications, including Federal Reserve SR 10-6 (Funding and Liquidity Risk Management), address the identification, measurement, monitoring and control of funding and liquidity risk by financial institutions.
The U.S. federal banking regulators have introduced two new liquidity metrics for large banking organizations. The first metric is the liquidity coverage ratio, and it aims to require a financial institution to maintain sufficient high-quality liquid resources to survive an acute stress scenario that lasts for one month. The second metric is the net stable funding ratio, and its objective is to require a financial institution to maintain a minimum amount of stable sources relative to the liquidity profiles of the institutions assets, as well as the potential for contingent liquidity needs arising from off-balance sheet commitments, over a one-year horizon.
The federal banking regulators finalized the liquidity coverage ratio in September 2014, and proposed the net stable funding ratio in May 2016. While the liquidity coverage ratio and the proposed net stable funding ratio only apply to the largest banking organizations in the country, certain elements may filter down and become applicable to or expected of all insured depository institutions.
Payment of Dividends
We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our shareholders, is dividends the Bank pays to us as the Banks sole shareholder. Statutory and regulatory limitations apply to the Banks payment of dividends to us as well as to our payment of dividends to our shareholders. A corollary to the requirement that a bank holding company serve as a source of strength to its subsidiary banks is the Federal Reserve policy that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding companys ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Washington corporate law that prevent distributions to shareholders if, after giving effect to the distribution, we would not be able to pay our liabilities as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. In addition, in deciding whether or not to declare a dividend of any particular size, our board of directors must consider our and the Banks current and prospective capital, liquidity, and other needs.
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The Washington DFI and the Federal Reserve also regulate the Banks dividend payments. Under Washington law, a state-chartered bank may not pay a dividend in an amount greater than its retained earnings without approval. Under Federal Reserve regulations, the Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Banks net income during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the Federal Reserve.
The Banks payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institutions capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements providing that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
Restrictions on Transactions with Affiliates and Insiders
The Bank is subject to Section 23A of the Federal Reserve Act, which places limits on the amount of:
| a banks loans or extensions of credit to affiliates; |
| a banks investment in securities issued by affiliates; |
| assets a bank may purchase from affiliates; |
| loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; |
| a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate; |
| a banks transactions with an affiliate involving the borrowing or lending of securities to the extent they create credit exposure to the affiliate; and |
| a banks derivative transactions with an affiliate to the extent they create credit exposure to the affiliate. |
Subject to various exceptions, the total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, the above transactions also must meet specified collateral requirements and safety and soundness requirements. Under no circumstances may a bank purchase a low-quality asset from an affiliate.
The Bank is also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits a bank from engaging in the above transactions with affiliates, as well as other types of transactions set forth in Section 23B, unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions between the bank and third parties, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. There are also individual and aggregate limitations on loans to insiders and their related interests. The aggregate amount of insider loans generally cannot exceed the institutions total unimpaired capital and surplus. Insiders and banks are subject to enforcement actions for knowingly entering into insider loans in violation of applicable restrictions.
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Single Borrower Credit Limits
Under federal law, total loans and extensions of credit to a borrower may not exceed 15% of the Banks unimpaired capital and surplus. However, such loans may be in excess of that percentage, but not above 25%, if each loan in excess of 15% is fully collateralized by readily marketable collateral. Under Washington law, total loans and extensions of credit to a borrower may not exceed 20% of the Banks capital and surplus.
Commercial Real Estate Concentration Limits
In December 2006, the federal banking regulators issued guidance entitled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices to address increased concentrations in commercial real estate, or CRE, loans. In addition, in December 2015, the federal bank agencies issued additional guidance entitled Statement on Prudent Risk Management for Commercial Real Estate Lending. Together, these guidelines describe the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk. An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development, and other land representing 100% or more of the institutions capital, or (iv) total CRE loans representing 300% or more of the institutions capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk. As of March 31, 2018, the Banks total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represented 366.8% of its capital, thus exceeding the 300% target. However, the increase in the portfolio over the preceding 36 months was less than 50%.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting non-public personal information of their clients. Clients generally may prevent financial institutions from sharing non-public personal information with nonaffiliated third parties except under certain circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly offering a product or service with a nonaffiliated financial institution. Additionally, financial institutions generally are prohibited from disclosing consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.
Cybersecurity
Federal banking agencies pay close attention to the cybersecurity practices of banks and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council, or FFIEC, has issued several policy statements and other guidance for banks as new cybersecurity threats arise. FFIEC has recently focused on such matters as compromised customer credentials and business continuity planning. Examinations by the banking agencies now include review of an institutions information technology and its ability to thwart cyberattacks.
Consumer Credit Reporting
The FCRA imposes, among other things:
| requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, to place a fraud alert in the consumers credit file stating that the consumer may be the victim of identity theft or other fraud; |
| requirements for entities that furnish information to consumer reporting agencies to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; |
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| requirements for mortgage lenders to disclose credit scores to consumers in certain circumstances; and |
| limitations on the ability of a business that receives consumer information from an affiliate to use that information for marketing purposes. |
Anti-Terrorism, Money Laundering Legislation and OFAC
The Bank is subject to the Bank Secrecy Act and the USA Patriot Act. These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and accounts and other relationships intended to guard against money laundering and terrorism financing. The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a know your customer program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships. For many of these tasks a bank must keep records to be made available to its primary federal regulator. Anti-money laundering rules and policies are developed by a bureau within the Treasury Department , the Financial Crimes Enforcement Network, but compliance by individual institutions is overseen by its primary federal regulator.
The Bank has established appropriate anti-money laundering and customer identification programs. The Bank also maintains records of cash purchases of negotiable instruments, files reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify money laundering, tax evasion, or other criminal activities pursuant to the Bank Secrecy Act. The Bank otherwise has implemented policies and procedures to comply with the foregoing requirements.
The Treasury Departments Office of Foreign Assets Control, or OFAC, is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Company or the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Company or the Bank must freeze or block such account or transaction, file a suspicious activity report, and notify the appropriate authorities.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered, or that file reports, under the Exchange Act. In particular, the act established (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) responsibilities regarding financial statements for the chief executive officer and chief financial officer of the reporting company and new requirements for them to certify the accuracy of periodic reports; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violations of the federal securities laws. The legislation also established a new accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their public company audit clients.
Overdraft Fees
Federal Reserve Regulation E restricts banks abilities to charge overdraft fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
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The Dodd-Frank Act and the EGRRCPA
As final rules and regulations implementing the Dodd-Frank Act have been adopted, this law has significantly changed and is significantly changing the bank regulatory framework and affected the lending, deposit, investment, trading and operating activities of banks and their holding companies.
A number of the effects of the Dodd-Frank Act are described or otherwise accounted for in various parts of this Supervision and Regulation section. The following items provide a brief description of certain other provisions of the Dodd-Frank Act that may be relevant to us and the Bank.
| The Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of new consumer protections, including limitations, subject to exceptions, on the manner by which loan originators may be compensated and an obligation on the part of lenders to verify a borrowers ability to repay a residential mortgage loan. Final rules implementing these latter statutory requirements became effective in 2014. |
| The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. |
| The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give shareholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence requirements for compensation committee members; (iii) requires national securities exchanges to require listed companies to adopt incentive-based compensation clawback policies for executive officers; (iv) authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a companys proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks. |
The EGRRCPA made changes to a variety of rules and regulations, including revisions to the Dodd-Frank Act. For example, the EGRRCPA exempts certain lenders from the ability to repay requirements. Other EGRRCPA changes are described elsewhere in this section.
Consumer Financial Protection Bureau
The Dodd-Frank Act created the CFPB, an independent federal bureau within the Federal Reserve System having broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with more than $10.0 billion in assets. Smaller institutions, including the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking agencies for compliance with federal consumer protection laws and regulations. The CFPB also has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. The EGRRCPA requires amendments generally intended to narrow the scope of certain of these rules, but we are not currently able to determine how these changes may affect the Banks business.
The CFPB has proposed or issued a number of important rules affecting a wide range of consumer financial products. The changes resulting from the Dodd-Frank Act and CFPB rulemakings and enforcement policies may
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impact the profitability of our business activities, limit our ability to make, or the desirability of making, certain types of loans, require us to change our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business or profitability. The changes may also require us to dedicate significant management attention and resources to evaluate and make necessary changes to comply with the new statutory and regulatory requirements.
The CFPB has concentrated much of its rulemaking efforts on reforms related to residential mortgage transactions. The CFPB has issued rules related to a borrowers ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, requirements for high cost mortgages, appraisal and escrow standards and requirements for higher-priced mortgages. The CFPB has also issued rules establishing integrated disclosure requirements for lenders and settlement agents in connection with most closed end, real estate secured consumer loans; and rules which, among other things, expand the scope of information lenders must report in connection with mortgage and other housing-related loan applications under the Home Mortgage Disclosure Act. These rules, which become effective on a rolling basis through January 1, 2019, include significant regulatory and compliance changes and are expected to have a broad impact on the financial services industry.
With the recent change in leadership at the CFPB, the agency has released a new strategic plan and published formal requests for information on possible changes to its supervisory, enforcement and other programs. These developments suggest that the CFPB may be taking a different approach to its implementation of consumer financial protection laws, but the agency has not proposed specific changes to its regulations. The EGRRCPA requires the CFPB to make changes to various regulations.
The Volcker Rule
On December 10, 2013, five U.S. financial regulators, including the Federal Reserve, adopted a final rule implementing the Volcker Rule. The Volcker Rule was created by Section 619 of the Dodd-Frank Act and prohibits banking entities from engaging in proprietary trading. Banking entities also are prohibited from sponsoring or investing in private equity or hedge funds, or extending credit to or engaging in other covered transactions with affiliated private equity or hedge funds. The fundamental prohibitions of the Volcker Rule generally apply to banking entities of any size, including us, the bank and any other affiliate under the BHC Act. The EGRRCPA amends Section 619 to exempt from the Volcker Rule any insured depository institution that has $10.0 billion or less in total consolidated assets and whose total trading assets and trading liabilities are 5% or less of total consolidated assets.
Limitations on Incentive Compensation
In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution (1) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (2) that could lead to material financial loss to the institution. The proposal would also impose certain governance and recordkeeping requirements on institutions covered by the rule. Whether or when the agencies will finalize the proposal is uncertain.
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Executive Officers and Directors
The table below provides information about our executive officers and directors. Our board of directors is divided into three classes, the terms for which expire at our annual shareholder meetings in 2019, 2020 and 2021. Ages are as of March 31, 2018.
Name |
Age | Position |
Director Term Expires | |||||
Executive Officers: |
||||||||
Eric M. Sprink |
46 | President, Chief Executive Officer and Director | 2021 | |||||
Joel G. Edwards |
57 | Chief Financial Officer | n/a | |||||
Russ A. Keithley |
52 | Chief Lending Officer | n/a | |||||
John J. Dickson |
57 | Chief Operations Officer | n/a | |||||
Non-Employee Directors: |
||||||||
Andrew P. Skotdal |
47 | Chairman of the Board of Directors | 2020 | |||||
Christopher D. Adams |
38 | Vice Chairman of the Board of Directors | 2019 | |||||
Andrew R. Dale |
51 | Director | 2021 | |||||
John M. Haugen, Jr. |
69 | Director | 2020 | |||||
Steven D. Hovde |
63 | Director | 2019 | |||||
Thomas D. Lane |
48 | Director | 2019 | |||||
Jack T. Thompson |
47 | Director | 2021 | |||||
Gregory A. Tisdel |
63 | Director | 2020 |
Executive Officers
The following is a brief discussion of the business and banking background and experience of our executive officers, including their business experience during the last five years.
Eric M. Sprink serves as our President and Chief Executive Officer. Mr. Sprink joined the Company in late 2006 as President and Chief Operating Officer and became Chief Executive Officer in 2010. Mr. Sprink began his banking career working for Security Pacific Bank while enrolled at Arizona State University. He assumed increasing levels of responsibility in the areas of retail operations, consumer and commercial lending and wealth management with Security Pacific Bank and its successor, Bank of America. He then moved to Centura Bank, where he held management positions in retail operations and corporate finance. After Centura Bank was acquired, he held senior management positions at Washington Trust Bank and Global Credit Union. Mr. Sprink is active in industry trade groups and is a director and past chairman of the Community Bankers of Washington. Mr. Sprink received a bachelors degree from Arizona State University and an M.B.A. from the University of North Carolina. Mr. Sprink brings to our board of directors leadership experience, significant experience in many facets of the financial services business, and familiarity with our market area. Mr. Sprink has been a member of our board of directors since 2006.
Joel G. Edwards has served as Executive Vice President and Chief Financial Officer of the Company since 2012. Mr. Edwards is also the Executive Vice President and Chief Financial Officer of the Bank. Prior to joining the Company and Bank, Mr. Edwards was a Senior Vice President and Administration Officer at AmericanWest Bank. Prior to that experience, he was Executive Vice President and Chief Financial Officer at Viking Bank, Vice President and Chief Financial Officer at Rainier Pacific Bank, and President of the Washington Credit Union Share Guaranty Association. He also was employed in the Farm Credit System for eight years including positions as vice president responsible for administration, budget and policy. Mr. Edwards graduated magna cum laude with a bachelors degree in business and concentration in economics from, and completed post-graduate studies in accounting at, Eastern Washington University. He also received an M.B.A. from Eastern Washington University.
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Russ A. Keithley serves as Executive Vice President and Chief Lending Officer of the Bank, positions he has held since 2015. Mr. Keithley joined the Bank in 2012 and became Senior Vice President and Chief Credit Officer in 2014. Prior to joining the Bank, he served as Senior Vice President and Chief Lending Officer of North County Bank and Manager Team Lead at InterWest Bank. Mr. Keithley graduated from the University of Washington with a bachelors degree in political science. He is an honors graduate of the Pacific Coast Banking School at the University of Washington.
John J. Dickson joined the Bank in 2010 and currently serves as Executive Vice President and Chief Operations Officer of the Bank. Prior to joining the Bank, he served in various roles for Frontier Financial Corporation and Frontier Bank from 1985 to 2010, most recently serving as President of Frontier Bank from 2008 to 2010. In 2010, Frontier Bank was closed by the Washington DFI, and the FDIC was named receiver. Mr. Dickson received a bachelors degree in economics from the University of Puget Sound and graduated with honors from the Graduate School of Banking at the University of Wisconsin-Madison. Mr. Dickson practiced accounting as a CPA for three years in the audit division of a large accounting firm. Mr. Dickson is past Chairman of the Washington Bankers Association.
Non-Employee Directors
The following is a brief discussion of the business experience of our non-employee directors during the last five years, which we believe qualifies them to serve in their respective capacities.
Andrew P. Skotdal serves as President of the commercial and industrial portfolios of Skotdal Real Estate, a private commercial real estate development company that develops projects as long-term investments in the northern Puget Sound region and that also operates retail and multi-family portfolios. He is also the President and co-owner of S-R Broadcasting Co., Inc., which operates radio stations serving the northern Puget Sound region. He is a member of Young Presidents Organization, a global network of young chief executives. Mr. Skotdal graduated from the University of Virginia with a bachelors degree in history. Mr. Skotdal brings to the board of directors leadership experience, expertise in finance and real estate and familiarity with our market area. Mr. Skotdal, who was one of the founders of the Bank, has been a member of our board of directors since 1997.
Christopher D. Adams is a partner in the law firm of Adams & Duncan, Inc., P.S. in Everett, Washington. Mr. Adams practices in the areas of corporate law, commercial real estate and tax matters. He graduated from the University of Washington with a bachelors degree in business and received his J.D. and M.B.A. from Gonzaga University. Mr. Adams also holds a Masters in Tax Law from the University of Washington School of Law. Mr. Adams brings to the board of directors legal expertise and familiarity with our market area. Mr. Adams has been a member of our board of directors since 2016.
Andrew R. Dale is the Managing Director of Montlake Capital LLC, a private equity firm based in Seattle, Washington, a position he has held since 1999. He currently serves on the board of directors or managers for Montlake portfolio companies including AA Asphalting LLC, Institute for Corporate Productivity, Inc., SmartRG, Inc. and Specified Fittings, LLC. Mr. Dale began his career as an analyst in the mergers and acquisitions department at Smith Barney in New York City as a member of the bankruptcy reorganization practice. Mr. Dale is the former Vice Chair of the Board of Trustees for the Center for Infectious Disease Research, former President of the Evergreen Venture Capital Association and currently serves on the board of the Roosevelt High School Foundation. He holds an A.B. in economics from Harvard College and received his M.B.A. from Harvard Business School. Mr. Dale brings to the board of directors experience in private equity and finance. Mr. Dale has been a member of our board of directors since 2011.
John M. Haugen, Jr. is a retired businessman. From 1984 until 2007, he was the president and majority owner of Crown Photo Systems, Marysville, Washington, a leading manufacturer of equipment and supplies for the photo industry. Mr. Haugen graduated from Western Washington University with a bachelors degree in business administration. Mr. Haugen brings to the board of directors leadership experience and familiarity with our market area. Mr. Haugen has been a member of our board of directors since the Banks formation in 1997.
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Steven D. Hovde is the Chairman and Chief Executive Officer at Hovde Group, LLC, an investment banking and advisory firm that serves bank and thrift clients across the United States, where he is responsible for managing its investment banking activities, the strategic development of mergers and acquisitions of bank and thrift institutions, and its private equity activities. He serves as a director of H Bancorp and as a trustee of several charitable foundations. Before co-founding Hovde Group in 1987, Mr. Hovde was Regional General Counsel and Vice President of a national commercial real estate development firm. Previous to that, Mr. Hovde served as an attorney with, Rudnick & Wolfe, which is today DLA Piper, specializing in real estate law. Prior to that, Mr. Hovde practiced accounting in Chicago as a Certified Public Accountant with Touche Ross LLP, which is today Deloitte & Touche LLP. Mr. Hovde graduated summa cum laude with a Bachelor of Business Administration, majoring in Accounting, from the School of Business at the University of Wisconsin, Madison. He also earned his law degree, cum laude, at Northwestern University. Mr. Hovde provides the board of directors with important experience and insight into the financial services industry. Mr. Hovde has been a member of our board of directors since 2011.
Thomas D. Lane is the owner and president and chief executive officer of Dwayne Lanes Auto Family, which operates six automobile dealerships. He is active in community organizations and currently serves on the Economic Alliance Snohomish County board of trustees. Mr. Lane graduated from Western Washington University with a bachelors degree in business administration. Mr. Lane brings to the board of directors leadership experience and familiarity with our market area. Mr. Lane has been a member of our board of directors since the Banks formation in 1997.
Jack T. Thompson has been the Head of Financial Services Investments at Gapstow Capital Partners, an alternative investment firm based in New York City, since 2010. Mr. Thompson is responsible for the firms investments within the banking industry and is a member of the Gapstow Capital Partners Investment Committee. Prior to joining Gapstow Capital Partners, Mr. Thompson held positions at Deutsche Bank Securities, Goldman Sachs, Novantas, and Booz Allen Hamilton. He serves as a director of Esquire Financial Holdings (and its subsidiaries) in Jericho, New York and Seaside National Bank in Orlando, Florida. He previously was a Director on the Board of Pan Pacific Bank in Fremont, California. He graduated from Yale University with a bachelors degree in history and he received his M.B.A. with honors from the University of Chicago with concentrations in Finance and Accounting. Mr. Thompson is also a former 1st Lieutenant in the Armor Branch of the U.S. Army Reserve. Mr. Thompson provides the board of directors with important experience and insight into the financial services industry. Mr. Thompson has been a member of our board of directors since 2012.
Gregory A. Tisdel is the owner of Tizs Door Sales, Inc. and a member of the City of Everett Planning Commission. He serves on the Advisory Board of the Puget Sound Clean Air Agency and is past Special Advisor to the Economic Alliance Snohomish County. Mr. Tisdel is an active supporter of social, civic and cultural programs and was honored with the 2008 Henry M. Jackson Citizen of the Year Award. Mr. Tisdel has been active in community organizations, including the YMCA, American Red Cross Snohomish County Chapter and Volunteers of America. Mr. Tisdel brings to the board of directors leadership experience and familiarity with our market area. Mr. Tisdel has been a member of our board of directors since 2002.
Board Composition
Our board of directors has nine members, divided into three classes. The number of directors constituting our board of directors will be fixed from time to time by resolution of our board of directors. Directors are elected for a term of three years, with one-third of the directors elected annually. Mr. Dale was appointed as a director pursuant to the terms of Investment Agreements between us and Montlake Capital II, L.P. and Montlake Capital II-B, L.P. Mr. Hovde was appointed as a director pursuant to the terms of an Investment Agreement between us and Mr. Hovde. Mr. Thompson was appointed as a director pursuant to the terms of Investment Agreements between us and CJA Private Equity Financial Restructuring Master Fund I, LP. See Certain Relationships and Related Party TransactionsCertain Related Party TransactionsInvestment Agreements.
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Board Leadership Structure
Our board of directors does not have a formal policy requiring the separation of the roles of Chief Executive Officer and Chairman of the Board. It is the board of directors view that rather than having a rigid policy, the board of directors, with the advice and assistance of the governance and nominating committee, and upon consideration of all relevant factors and circumstances, will determine, as and when appropriate, whether the two offices should be separate. Currently, our leadership structure separates the offices of Chief Executive Officer and Chairman of the Board, with Mr. Sprink serving as our Chief Executive Officer and Mr. Skotdal as Chairman of the Board, reinforcing the leadership role of our board of directors in its oversight of our business and affairs.
Director Independence
Under the rules of the Nasdaq Stock Market, independent directors must comprise a majority of our board of directors not later than the first anniversary date of this offering. The rules of the Nasdaq Stock Market, as well as those of the SEC, impose several requirements with respect to the independence of our directors. Our board of directors has undertaken a review of the independence of each director in accordance with these rules. Based on information provided by each director concerning his background, employment and affiliations, our board of directors has determined that Andrew P. Skotdal, Christopher D. Adams, Andrew R. Dale, Steven D. Hovde, Thomas D. Lane, Jack T. Thompson and Gregory A. Tisdel do not have relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under the applicable rules. In making this determination, our board of directors considered relationships that each director has with the Company, including the transactions described under the section entitled Certain Relationships and Related Party Transactions. Our board of directors has determined that Mr. Adams is independent for purposes of his service on the board of directors but at the time of completion of this offering will not satisfy the heightened independence requirements for audit committee members because of the fact that his law firm provides legal services to us. We will avail ourselves of the transition period in Rule 10A-3(b)(1)(iv)(A) under the Securities Act, under which Mr. Adams can continue to serve on the audit committee until the one year anniversary of the listing date. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with the Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director.
Certain Relationships
There is no family relationship between any of our directors or executive officers.
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Committees of Our Board of Directors
The standing committees of our board of directors include an audit committee, a compensation committee, and a governance and nominating committee. The responsibilities of these committees are described below. Our board of directors may also establish such other committees as it deems appropriate, in accordance with applicable law and regulations and our corporate governance documents. The following table summarizes the expected membership of each of the committees of the board of directors upon completion of this offering:
Name |
Audit Committee | Compensation Committee |
Governance and Nominating Committee | |||
Andrew P. Skotdal |
Member | |||||
Christopher D. Adams* |
Chair | Member | ||||
Andrew R. Dale |
Member | Member | ||||
John M. Haugen, Jr. |
||||||
Steven D. Hovde |
Member | Member | ||||
Thomas D. Lane |
Member | Member | Chair | |||
Jack T. Thompson |
Member | Member | ||||
Eric M. Sprink |
||||||
Gregory A. Tisdel |
Chair |
* | Mr. Adams may serve on the Audit Committee for up to one year from the Companys listing date pursuant to the transition period provided in Rule 10A-3(b)(1)(iv)(A) under the Securities Act. |
Audit Committee. The audit committee assists the board of directors in discharging its duties related to the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditors qualifications, independence and performance, the performance of our internal audit function, our accounting and financial reporting process and financial statement audits. Among other things, upon completion of this offering, the responsibilities of the audit committee will include:
| being responsible for the appointment, compensation, retention and oversight of the independent auditors; |
| reviewing the annual and quarterly financial statements with management and the independent auditors; |
| overseeing internal audit activities; |
| pre-approving all audit and permissible non-audit services to be performed by our independent auditors; |
| authorizing, reviewing and approving the audit committee report to be included in our annual proxy statement; |
| reviewing and approving any related party transactions; |
| establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; and |
| reviewing the committees performance and the adequacy of the audit committee charter on an annual basis. |
We will provide for appropriate funding, as determined by the audit committee, for payment of compensation to our independent auditors, any independent counsel or other advisors engaged by the audit committee and for administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties. The board of directors has adopted a written charter for the audit committee that, among other things, specifies the scope of its rights and responsibilities. Before completion of this offering, the charter will be available on our website at www.coastalbank.com.
On or before the one year anniversary of the listing date, the audit committee will be composed solely of members who satisfy the applicable independence, financial literacy and other requirements of the Nasdaq Stock
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Market for audit committees. Our board of directors has determined that Mr. Dale is an audit committee financial expert as defined in the regulations of the SEC.
Compensation Committee. The compensation committee will establish, administer and review our policies, programs and procedures for compensating our executive officers and directors. The functions and responsibilities of the compensation committee include:
| overseeing the Companys overall compensation structure, policies and programs, and assessing whether the Companys compensation structure establishes appropriate incentives for management and employees; |
| reviewing and approving annually the corporate goals and objectives applicable to the compensation of the chief executive officer, evaluating at least annually the chief executive officers performance in light of these goals and objectives, and recommending the chief executive officers compensation level based on this evaluation; |
| in collaboration with the chief executive officer, reviewing and evaluating the performance of the Companys executive officers and approving such other executive officers compensation and benefits; |
| reviewing, administering and making recommendations to our board of directors with respect to our incentive compensation and equity-based plans; |
| reviewing and making recommendations to our board of directors regarding any employment or severance arrangements or plans; |
| reviewing the Companys incentive compensation arrangements to determine whether they encourage any excessive risk-taking, reviewing at least annually the relationship between risk management policies and practices and compensation and evaluating compensation policies and practices that could mitigate any such risk; |
| retaining such compensation consultants, legal counsel or other advisors as the compensation committee deems necessary or appropriate for it to carry out its duties, with direct responsibility for the appointment, compensation and oversight of work of such consultants, counsels and advisors; |
| preparing a report on executive compensation for inclusion in the Companys annual meeting proxy statement; |
| reviewing and making recommendations to our board of directors with respect to the compensation of our directors; |
| developing a succession plan for our executive officer positions, reviewing it periodically and developing and evaluating potential candidates for succession; and |
| reviewing the committees performance and the adequacy of the compensation committee charter on an annual basis. |
The board of directors has adopted a written compensation committee charter that, among other things, specifies the scope of the compensation committees rights and responsibilities. Before completion of this offering, the charter will be available on our website at www.coastalbank.com. Upon completion of this offering, the compensation committee will be composed solely of members who satisfy the applicable independence requirements of the Nasdaq Stock Market for compensation committees.
Governance and Nominating Committee. The governance and nominating committee is responsible for assisting our board of directors in discharging its duties related to corporate governance and nominating functions. Among other things, the functions and responsibilities of the governance and nominating committee will include:
| developing policies on the size and composition of our board of directors; |
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| developing and recommending to our board of directors criteria to be considered in identifying and selecting nominees for director; |
| reviewing possible candidates for election to the board of directors; |
| recommending to the board of directors candidates for election or re-election to our board of directors; |
| recommending committee structure, composition and assignments; |
| conducting an annual performance evaluation of the board of directors and its committees; and |
| reviewing the committees performance and the adequacy of the governance and nominating committee charter on an annual basis. |
The board of directors has adopted a written governance and nominating committee charter that, among other things, specifies the scope of the governance and nominating committees rights and responsibilities. Before completion of this offering, the charter will be available on our website at www.coastalbank.com. Upon completion of this offering, the governance and nominating committee will be composed solely of members who satisfy the applicable independence requirements of the Nasdaq Stock Market for nominating committees.
Board Oversight of Risk Management
Our board of directors believes that effective risk management and control processes are critical to our safety and soundness, our ability to predict and manage the challenges that we face and, ultimately, our long-term corporate success. Our board of directors, both directly and through its committees, is responsible for overseeing our risk management processes, with each of the committees of our board of directors assuming a different and important role in overseeing the management of the risks we face.
The audit committee of our board of directors is responsible for overseeing risks associated with financial matters (particularly financial reporting, accounting practices and policies, disclosure controls and procedures and internal control over financial reporting). The compensation committee of our board of directors has primary responsibility for risks and exposures associated with our compensation policies, plans and practices, regarding both executive compensation and the Companys compensation structure generally. In particular, our compensation committee, in conjunction with our President and Chief Executive Officer and other members of our management, as appropriate, reviews our incentive compensation arrangements to ensure these programs are consistent with applicable laws and regulations, including safety and soundness requirements, and do not encourage imprudent or excessive risk-taking by our employees. The governance and nominating committee of our board of directors oversees risks associated with the independence of our board of directors and potential conflicts of interest.
Our senior management is responsible for implementing our risk management processes, including by assessing and managing the risks we face, including strategic, operational, regulatory, investment and execution risks, on a day-to-day basis, and reporting to our board of directors regarding our risk management processes. Our senior management is also responsible for creating and recommending to our board of directors for approval appropriate risk appetite metrics reflecting the aggregate levels and types of risk we are willing to accept in connection with the operation of our business and pursuit of our business objectives.
The role of our board of directors in our risk oversight is consistent with our leadership structure, with our President and Chief Executive Officer and the other members of senior management having responsibility for assessing and managing our risk exposure, and our board of directors and its committees providing oversight in connection with those efforts. We believe this division of risk management responsibilities presents a consistent, systemic and effective approach for identifying, managing and mitigating risks throughout our operations.
Compensation Committee Interlocks and Insider Participation
Upon completion of this offering, none of the members of our compensation committee will be, or will have been, employed by the Company or the Bank. None of our executive officers currently serves, or in the past three
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years has served, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of another entity that has one or more executive officers serving on our board of directors or compensation committee.
To the extent that any members of our compensation committee have participated in transactions with us, a description of those transactions is provided in Executive CompensationDirector Compensation and Certain Relationships and Related Party Transactions.
Code of Business Conduct and Ethics
Our board of directors will adopt a code of business conduct and ethics, referred to herein as the code of ethics, that will apply to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer and persons performing similar functions. The code of ethics will be available upon written request to Corporate Secretary, Coastal Financial Corporation, 5415 Evergreen Way, Everett, WA 98203 and on our website at www.coastalbank.com. If we amend or grant any waiver from a provision of our code of ethics that applies to our executive officers, we will publicly disclose such amendment or waiver on our website and as required by applicable law, including by filing a Current Report on Form 8-K.
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Our named executive officers for the year ended December 31, 2017, which consist of our Chief Executive Officer and our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2017, are as follows:
| Eric M. SprinkPresident and Chief Executive Officer |
| Joel G. EdwardsChief Financial Officer |
| Russ A. KeithleyExecutive Vice President, Chief Lending Officer |
Summary Compensation Table
The following table sets forth certain information with respect to the compensation paid to our named executive officers for the fiscal year ended December 31, 2017.
Name and Principal Position |
Year | Salary ($) |
Bonus ($)(1) |
Option Awards ($)(2) |
Non-Equity Incentive Plan Compensation ($)(3) |
All Other Compensation ($)(4) |
Total ($) |
|||||||||||||||||||||
Eric M. Sprink President and Chief Executive Officer |
2017 | 330,000 | - | 113,202 | 169,950 | 23,896 | 637,048 | |||||||||||||||||||||
Joel G. Edwards Chief Financial Officer |
2017 | 250,000 | 54,375 | 23,814 | 50,625 | 12,000 | 390,814 | |||||||||||||||||||||
Russ A. Keithley Executive Vice President, Chief Lending Officer |
2017 | 180,000 | 48,775 | 15,876 | 18,225 | 10,877 | 273,753 |
(1) | The amounts reported in this column represent the annual discretionary cash bonuses earned by our named executive officers for fiscal year 2017 performance. |
(2) | The amounts reported in this column represent the grant date fair value of the award of stock options computed in accordance with FASB ASC Topic 718 using the methodology set forth in Note 14 to the Companys consolidated financial statements included elsewhere in this prospectus. |
(3) | The amounts reported in this column represent the value of incentive awards earned in 2017 based on the Companys performance against performance levels set by the compensation committee of the Companys board of directors. |
(4) | The amounts reported in this column consist of the following: |
Name |
Matching Contribution to 401(k) Plan ($) |
Life Insurance Premiums ($) |
Perquisites and Other Benefits ($) |
Total ($) |
||||||||||||
Eric M. Sprink |
9,000 | 3,032 | 11,864 | (a) | 23,896 | |||||||||||
Joel G. Edwards |
12,000 | - | - | 12,000 | ||||||||||||
Russ A. Keithley |
10,877 | - | - | 10,877 |
(a) | This amount reflects the cost of the following perquisites and other benefits: automobile allowance, club dues, supplemental disability insurance, reimbursement of certain spouse travel to industry events, cell phone and airline club membership dues. |
Narrative Discussion of Summary Compensation Table
We have compensated our named executive officers through a combination of base salary, cash bonuses, stock options and other benefits including perquisites. Each of our named executive officers has substantial
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responsibilities in connection with our day-to-day operations. The compensation of the named executive officers in the Summary Compensation Table is not necessarily indicative of how we will compensate our named executive officers in the future. We plan to continue to review, evaluate and modify our compensation framework to ensure that our executive officer compensation packages remain competitive, achieve our desired goals and remain consistent with our compensation philosophy.
Base Salary
The base salary of our chief executive officer is reviewed and set annually by the compensation committee. In establishing the base salary for our chief executive officer, our compensation committee has relied on external market data obtained from outside sources, as well as public company compensation data. Base salary represents a fixed component of compensation for each year. Consistent with the compensation committees goal of aligning executive compensation with activities that generate shareholder value, Mr. Sprinks 2017 base salary was set at 53% of total targeted compensation so that a significant portion of his target compensation is performance-related. The base salary for other named executive officers is determined each year based on consideration of the executives responsibilities and job performance.
Non-Equity Incentive Compensation
Our named executive officers are eligible to receive a cash incentive award following the end of each year based on corporate achievement. Performance is assessed against goals and targets that are established for the fiscal year by our compensation committee, generally in the first quarter of each fiscal year. Each corporate goal was assigned a minimum performance level, a target level of performance, and a maximum level at which the award opportunity was capped. For achievement of the minimum performance level, our named executive officers would earn a percentage of their respective target opportunities. Achievement of the target performance level would earn the target award, and achievement at or above the maximum performance level would earn a multiple of the target opportunity. Results for any goal falling between performance levels would result in an award based on achieving intermediate performance thresholds. For 2017, the aggregate target award opportunity was fixed at 50% of base salary for the chief executive officer, 20% of base salary for the chief financial officer and 10% of base salary for the chief lending officer. The performance goals used to determine cash incentive awards for 2017 were based on net income, return on average assets, non-interest income, core deposit growth, loan growth, nonperforming assets, net charge-offs plus net OREO losses, and loan exceptions on new loans.
Discretionary Bonus
Historically, our named executive officers, other than our chief executive officer, have been eligible for discretionary cash bonus awards made after the end of the fiscal year. The determination of the amount of these discretionary bonus awards has been made based on an overall assessment of our corporate performance, along with the officers individual performance. We intend to continue to provide annual incentive cash bonuses and discretionary cash bonuses to reward corporate and individual achievement. Following completion of this offering, our annual bonus program may change. We expect that in subsequent fiscal years we may change the allocation between performance-based incentive awards and annual cash bonuses for our named executive officers, other than our chief executive officer, for future performance periods. However, no decisions have yet been made regarding the bonus program structure that will be in place following this offering.
Stock Options
The stock options reflected in the table below were issued under the 2006 Stock Option and Equity Compensation Plan, or 2006 Plan. The 2006 Plan provides for the grant of stock-based incentives, including stock options, restricted stock, restricted stock units, and stock appreciation rights, to employees and directors. These awards are subject to forfeiture until vesting conditions have been satisfied by the award recipient under
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the terms of the award. We believe these awards to our executive officers help align the interests of management and our shareholders and reward our executive officers for improved Company performance. The amount of stock options granted to our chief executive officer is based on performance measured against the same corporate performance goals and targets established for his annual cash incentive award. For achievement of the minimum performance level, our chief executive officer would earn 60% of his respective target opportunity. Achievement of the target performance level would earn the target award, and achievement at or above the maximum performance level would earn 140% of the target opportunity. Results for any goal falling between performance levels would result in an award based on achieving intermediate performance thresholds. For 2017, the value of the aggregate target award opportunity was set at one-third of base salary. The determination of the stock option grants to our other named executive officers has been made based on an overall assessment of our performance, along with the officers individual performance.
401(k) Plan
Our 401(k) Plan is designed to provide retirement benefits to all eligible full-time and part-time employees. The 401(k) Plan provides employees with the opportunity to save for retirement on a tax-favored basis. Our named executive officers, all of whom were eligible to participate in the 401(k) Plan during 2017, may elect to participate in the 401(k) Plan on the same basis as all other employees. We may make matching contributions of employee salary contribution deferrals. An employee must contribute to receive the matching contribution.
Health and Welfare Benefits
Our named executive officers are eligible to participate in the same benefit plans and programs available for all of our eligible full-time and part-time employees, including health, dental, vision, disability and basic group life insurance coverage. The purpose of our employee benefit plans and programs is to help us attract and retain quality employees, including executives, by offering benefits similar to those typically offered by our competitors.
Perquisites
We provide Mr. Sprink with a limited number of perquisites that we believe are reasonable and consistent with our overall compensation program. These perquisites better enable us to attract and retain superior employees for key positions. Following completion of this offering, our compensation committee will periodically review the levels of perquisites and other personal benefits provided to our named executive officers. Based on these periodic reviews, perquisites may be awarded or adjusted on an individual basis. Please refer to the Summary Compensation Table for a description of the types of perquisites provided to Mr. Sprink.
Employment and Change in Control Agreements with Executive Officers
Employment Agreement with Eric M. Sprink
We entered into an employment agreement with Mr. Sprink on April 9, 2013, pursuant to which he serves as our President and Chief Executive Officer. The employment agreement incorporates a Change in Control Severance Agreement that we entered into with Mr. Sprink on April 21, 2009. In connection with this offering, we and Mr. Sprink agreed to amend and restate his employment agreement effective as of the effective date of the registration statement of which this prospectus forms a part. His amended and restated employment agreement (which has an initial term of five years that extends for successive one-year renewal terms unless either party gives 90-days advance notice of non-renewal) provides that Mr. Sprink will continue to serve as President and Chief Executive Officer of the Company and the Bank, and as a member of our board of directors (subject to re-election by our shareholders) and the board of directors of the Bank. As consideration for these services, the amended and restated employment agreement provides Mr. Sprink with a minimum annual base salary of $360,000, subject to annual review by our compensation committee, an annual cash performance bonus opportunity, an annual equity incentive opportunity, and certain other employee benefits and perquisites, including a car allowance and reimbursement of country club dues.
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The amended and restated employment agreement provides for severance benefits if we terminate Mr. Sprink without cause or if he resigns for good reason (as each of those terms is defined in the employment agreement), which circumstances we refer to as a a qualifying termination of employment. Upon a qualifying termination of employment, Mr. Sprink will be entitled to the following payments and benefits under his employment agreement: an amount equal to the accrued but unpaid base salary and unused vacation pay, a lump sum payment equal to 200% of his then-current annual base salary (unless termination occurs due to a change of control), the pro-rata portion of his annual cash performance bonus, and reimbursement for the cost of continuing group health plan coverage for himself and his dependents for up to one year following the date of termination of employment. In addition, Mr. Sprink will fully vest in all outstanding unvested equity awards that would have vested based solely on Mr. Sprinks continued employment.
Pursuant to his amended and restated employment agreement, if Mr. Sprink experiences a qualifying termination of employment within two years following a change of control (as such term is defined in Mr. Sprinks amended and restated employment agreement), then, in lieu of the cash severance payment otherwise payable to him, Mr. Sprink will be entitled to receive an amount equal to the accrued but unpaid base salary and unused vacation pay, a cash severance payment equal to three times the sum of his then-current base salary, his annual cash bonus for the prior calendar year and the grant date fair value of the his annual equity incentive award for the prior year. In addition, Mr. Sprink will receive a lump-sum payment equal to the cost of 36 months of continuing group health plan coverage for himself and his dependents and will fully vest in all outstanding unvested equity awards that would have vested based solely on Mr. Sprinks continued employment.
Upon termination of Mr. Sprinks employment without cause or for good reason and payment of the amounts required under the amended and restated employment agreement, or upon expiration of the agreement and payment to Mr. Sprink of an amount equal to two times his taxable compensation for prior calendar year, Mr. Sprink will be subject to a one-year post-termination non-competition covenant and a one-year post-termination non-solicitation covenant.
Change in Control Agreement with Joel G. Edwards
We entered into a change in control severance agreement with Mr. Edwards on January 1, 2016. In connection with this offering, we and Mr. Edwards agreed to amend and restate his change in control severance agreement effective as of the effective date of the registration statement of which this prospectus forms a part. His amended and restated change in control severance agreement provides that if Mr. Edwards experiences a qualifying termination of employment during the period that begins 90 days prior to a change of control (as such term is defined in Mr. Edwards amended and restated change in control severance agreement) and ends 24 months following such change of control, then he will be entitled to receive a cash severance payment equal to two times the sum of his then-current base salary, his cash bonus for the calendar year prior to which the change in control occurs and the value of any equity incentive awards made in the calendar year prior to which the change in control occurs. In addition, if Mr. Edwards experiences a qualifying termination within 24 months of a change of control, he will fully vest in all unvested stock options or other equity incentive compensation awards previously granted to him that would have vested based solely on his continued employment.
Outstanding Equity Awards at Fiscal Year-End
2006 Stock Option and Equity Compensation Plan
The 2006 Plan is intended to provide incentives to certain officers, employees, and directors to stimulate their efforts toward the continued success of the Company and to operate and manage the business in a manner that will provide for our long-term growth and profitability. Additionally, the 2006 Plan is intended to encourage stock ownership to align the interests of employees and shareholders and to provide a means of rewarding and retaining officers, employees and directors.
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The 2006 Plan is administered by our compensation committee. In order to be eligible for participation in the 2006 Plan, an individual must be an employee or director of the Company. In determining awards under the 2006 Plan, the compensation committee takes into account the nature of the services rendered by the eligible individual, their present and potential contributions to our success, and such other factors as the compensation committee deems relevant.
The following table provides information regarding outstanding stock awards held by the named executive officers as of December 31, 2017.
Grant Date | Option Awards | |||||||||||||||||||
Name |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Option Exercise Price ($) |
Option Expiration Date |
||||||||||||||||
Eric M. Sprink |
01/26/2017 | 0 | (1) | 33,825 | 6.50 | 01/26/2027 | ||||||||||||||
02/24/2016 | 1,881 | (1) | 16,930 | 6.25 | 02/24/2026 | |||||||||||||||
07/01/2015 | 3,759 | (1) | 15,036 | 7.20 | 07/01/2025 | |||||||||||||||
11/13/2014 | 23,876 | (2) | 15,918 | 6.25 | 11/13/2024 | |||||||||||||||
04/09/2013 | 84,446 | (3) | 105,555 | 5.50 | 04/09/2023 | |||||||||||||||
Joel G. Edwards |
01/26/2017 | 0 | (1) | 6,000 | 6.50 | 01/26/2027 | ||||||||||||||
02/24/2016 | 600 | (1) | 5,400 | 6.25 | 02/24/2026 | |||||||||||||||
07/01/2015 | 1,200 | (1) | 4,800 | 7.20 | 07/01/2025 | |||||||||||||||
03/18/2014 | 1,200 | (1) | 2,800 | 5.50 | 03/18/2024 | |||||||||||||||
11/15/2012 | 10,000 | (4) | 10,000 | 4.25 | 11/15/2022 | |||||||||||||||
Russ A. Keithley |
01/26/2017 | 0 | (1) | 4,000 | 6.50 | 01/26/2027 | ||||||||||||||
02/24/2016 | 400 | (1) | 3,600 | 5.25 | 02/24/2026 | |||||||||||||||
07/01/2015 | 800 | (1) | 3,200 | 7.20 | 07/01/2025 | |||||||||||||||
03/18/2014 | 780 | (1) | 1,820 | 5.50 | 03/18/2024 |
(1) | These option awards vest over a ten year period from the grant date, with one-tenth of the options under the grant becoming exercisable on each of the first nine anniversaries of the grant date and the final one-tenth of the options under the grant becoming exercisable 90 days prior to the tenth anniversary of the grant date. |
(2) | These option awards vest over a five year period from the grant date, with one-fifth of the options under the grant becoming exercisable on each of the first five anniversaries of the grant date. |
(3) | These option awards vest over a nine year period from the grant date, with one-ninth of the options under the grant becoming exercisable on each of the first nine anniversaries of the grant date. All unvested options will vest upon termination of employment. |
(4) | These option awards vest over a ten year period from the grant date, with one-tenth of the options under the grant becoming exercisable on each of the first ten anniversaries of the grant date. |
2018 Omnibus Incentive Plan
Our board of directors has adopted, and our shareholders have approved, the Coastal Financial Corporation 2018 Omnibus Incentive Plan, or 2018 Plan. The purpose of the 2018 Plan is to motivate and reward those employees and other individuals who are expected to perform at the highest level and contribute significantly to our success, thereby furthering our best interests and those of our shareholders. The 2018 Plan replaces both our 2006 Plan and our Directors Stock Bonus Plan, which expired on May 31, 2018. No further awards will be made under those plans.
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Plan Term
The 2018 Plan will expire on April 30, 2028, the tenth anniversary of shareholder approval. The 2018 Plan will expire sooner if, prior to the end of the term, the maximum number of shares available for issuance under the 2018 Plan has been issued or our board of directors terminates the 2018 Plan.
Authorized Shares and Award Limits
Subject to adjustment (as described below), 500,000 shares of our common stock will be available for new awards under the 2018 Plan. Shares granted under the 2018 Plan that are subject to an outstanding award that is forfeited, expires, terminates, otherwise lapses or is settled for cash, in whole or in part, without the delivery of the shares will again be available for issuance under the 2018 Plan. However, shares tendered or withheld in payment of an exercise price or in respect of taxes related to awards will not become available for issuance under the 2018 Plan.
Administration
Our compensation committee will administer the 2018 Plan and will have authority to: designate participants; determine the types of awards to be granted to each participant; determine the number of shares to be covered by awards; determine the terms and conditions of awards; determine whether, to what extent and under what circumstances awards may be settled or exercised in cash, shares, other awards, other property or net settlement; determine the circumstances under which awards may be canceled, repurchased, forfeited or suspended; interpret and administer the 2018 Plan and any instrument or agreement relating to, or award made under, the 2018 Plan; and make any other determination and take any other action that it deems necessary or desirable to administer the 2018 Plan.
To the extent permitted by applicable law, our compensation committee may delegate to one or more of our officers the authority to grant awards under the 2018 Plan, other than awards to persons subject to reporting obligations under Section 16 of the Exchange Act.
Types of Awards
The 2018 Plan provides for grants of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units and cash- or stock-based performance awards. Our compensation committee will determine the terms and conditions of all awards granted under the 2018 Plan, including the date(s) on which awards become vested.
Stock Options. A stock option is a contractual right to purchase shares at a future date at a specified exercise price. The per share exercise price of a stock option will be determined by our compensation committee at the time of grant but may not be less than the fair market value of a share of our common stock (defined under the 2018 Plan as the closing price of a share of our common stock on the grant date or, if no sales are reported on that date, the closing price of a share of our common stock on the day prior to the grant date; if the shares are not listed on an exchange, fair market value will be a price determined by our compensation committee in good faith on the basis of objective criteria). Our compensation committee will determine the date on which each stock option becomes vested and exercisable and the expiration date of each option. No stock option will be exercisable more than ten years from the grant date, except that our compensation committee may provide in an award agreement for an extension of such ten-year term in the event the exercise of the option would be prohibited by law on the expiration date. A grant of a stock option may not be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on such options. Stock options that are intended to qualify as incentive stock options must meet the requirements of Section 422 of the Internal Revenue Code.
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Stock Appreciation Rights (SARs). A SAR represents a contractual right to receive, in cash or shares, an amount equal to the appreciation of one share of our common stock from the grant date over the exercise or hurdle price of such SAR. The per share exercise price of a SAR (except in the case of substitute awards) will be determined by our compensation committee but may not be less than the fair market value of a share of our common stock (as defined under the 2018 Plan and summarized above). Our compensation committee will determine the date on which each SAR may be exercised or settled, in whole or in part, and the expiration date of each SAR. However, no SAR will be exercisable more than ten years from the grant date. A grant of a SAR may not be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on such SAR.
Restricted Stock. Restricted stock is an award of shares of our common stock that are subject to restrictions on transfer and a substantial risk of forfeiture.
Restricted Stock Units (RSUs). An RSU represents a contractual right to receive the value of a share of our common stock at a future date, subject to specified vesting and other restrictions.
Performance Awards. Performance awards, which may be denominated in cash or shares, will be earned upon the satisfaction of performance conditions specified by our compensation committee. Performance criteria may be measured on an absolute (e.g., plan or budget) or relative basis, may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business segments, may be based on a ratio or separate calculation of any performance criteria and may be made relative to an index or one or more of the performance goals themselves.
Adjustments
In the event that our compensation committee determines that, as result of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, separation, rights offering, split-up, spin-off, combination, repurchase or exchange of our shares or other securities, issuance of warrants or other rights to purchase our shares or other securities, issuance of our shares pursuant to the anti-dilution provisions of our securities, or other similar corporate transaction or event affecting our shares, or of changes in applicable laws, regulations or accounting principles, an adjustment is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2018 Plan, our compensation committee will, subject to compliance with Section 409A of the Internal Revenue Code, adjust equitably any or all of:
| the number and type of shares or other securities that thereafter may be made the subject of awards, including the aggregate and individual limits under the 2018 Plan; |
| the number and type of shares or other securities subject to outstanding awards; and |
| the grant, purchase or exercise price for any award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding award. |
In addition, our compensation committee is authorized to adjust the terms and conditions of, and the criteria included in, outstanding awards in recognition of events (including those events described above) affecting the Company or the financial statements of the Company, or changes in applicable laws, regulations or accounting principles, whenever our compensation committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2018 Plan.
Effect of a Change of Control
In the event of a Change of Control (as summarized below), the 2018 Plan provides for vesting of outstanding awards only upon a participants termination of employment, other than for just cause, during the 12-month
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period following the Change of Control. In addition, to maintain the participants rights in connection with a Change of Control, the compensation committee, may, as to any award, either at the time such award is made or any time thereafter, take any one or more of the following actions: (i) provide for the purchase of any such award for an amount of cash equal to the amount that could have been attained upon exercise of such award or the realization of the participants rights, had such award been currently exercisable or payable; or (ii) cause any award then outstanding to be assumed, or new rights substituted therefore, by the acquiring or surviving corporation after change in control. The compensation committee may accelerate the vesting of awards upon a Change of Control.
Under the 2018 Plan, except as otherwise provided in a participants award agreement, Change of Control generally means the occurrence of one or more of the following events:
| the Company merges into or consolidates with another entity, or merges another entity into the Company, and, as a result, less than a majority of the combined voting power of the resulting entity, or if applicable, the ultimate parent thereof, is held by persons who were shareholders of the Company immediately before the merger or consolidation; or |
| the acquisition of 50% or more of the combined voting power of our outstanding securities (other than by an employee benefit plan or trust maintained by us); |
| the replacement of the majority of our directors during any period of two consecutive years, other than through the customary director nomination process; and |
| a sale or transfer of all or substantially all of our assets, following which the persons who were owners of the Company do not own more than 50% of combined voting power of (i) the entity to which our assets were sold or transferred or (ii) an entity that directly or indirectly owns more than 50% of the combined voting power of the entity to which our assets were sold or transferred. |
Amendment and Termination
Our Board of directors may amend, alter, suspend, discontinue or terminate the 2018 Plan, subject to approval of our shareholders if required by applicable law or the rules of the stock exchange on which our shares are principally traded. The compensation committee may also amend, alter, suspend, discontinue or terminate, or waive any conditions or rights under, any outstanding award. However, subject to the adjustment provision and change of control provision (each summarized above), any such action by the compensation committee that would materially adversely affect the rights of a holder of an outstanding award may not be taken without the holders consent, except (i) to the extent that such action is taken to cause the 2018 Plan to comply with applicable law, stock market or exchange rules and regulations, or accounting or tax rules and regulations, or (ii) to impose any clawback or recoupment provisions on any awards in accordance with the 2018 Plan.
Cancellation or Clawback of Awards
Our compensation committee may, to the extent permitted by applicable law and stock exchange rules or by any of our policies, cancel or require reimbursement of any awards granted, shares issued or cash received upon the vesting, exercise or settlement of any awards granted under the 2018 Plan or the sale of shares underlying such awards.
Prohibition on Repricing
Subject to the adjustment provision summarized above, our compensation committee may not directly or indirectly, through cancellation or re-grant or any other method, reduce, or have the effect of reducing, the exercise or hurdle price of any award established at the time of grant without approval of our shareholders.
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U.S. Federal Income Tax Consequences of 2018 Plan Awards
Non-Statutory Stock Options. A non-statutory stock option is an option that does not meet the requirements of Section 422 of the Internal Revenue Code. A participant will not recognize income when granted a non-statutory stock option. When the participant exercises the stock option, he or she will recognize ordinary income equal to the excess of the fair market value of the shares received on the exercise date over the aggregate exercise price of the shares. The participants tax basis in the shares acquired on exercise of the option will generally equal the exercise price plus the amount of taxable income recognized on exercise. We generally will be entitled to a federal income tax deduction in an amount equal to the ordinary income that the participant recognizes. When the participant sells the shares acquired on exercise, the participant will realize long-term or short-term capital gain or loss, depending on whether the participant holds the shares for more than one year before selling them. Special rules apply if all or a portion of the exercise price is paid in the form of shares.
Incentive Stock Options. An incentive stock option is an option that meets the requirements of Section 422 of the Internal Revenue Code. A participant will not have taxable income when granted an incentive stock option or when exercising the option, although the participant will have a preference item for purposes of the alternative minimum tax upon exercise of an incentive stock option. If the participant exercises the option and does not dispose of the shares until the later of two years after the grant date and one year after the exercise date, the entire gain, if any, realized when the participant sells the shares will be taxable as long-term capital gain. We will not be entitled to any corresponding tax deduction.
If a participant disposes of the shares received upon exercise of an incentive stock option within the one-year or two-year periods described above, it will be considered a disqualifying disposition, and the option will be treated as a non-statutory stock option for federal income tax purposes. If a participant exercises an incentive stock option more than three months after the participants employment or service with us terminates, the option will be treated as a non-statutory stock option for federal income tax purposes. If the participant is disabled and terminates employment or service because of his or her disability, the three-month period is extended to one year. The three-month period does not apply in the case of the participants death.
Stock Appreciation Rights. In general, no taxable income will be realized by a participant upon the grant of a SAR. Upon the settlement of a SAR, the participant will recognize ordinary income equal to the aggregate value of the payment received, and we generally will be entitled to a tax deduction at such time in the same amount.
Restricted Stock. Unless a participant makes an election to accelerate recognition of the income to the date of grant as described below, the participant will not recognize income, and the Company will not be allowed a tax deduction, at the time a restricted stock award is granted. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date, less any amount paid for the common stock, and the Company will be allowed a corresponding tax deduction at that time. If the participant properly files an election under Section 83(b) of the Internal Revenue Code within 30 days after the date of grant of the restricted stock, the participant will recognize ordinary income as of the date of grant equal to the fair market value of the common stock as of that date, less any amount the participant paid for the common stock, and we will be allowed a corresponding tax deduction at that time. Any future appreciation in the common stock will be taxable to the participant at capital gains rates. However, if the restricted stock award is later forfeited, the participant generally will not be able to recover the tax previously paid pursuant to his or her Section 83(b) election.
Restricted Stock Units. A participant does not recognize income, and the Company will not be allowed a tax deduction, at the time an RSU is granted. When the RSUs vest and are settled for cash or common stock, the participant generally will be required to recognize as income an amount equal to the fair market value of the shares on the date of vesting, and the Company will be allowed a corresponding tax deduction at that time. Any gain or loss recognized upon a subsequent sale or exchange of the common stock (if settled in common stock) is treated as capital gain or loss for which we are not entitled to a deduction.
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Performance Awards. A participant to whom a performance award is made will not recognize taxable income at the time such award is made. The participant will recognize taxable income, however, when cash or shares of common stock is released or paid to the award recipient, and the amount of such income will be the amount of the cash and/or the fair market value at such time of the shares. The tax basis of any such shares received by the participant pursuant to a performance grant award should be equal to the amount includable in the participants gross income as compensation in respect of such shares.
Risk Considerations in our Compensation Program
We believe that our compensation policies and practices for our employees are reasonable and properly align our employees interests with those of our shareholders. We believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the company. Although certain of our employees who are not executive officers are compensated by the number or dollar volume of transactions they complete, our extensive underwriting process is designed to prevent us from entering into transactions that deviate from our underwriting standards.
Director Compensation
During 2017, our non-employee directors received compensation for service and attendance as follows:
| The Chairman of the board of directors received annual cash compensation of $22,500 and $7,500 in restricted stock under our Directors Stock Bonus Plan. |
| Committee chairs received annual cash compensation of $18,750 and, if eligible under our Directors Stock Bonus Plan, $6,250 in restricted stock. |
| Other directors received annual cash compensation of $15,000 and, if eligible under our Directors Stock Bonus Plan, $5,000 in restricted stock. |
Directors Andrew R. Dale and Jack T. Thompson are subject to employer policies that restrict them from receiving compensation from the Company. The Company pays all director compensation to their firms, Montlake Capital LLC and Gapstow Capital Partners, which receive cash in lieu of any equity compensation.
Mr. Sprink does not receive fees or other compensation for his service as a director of the Company or the Bank.
Directors Stock Bonus Plan. Non-employee directors are granted restricted stock under our Directors Stock Bonus Plan, or Director Plan. Under the Director Plan, within three weeks following the conclusion of the year, each non-employee director who has attended a minimum of 75% of the regular and special meetings of the board of directors held during the prior year will receive a grant of that number of shares to restricted stock having a value equal to the amounts described above. Shares granted under the Director Plan vest two years from the date of grant. Upon termination of service with the Company for any reason other than death, disability or retirement at age 72, all unvested shares shall be forfeited. The Director Plan expired on May 31, 2018. Future equity awards to directors will be made under our 2018 Plan.
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The following table sets forth information regarding compensation paid during 2017 to our directors who were not named executive officers:
Name |
Fees Earned or Paid in Cash ($) |
Stock Awards ($)(1) |
Total ($) |
|||||||||
Andrew P. Skotdal |
22,500 | 7,500 | 30,000 | |||||||||
Christopher D. Adams |
15,000 | 5,000 | 20,000 | |||||||||
Andrew R. Dale (2) |
20,000 | - | 20,000 | |||||||||
John M. Haugen, Jr. |
18,750 | 6,250 | 25,000 | |||||||||
Steven D. Hovde |
18,750 | 6,250 | 25,000 | |||||||||
Thomas D. Lane |
18,750 | - | 18,750 | |||||||||
Jack T. Thompson (2) |
20,000 | - | 20,000 | |||||||||
Gregory A. Tisdel |
18,750 | 6,250 | 25,000 |
(1) | The amount reported represents the grant date fair value of the restricted stock award computed in accordance with FASB ASC Topic 718, and based on a grant date stock price of $1.42 per share. All restricted stock awards vest 100% on the second anniversary of the date of grant. As of December 31, 2017, each non-employee director held unvested shares of restricted stock as follows: Skotdal, 2,211 shares; Adams, 1,475 shares; Dale, 0 shares; Haugen, 1,843 shares; Hovde, 1,843 shares; Lane, 0 shares; Thompson, 0 shares; Tisdel, 1,843 shares. |
(2) | All directors fees payable to Mr. Dale and Mr. Thompson are paid directly to their firms. |
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PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth information, as of the date of this prospectus, regarding the beneficial ownership of our common stock immediately prior to and immediately after the consummation of this offering, by:
| each person known by us to own beneficially more than 5% of our outstanding common stock; |
| each of our directors; |
| each of our named executive officers; |
| all of our directors and executive officers as a group; and |
| each selling shareholder. |
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. A security holder is also deemed to be, as of any date, the beneficial owner of all securities that such security holder has the right to acquire within 60 days after such date through (i) the exercise of any option or warrant, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement or (iv) the automatic termination of a trust, discretionary account or similar arrangement. Except as otherwise indicated in the footnotes to the following table, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Except as otherwise indicated, the address for each shareholder listed below is c/o Coastal Financial Corporation, 5415 Evergreen Way, Everett, WA 98203.
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Calculations of the percentage of beneficial ownership held by each person listed below are based on 8,891,859 shares of our common stock outstanding as of March 31, 2018, shares of our common stock to be outstanding after the completion of this offering (assuming no exercise of the underwriters option to purchase additional shares), and shares of our common stock to be outstanding after the completion of this offering (assuming exercise in full of the underwriters option to purchase additional shares ). Information presented assumes no participation by the shareholders, directors or executive officers listed below in our directed share program described in Underwriting (Conflicts of Interest)Directed Share Program.
Shares of Common Stock Beneficially Owned Prior to Offering |
Shares of Common Stock Sold in this Offering |
Shares of Common Stock Beneficially Owned Following Offering Assuming No Exercise of Underwriters Option to Purchase Additional Shares |
Shares of Common Stock Beneficially Owned Following Offering Assuming Exercise of Underwriters Option to Purchase Additional Shares |
|||||||||||||||||||||||||
Name of Beneficial Owner |
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
Greater than 5% Shareholders |
||||||||||||||||||||||||||||
Steven D. Hovde(1) 1629 Colonial Parkway Inverness, IL 60067 |
1,709,121 | 19.2 | % | |||||||||||||||||||||||||
Andrew R. Dale(2) Montlake Capital LLC Montlake Capital Advisor II LLC Montlake Capital II, L.P. Montlake Capital II-B, L.P. 1200 Fifth Avenue, Suite 1800 Seattle, WA 98101 |
1,496,506 | 16.8 | ||||||||||||||||||||||||||
CJA Private Equity Financial Restructuring Master Fund I, LP(3) c/o Gapstow Capital Partners 654 Madison Avenue, Suite 601 New York, NY 10065 |
|
1,403,511 |
|
|
15.8 |
|
||||||||||||||||||||||
Ellis Family Special Investment Trust, LP 311 S. Wacker Drive Suite 3390 Chicago, IL 60606 |
516,222 | 5.8 | ||||||||||||||||||||||||||
Directors and Named Executive Officers |
||||||||||||||||||||||||||||
Christopher D. Adams(4) |
13,475 | * | ||||||||||||||||||||||||||
Andrew R. Dale(5) |
1,496,506 | 16.8 | ||||||||||||||||||||||||||
Joel G. Edwards(6) |
17,960 | * | ||||||||||||||||||||||||||
John M. Haugen, Jr.(7) |
93,570 | 1.1 | ||||||||||||||||||||||||||
Steven D. Hovde(1) |
1,709,121 | 19.2 | ||||||||||||||||||||||||||
Russ A. Keithley(8) |
3,440 | * | ||||||||||||||||||||||||||
Thomas D. Lane(9) |
85,122 | * | ||||||||||||||||||||||||||
Andrew P. Skotdal(10) |
424,401 | 4.8 | ||||||||||||||||||||||||||
Eric M. Sprink(11) |
161,209 | 1.8 | ||||||||||||||||||||||||||
Jack T. Thompson(12) |
1,403,511 | 15.8 | ||||||||||||||||||||||||||
Gregory A. Tisdel(13) |
8,504 | * | ||||||||||||||||||||||||||
All directors and executive officers as a group (12 persons) |
5,437,219 | 60.0 | ||||||||||||||||||||||||||
Additional Selling Shareholders |
* | Less than 1%. |
(1) | Includes (i) 1,707,278 shares owned individually by Mr. Hovde and (ii) 1,843 shares of unvested restricted stock. |
(2) | Mr. Dale is the Managing Director of Montlake Capital LLC, which holds all of the capital and voting interests in Montlake Capital Advisor II LLC, the sole general partner of Montlake Capital II, L.P., which owns 853,241 shares of common stock, and Montlake Capital II-B, L.P., which owns 643,265 shares of common stock. |
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(3) | Does not include 261,444 shares of the Companys Class C Nonvoting Common Stock, which are not convertible by the holder, but which are convertible on a one-for-one basis into shares of our voting common stock under certain circumstances. CJA Private Equity Financial Restructuring GP I Ltd., the general partner of CJA Private Equity Financial Restructuring Master Fund I, LP, has designated all voting rights to Gapstow Capital Partners LP in its capacity as investment manager for CJA Private Equity Financial Restructuring Master Fund I, LP,. Christopher J. Acito is the Chief Executive Officer of Gapstow Capital Partners LP and Jack T. Thompson is an employee of Gapstow Capital Partners LP. Mr. Acito and Mr. Thompson share voting and investment power with respect to the shares held by CJA Private Equity Financial Restructuring Master Fund I, LP. |
(4) | Includes (i) 12,000 shares owned individually by Mr. Adams and (ii) 1,475 shares of unvested restricted stock. |
(5) | Mr. Dale is the Managing Director of Montlake Capital LLC, which holds all of the capital and voting interests in Montlake Capital Advisor II LLC, the sole general partner of Montlake Capital II, L.P., which owns 853,241 shares of common stock, and Montlake Capital II-B, L.P., which owns 643,265 shares of common stock. Mr. Dale disclaims beneficial ownership of such shares held by Montlake Capital II, L.P. and Montlake Capital II-B, L.P., except to the extent of his pecuniary interest therein. |
(6) | Includes (i) 2,760 shares owned directly by Mr. Edwards and (ii) 15,200 shares of our common stock underlying options that have vested or that will vest within 60 days. Excludes 32,800 shares of our common stock underlying options that are subject to vesting. |
(7) | Includes (i) 84,543 shares owned individually by Mr. Haugen, (ii) 1,843 shares of unvested restricted stock, (iii) 5,184 shares held by Mr. Haugens individual retirement account, and (iv) 2,000 shares held by Mr. Haugens spouse. |
(8) | Includes 3,440 shares of our common stock underlying options that have vested or that will vest within 60 days. Excludes 15,160 shares of our common stock underlying options that are subject to vesting. |
(9) | Includes 85,122 shares held by Mr. Lane jointly with his spouse, as to which Mr. Lane shares voting and dispositive power. |
(10) | Includes (i) 6,425 shares owned individually by Mr. Skotdal, (ii) 2,211 shares of unvested restricted stock, (iii) 347,757 shares owned by a limited liability company as to which Mr. Skotdal shares voting and dispositive power, (iv) 37,888 shares owned by a corporation as to which Mr. Skotdal shares voting and dispositive power, (v) 1,600 shares held by Mr. Skotdals spouse, and (vi) 25,520 shares held in trusts for Mr. Skotdals children over which Mr. Skotdal exercises voting and dispositive power. |
(11) | Includes (i) 14,126 shares owned by Mr. Sprink jointly with his spouse, as to which Mr. Sprink shares voting and dispositive power, (ii) 4,863 shares held by Mr. Sprink through the Banks 401(k) plan, and (iii) 142,220 shares of our common stock underlying options that have vested or that will vest within 60 days. Excludes 187,554 shares of our common stock underlying options that are subject to vesting. |
(12) | Mr. Thompson is a member of CJA Private Equity Financial Restructuring GP I Ltd., the sole general partner of CJA Private Equity Financial Restructuring Master Fund I LP, which entity owns 1,403,511 shares of the Companys common stock and 261,444 shares of the Companys Class C Nonvoting Common Stock. Mr. Thompson disclaims beneficial ownership of such shares held by CJA Private Equity Financial Restructuring Master Fund I LP, except to the extent of his pecuniary interest therein. |
(13) | Includes (i) 5,796 shares owned by Mr. Tisdel individually, (ii) 1,843 shares of unvested restricted stock and (iii) 865 shares owned by a corporation controlled by Mr. Tisdel. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We or the Bank may occasionally enter into transactions with certain related persons. Related persons include our executive officers, directors, beneficial owners of 5% or more of our common stock, immediate family members of or other persons sharing a household with these persons and entities in which one of these persons has a direct or indirect material interest. We generally refer to transactions with these related persons as related party transactions.
Related Party Transaction Policy
Our board of directors will adopt a written policy governing the review and approval of transactions with related parties that will or may be expected to exceed $120,000 in any fiscal year. The policy will call for the related party transactions to be reviewed and, if deemed appropriate, approved or ratified by our audit committee. Upon determination by our audit committee that a transaction requires review under the policy, the material facts will be required to be presented to the audit committee. In determining whether or not to approve a related party transaction, our audit committee will take into account, among other relevant factors, the size of the transaction and the amount of consideration payable to the related party, whether the related party transaction involves a conflict of interest and whether the terms of the transaction are at least as favorable to the Company as those that might be achieved with an unaffiliated third party. In the event that we become aware of a related party transaction that was not approved under the policy before it was entered into, our audit committee will review such transaction as promptly as reasonably practical and will take such course of action as may be deemed appropriate under the circumstances. In the event a member of our audit committee is not disinterested with respect to the related party transaction under review, that member may not participate in the review, approval or ratification of that related party transaction.
Certain decisions and transactions are not subject to the related party transaction policy, including: (i) compensation or benefits relating to directors or executive officers and (ii) indebtedness to us in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to us and not presenting more than the normal risk of collectability or other unfavorable features.
Certain Related Party Transactions
The following is a description of transactions since January 1, 2015, including currently proposed transactions to which we have been or are to be a party in which the amount involved exceeded or will exceed $120,000, and in which a related party had or will have a direct or indirect material interest.
Investment Agreements. On March 30, 2011, in connection with the completion of a private placement of our common stock in which we raised gross proceeds of approximately $5.3 million, we entered into substantially identical Investment Agreements with CJA Private Equity Financial Restructuring Master Fund I LP (the Gapstow fund), Montlake Capital II, L.P. and Montlake Capital II-B, L.P. (collectively, the Montlake funds), and Steven D. Hovde, a member of our board of directors. We subsequently entered into substantially identical Investment Agreements with the Gapstow fund and the Montlake funds in 2012 in connection with the completion of a private placement of our common stock and nonvoting common stock in which we raised gross proceeds of approximately $9.0 million. Under the Investment Agreements, the Gapstow fund, the Montlake funds and Mr. Hovde have each agreed to certain restrictions for so long as such investor holds 4.9% or more of our outstanding common stock, including not to (i) acquire any of our voting securities if such acquisition would result in the investor or its affiliates controlling the Company for purposes of the BHC Act or the Change in Bank Control Act, owning 25% or more of the total equity of the Company (provided that, pursuant to certain of the Investment Agreements, the investor may not acquire securities that would result in the ownership of 33% or more of our total equity if the investor owns less than 15% of any class of our voting securities) or having beneficial ownership or control of 25% or more of any class of our voting securities, (ii) make or participate in any solicitation of proxies to vote, or seek to advise or influence any person with respect to the voting of, any of
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our voting securities, (iii) propose a director or slate of directors in opposition to a nominee or slate of nominees proposed by us, call a meeting of shareholders or initiate any proposal for action by shareholder of the Company, form or join a group with respect to any of our voting securities, or otherwise act alone or in concert with others to influence or control our management, board of directors or policies, (iv) bring any action to contest the validity of the restrictions in the Investment Agreement or seek a release, or request an amendment or waiver, of any of the restrictions in the Investment Agreement, (v) enter into, or agree, offer, propose or seek to enter into, any business combination relating to all or part of the Company or the Bank, (vi) publicly disclose any intention, plan or arrangement inconsistent with the foregoing restrictions, (vii) enter into any agreement with us that substantially limits the discretion of our management over major policies and decisions, or (viii) dispose or threaten to dispose of the investors equity interest in the Company as a condition or inducement of specific material action or non-action by us. We have agreed not to adopt any poison pill or shareholder rights plan that would limit the investors rights to acquire shares up to the limits described in clause (i) above.
Under the Investment Agreements, as amended, at any time we issue any equity securities, or any securities, options or debt convertible or exchangeable for equity securities, the Gapstow fund, the Montlake funds and Mr. Hovde each shall be afforded the opportunity to acquire from us at the same price and on the same terms as such securities are issued to others an amount of the new securities that enables the investor to maintain its proportionate aggregate ownership interest in the Company immediately prior to the new issuance, excluding issuances of securities under our equity incentive plans or as consideration in connection with an acquisition or business combination. The anti-dilution rights provided in the Investment Agreements will terminate upon the earlier of the date that the Investor ceases to own 4.9% or more of our outstanding common stock (before giving effect to any issuances triggering the anti-dilution rights) or completion of an underwritten public offering of our common stock pursuant to a registration statement (other than on Form S-4, Form S-8 or comparable form) under the Securities Act (i) pursuant to which there is established a listing on the Nasdaq Stock Market or other national securities exchange for our common stock and (ii) with aggregate gross proceeds of at least $25 million.
The Investment Agreements require us to elect or appoint a representative of the Gapstow fund, the Montlake funds and Mr. Hovde to the board of directors of the Company and the Bank, subject to the satisfaction of all legal and governance requirements regarding service as a director and approval of our nominating committee, for as long as the investor owns 4.9% or more of our outstanding common stock. The Investment Agreements also require us to recommend to shareholders the election of the investors board representatives, to use our best efforts to cause them to be elected and to appoint each of the investors board representatives to two committees of the board of directors, subject to meeting applicable governance rules and guidelines. Under the Investment Agreement, for as long as the investor owns 4.9% or more of our outstanding common stock, the investors board representatives are prohibited from serving as chairman of the board of directors or chairman of any board committee. Messrs. Dale, Hovde and Thompson serve on our board of directors under the terms of the Investment Agreements. We do not expect the governance rights described in this paragraph to terminate in connection with this offering.
The Gapstow fund, the Montlake funds and Mr. Hovde have the right, upon notice to the Company, to convert all or a portion of their shares of common stock into an equivalent number of shares of nonvoting common stock.
The foregoing description of the Investment Agreements does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Investments Agreements, which are filed as an exhibit to the registration statement of which this prospectus forms a part.
Silver Lake Lease. Effective June 4, 2008, we entered into a lease with respect to our Silver Lake facility with a limited liability company that is owned by John M. Haugen, Jr., who is one of our directors. The lease has an initial term of ten years ending June 30, 2018, with four renewal options of five years each. We have exercised our option to extend the lease for an additional ten years through June 30, 2028. The lease provides for a monthly base rent of $15,150 for the initial year of the renewal term and is subject to increase annually thereafter based on the consumer price index. We are also responsible for real property taxes, utilities, maintenance, repairs and alterations. For 2017, total lease payments were $203,000.
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Downtown Everett Lease. On October 21, 1996, we entered into a lease with respect to our downtown Everett branch facility with a group of investors that includes a limited liability company in which Andrew P. Skotdal, who is one of our directors, has an interest. The lease commenced in 1997 for a period of ten years and has been renewed through March 31, 2024. The lease, as amended, provides for a minimum monthly rent of $45,520, subject to possible reduction of $3,000 per month for a 36-month period in connection with construction on an adjoining property. We are also responsible for real property taxes, utilities, maintenance, repairs and alterations. For 2017, total lease payments were $475,000.
Letter Agreement with Hovde Group, LLC. On January 6, 2015, we entered into a letter agreement with Hovde Group, LLC, the sole owner of which is Steven D. Hovde, our director. The letter agreement, which terminated as of April 27, 2018, engaged Hovde Group, LLC to provide certain financial advisory services to the Company in connection with the possible acquisition of certain enumerated financial institutions. However, if within twelve months of April 27, 2018, the Company enters into a binding agreement, arrangement or commitment relating to the terms and conditions of an acquisition of one of the enumerated financial institutions and subsequently consummates such acquisition transaction, Hovde Group, LLC could be entitled to compensation in the amount of $350,000. The Company also remains obligated to reimburse Hovde Group, LLC for certain expenses and to incur certain indemnification costs, in each case as provided in the letter agreement.
Ordinary Banking Relationships
In the ordinary course of our business, we have engaged in ordinary banking transactions with our directors, executive officers, their immediate family members and companies in which they may have a 5% or more beneficial ownership interest, including deposit relationships and loans to such persons and companies. Any such transactions were made on substantially the same terms, including interest rates and collateral (where applicable), as those prevailing at the time as comparable transactions with persons who were not related to us. Any loans that we make to our officers, directors and principal shareholders, as well as their immediate family members and affiliates, are approved by our board of directors in accordance with applicable bank regulatory requirements. No related party loans involve more than the normal credit collection risk and do not present any other unfavorable features to us. As of March 31, 2018, we had $5.8 million of loans outstanding to our directors and officers, their immediate family members and their affiliates, while deposits from this group totaled $4.6 million. As of the date of this prospectus, no related party loans were categorized as nonaccrual, past due, restructured or potential problem loans. We expect to continue to enter into transactions in the ordinary course of business on similar terms with our directors and officers, as well as their immediate family members and affiliates.
Other Related Party Transactions
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of our common stock offered in this offering for sale to certain of our directors, executive officers, employees and other related persons who have expressed an interest in purchasing our shares of common stock in this offering through a directed share program. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See Underwriting (Conflicts of Interest)Directed Share Program for additional information.
Passivity Commitments
Certain of our shareholders have entered into passivity commitments with the Federal Reserve that generally restrict these shareholders from entering into banking or nonbanking transactions with us and from a variety of actions that would result in the shareholders exercising or attempting to exercise a controlling influence over the management or policies of the Company. These shareholders may establish and maintain deposit accounts with us provided that the aggregate balance of these deposit accounts does not exceed $500,000 and the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons who are unaffiliated with us.
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The following description of our capital stock and provisions of our articles of incorporation and our bylaws are summaries and are qualified by reference to the articles of incorporation and the bylaws. We have filed copies of these documents with the SEC as exhibits to the registration statement of which this prospectus forms a part.
General
Our authorized capital stock consists of 300,000,000 shares of voting and nonvoting common stock, no par value per share, and 25,000,000 shares of preferred stock, no par value per share. Of the 300,000,000 shares of voting and nonvoting common stock, 1,000,000 shares are designated as Class B Nonvoting Common Stock and up to 100,000,000 shares may be designated as Class C Nonvoting Common Stock.
At March 31, 2018, 8,891,859 shares of our common stock were issued and outstanding and held by approximately 575 shareholders of record, 100,000 shares of Class B Nonvoting Common Stock were issued and outstanding and held by one shareholder of record, 261,444 shares of Class C Nonvoting Common Stock were issued and outstanding and held by one shareholder of record, and no shares of preferred stock were issued and outstanding. Also as of March 31, 2018, options to purchase 784,984 shares of our common stock under our 2006 Plan were outstanding. In addition, 500,000 shares of our common stock are reserved for future issuance under our 2018 Plan.
In the future, the authorized but unissued and unreserved shares of common stock, nonvoting common stock and preferred stock will be available for issuance for a variety of corporate purposes, including future private or public offerings to raise additional capital, corporate acquisitions, and employee benefit plans. Except as may be required to approve a merger or other transaction in which the additional authorized shares of common stock or preferred stock would be issued, no shareholder approval will be required for the issuance of those shares.
Shares of our capital stock represent equity interests in the Company and are not bank deposits, savings accounts or other obligations of or guaranteed by the Bank. Our capital stock is neither insured nor guaranteed by the FDICs Deposit Insurance Fund or any other governmental agency and is subject to investment risks, including the possible loss of your entire investment.
The description of our capital stock below is qualified in its entirety by reference to our articles of incorporation.
Reverse Stock Split
On May 4, 2018, we effected a one-for-five reverse stock split, whereby every five shares of our common stock and nonvoting common stock were automatically combined into one share of common stock and nonvoting common stock, respectively. Fractional shares were rounded up to the nearest whole share. Except for adjustments that resulted from the treatment of fractional shares, each shareholder held the same percentage of common stock or nonvoting common stock, as the case may be, outstanding after the reverse stock split as that shareholder held immediately prior to the reverse stock split. The effect of the reverse stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this prospectus.
Common Stock
General. Each share of common stock has the same relative rights as, and is identical in all respects to, each other share of common stock.
Voting Rights. Each holder of our common stock is entitled to one vote for each share of record held on all matters submitted to a vote of shareholders, except as otherwise required by law and subject to the rights and
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preferences of the holders of any outstanding shares of our preferred stock. Holders of our common stock are not entitled to cumulative voting in the election of directors. Directors are elected by a plurality of the votes cast.
Dividends. Holders of our common stock are equally entitled to receive ratably such dividends as may be declared from time to time by our board of directors out of legally available funds. The ability of our board of directors to declare and pay dividends on our common stock is subject to the laws of the state of Washington, applicable federal and state banking laws and regulations, and the terms of any senior securities (including preferred stock) we may then have outstanding. Our principal source of income is dividends that are declared and paid by the Bank on its capital stock. Therefore, our ability to pay dividends is dependent upon our receipt of dividends from the Bank. See Dividend Policy.
No Preemptive or Conversion Rights. Holders of shares of our common stock do not have preemptive rights to purchase additional shares of our common stock and have no conversion or redemption rights.
Liquidation Rights. In the event of our liquidation, dissolution, or winding up, the holders of shares of our common stock shall be entitled to receive, in cash or in kind, our assets available for distribution remaining after payment or provision for payment of our debts and liabilities and distributions or provision for distributions to holders of any preferred stock that may be issued and outstanding having preference over common shares. Because we are a bank holding company, our rights and the rights of our creditors and shareholders to receive the assets of any subsidiary upon liquidation or recapitalization may be subject to prior claims of our subsidiarys creditors, except to the extent that we may be a creditor with recognized claims against our subsidiary.
Class B Nonvoting Common Stock
Except with respect to voting rights, our Class B Nonvoting Common Stock is identical to and has the same rights as our common stock. Class B Nonvoting Common Stock does not have the right to vote on any matter requiring the approval of shareholders unless specifically required by applicable law.
Class C Nonvoting Common Stock
Except with respect to voting rights, restriction on transfer and conversion rights, our Class C Nonvoting Common Stock is identical to and has the same rights as our common stock.
Voting Rights. Class C Nonvoting Common Stock has no voting rights, except as may be required by law.
Restrictions on Transfer. The shares of Class C Nonvoting Common Stock may not be transferred by the original purchaser of the shares except: (1) to the Company; (2) in a widely distributed public offering that is registered under the Securities Act; (3) to a person that is acquiring a majority of the Companys voting securities (not including voting securities such person is acquiring from the transferor); or (4) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company (including pursuant to a related series of transactions), provided that the transferee or transferees are not affiliated with the original purchaser of the Class C Nonvoting Common Stock.
Conversion Rights. Class C Nonvoting Common Stock is not convertible into common stock or any other class or series of the Companys equity by the original purchaser of the shares. Following a permissible transfer of the Class C Nonvoting Common Stock, as described above, with the approval of our board of directors, the Class C Nonvoting Common Stock may be converted into common stock by the transferee or transferees on terms and conditions approved by our board of directors.
Preferred Stock
Our articles of incorporation authorize our board of directors to establish one or more series of preferred stock. Unless required by law or any stock exchange, the authorized but unissued shares of preferred stock will be
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available for issuance without further action by our shareholders. Our board of directors is authorized to divide the preferred stock into series and, with respect to each series, to fix and determine the designation, terms, preferences, limitations and relative rights thereof, including dividend rights, dividend rates, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. Without shareholder approval, we could issue preferred stock that could impede or discourage an acquisition attempt or other transaction that some, or a majority, of our shareholders may believe is in their best interests or in which they may receive a premium for their common stock over the market price of the common stock.
Anti-Takeover Effects of Applicable Law and Provisions of our Articles of Incorporation and Bylaws
Certain provisions of the WBCA, federal banking laws and regulations, our articles of incorporation and our bylaws contain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors and are intended to enhance the likelihood of continuity and stability in the composition of our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.
Federal Banking Law. The ability of a third party to acquire our stock is also limited under applicable U.S. banking laws, including regulatory approval requirements. The BHC Act requires any bank holding company to obtain the approval of the Federal Reserve before acquiring, directly or indirectly, more than 5% of our outstanding common stock. Any company (as defined in the BHC Act) other than a bank holding company is required to obtain the approval of the Federal Reserve before acquiring control of us. Control generally means (i) the ownership or control of 25% or more of a class of voting securities, (ii) the ability to elect a majority of the directors or (iii) the ability otherwise to exercise a controlling influence over management and policies. A person, other than an individual, that controls us for purposes of the BHC Act is subject to regulation and supervision as a bank holding company under the BHC Act. In addition, under the Change in Bank Control Act, and the Federal Reserves regulations thereunder, any person, either individually or acting through or in concert with one or more persons, often must provide notice to the Federal Reserve prior to acquiring, directly or indirectly, 10% or more of our outstanding common stock (or any other class of our voting securities).
Business Combinations under Washington Law. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the WBCA prohibits, with certain exceptions, a target corporation from engaging in certain significant business transactions with an acquiring person who acquires 10% or more of the voting securities of the target corporation for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporations board of directors prior to the date of the acquisition or, at or subsequent to the date of the acquisition, the transaction is approved by a majority of the members of the target corporations board of directors and authorized at a shareholders meeting by the vote of at least two-thirds of the outstanding voting shares of the target corporation, excluding shares owned or controlled by the acquiring person. The prohibited transactions include, among others, a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person, termination of 5% or more of the employees of the target corporation as a result of the acquiring persons acquisition of 10% or more of the shares, or allowing the acquiring person to receive any disproportionate benefit as a shareholder. After the five-year period during which significant business transactions are prohibited, certain significant business transactions may occur if certain fair price criteria or shareholder approval requirements are met. Target corporations include all publicly-traded corporations incorporated under Washington law, as well as publicly traded foreign corporations that meet certain requirements.
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Transactions with Interested Shareholders. Under our articles of incorporation, an interested shareholder transaction must be approved by the affirmative vote of the holders of two-thirds of the shares held or controlled by persons other than the interested shareholder. For purposes of this provision, an interested shareholder transaction is defined as any merger, share exchange, sale of assets, dissolution or similar transaction between us or any of our subsidiaries and an interested shareholder or an affiliated person of that shareholder. An interested shareholder is any person or group of affiliated persons who beneficially owns 20% or more of our voting shares (that is, our common stock). The special shareholder approval requirement for an interested shareholder transaction will not apply to a transaction that (1) is approved by a majority vote of our board of directors, excluding votes cast by directors who are directors or officers of, or have a material financial interest in, the interested shareholder or who were nominated for election as a director pursuant to an arrangement with the interested shareholder and first elected as a director within 24 months of the proposed transaction or (2) a majority of the directors whose votes are entitled to be counted, as described above, determines that the fair market value of the consideration to be received by the noninterested holders of shares of the same class owned by the interested shareholder is not less than the highest fair market value of the consideration paid by the interested shareholder in acquiring shares of the same class within 24 months of the proposed transaction.
Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock are available for future issuances without shareholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans. However, these additional authorized shares may also be used by the board of directors consistent with its fiduciary duty to deter future attempts to gain control of us. The board of directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board of directors has the power to the extent consistent with its fiduciary duties to issue a series of preferred stock to persons friendly to management in order to attempt to block a tender offer, merger or other transaction by which a third party seeks control of us.
Classified Board of Directors. Our board of directors is divided into three classes, each of which contains approximately one-third of the members of the board of directors. The members of each class are elected for terms of three years, with the terms of office of all members of one class expiring each year so that approximately one-third of the total number of directors is elected each year. The classification of directors, together with the provisions in our Articles of Incorporation described below that limit the ability of shareholders to remove directors and that permit only the remaining directors to fill any vacancies on the board of directors, have the effect of making it more difficult for shareholders to change the composition of the board of directors. As a result, at least two annual meetings of shareholders will be required for the shareholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable.
Removal of Directors. Our articles of incorporation provide that no director may be removed from office by the shareholders without cause except by a vote of 80% of the outstanding shares then entitled to vote.
No Cumulative Voting. Our articles of incorporation eliminate cumulative voting in the election of directors.
Special Meeting of Shareholders. Our bylaws provide that special meetings of our shareholders may be called only by our Chief Executive Officer, President, any member of our board of directors or by holders of not less than one-third of all shares of stock entitled to vote on any issue proposed to be considered at the meeting.
No Action by Less than Unanimous Written Consent. Under the WBCA, shareholder action may be taken without a meeting or a vote only if the action is approved by all shareholders entitled to vote on the corporate action.
Advance Notice Requirements for Shareholder Proposals and Director Nominations. Our bylaws provide that shareholders seeking to bring business before our annual meeting of shareholders, or to nominate candidates for
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election as directors at our annual meeting of shareholders, must provide timely notice of their intent in writing. To be timely, a shareholders notice must be delivered to our principal executive offices not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding years annual meeting. For the first annual meeting of shareholders after the closing of this offering, a shareholders notice shall be timely if delivered to our principal executive offices not later than the tenth day following the day on which a public announcement of the date of our annual meeting of shareholders is first made by us. Our bylaws also specify certain requirements as to the form and content of a shareholders notice. These provisions may preclude our shareholders from bringing matters before our annual meeting of shareholders or from making nominations for directors at our annual meeting of shareholders.
Exclusive Forum
Our bylaws provide that a state court located within the state of Washington (or, if no state court located within the state of Washington has jurisdiction, the United States District Court for the Western District of Washington) will be the exclusive forum for: (a) any actual or purported derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty by any of our directors or officers; (c) any action asserting a claim against us or our directors or officers arising pursuant to the WBCA, our articles of incorporation, or our bylaws; or (d) any action asserting a claim against us or our officers or directors that is governed by the internal affairs doctrine. By becoming a shareholder of our Company, you will be deemed to have notice of and have consented to the provisions of our bylaws related to choice of forum. The choice of forum provision in our bylaws may limit our shareholders ability to obtain a favorable judicial forum for disputes with us.
Limitation on Liability and Indemnification of Directors and Officers
The WBCA provides that a corporation may indemnify an individual made a party to a proceeding because the individual is or was a director against liability incurred in the proceeding if: (i) the individual acted in good faith; and (ii) the individual reasonably believed, in the case of conduct in the individuals official capacity, that the individuals conduct was in the best interests of the corporation, and in all other cases, that the individuals conduct was at least not opposed to the corporations best interests. In the case of a criminal proceeding, the individual must not have had any reasonable cause to believe the conduct was unlawful.
A director may not be indemnified in connection with a proceeding by or in the right of the corporation in which the director was found liable to the corporation, or a proceeding in which the director was found to have improperly received a personal benefit. Washington law provides for mandatory indemnification of directors for reasonable expenses incurred when the indemnified party is wholly successful in the defense of the proceeding. A corporation may indemnify officers to the same extent as directors.
Washington law permits a director of a corporation who is a party to a proceeding to apply to the courts for indemnification or advance of expenses, unless the articles of incorporation provide otherwise, and the court may order indemnification or advancement of expenses under certain circumstances set forth in the statute. Washington law further provides that a corporation may, if authorized by its articles of incorporation or a bylaw or resolution adopted or ratified by the shareholders, provide indemnification in addition to that provided by statute, subject to certain conditions set forth in the statute.
Our articles of incorporation provide, among other things, for the indemnification of directors, and authorize the board of directors to pay reasonable expenses incurred by, or satisfy a judgment or fine against, a current or former director in connection with any legal liability incurred by the individual while acting for us within the scope of his or her employment and which was not the result of conduct finally adjudged to be egregious conduct. Egregious conduct is defined to mean acts or omissions involving intentional misconduct, a knowing violation of law, conduct violating the statutory provision regarding liability for unlawful distributions, or participation in any transaction from which the person will personally receive a benefit in money, property or services to which that person is not legally entitled.
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In addition, our articles of incorporation provide that our directors will not be personally liable for monetary damages to us for conduct as a director unless the conduct is finally adjudged to have been egregious conduct, as described above.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors and officers, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Certain indemnification payments to our directors for certain actions taken with respect to the Bank require specific prior approval of a majority of directors not named as respondents in the matter under FDIC regulations; other indemnification payments may be prohibited entirely.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Transfer Online, Inc.
Listing
We have applied to list our common stock on the Nasdaq Global Select Market under the symbol CCB.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no established public trading market for our common stock. Although we have applied to list our common stock on the Nasdaq Global Select Market, we cannot assure you that a significant public market for our common stock will develop or be sustained following this offering. Future sales of substantial amounts of our common stock (including shares issued on the exercise of options) in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices as well as our ability to raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock issued and outstanding (or shares if the underwriters exercise in full their option to purchase additional shares).
The shares of our common stock sold in this offering will be freely tradable without further restriction or registration under the Securities Act, except for any shares held by our affiliates as that term is defined in Rule 144 under the Securities Act, including those shares that may be purchased by certain of our directors and executive officers through the directed share program described in the section entitled Underwriting (Conflicts of Interest)Directed Share Program. The remaining outstanding shares of our common stock and nonvoting common stock will be deemed restricted securities or control securities under the Securities Act. Subject to certain contractual restrictions, including the lock-up agreements described below, restricted securities and control securities may be sold in the public market only if (i) they have been registered or (ii) they qualify for an exemption from registration under Rule 144 or any other applicable exemption.
Lock-Up Agreements
We, our executive officers and directors, the selling shareholders and certain other shareholders who beneficially own in the aggregate approximately % of our currently outstanding shares of common stock are entering into lock-up agreements under which we and they will generally agree not to sell or otherwise transfer our or their common stock or securities convertible into or exchangeable or exercisable for our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions. For additional information, see Underwriting (Conflicts of Interest)Lock-Up Agreements. As a result, shares of our common stock subject to lock-up agreements will not be eligible for sale until these agreements expire or the restrictions are waived.
Following the lock-up period, all of the shares of our common stock that are restricted securities or are held by our affiliates as of the date of this prospectus will be eligible for sale in the public market only if (i) they are registered under the Securities Act or (ii) an exemption from registration, such as Rule 144, is available.
The underwriters do not intend to release early any portion of the shares of our common stock subject to the foregoing lock-up agreements. However, the underwriters, in their sole discretion, may release any of our shares of common stock from the lock-up agreements prior to expiration of the 180-day period without notice.
Rule 144
Under Rule 144, a person (or persons whose shares are aggregated) who is, or was at any time during the three months preceding a sale, deemed to be our affiliate would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock, which would be approximately shares of common stock immediately after this offering (assuming the underwriters do not elect to exercise their option to purchase additional shares), or the average weekly trading volume of our common stock on the Nasdaq Global Select Market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to a six-month holding period and requirements relating to manner of sale and notice requirements and the availability of current public information about us. Upon completion of this offering and subject to the lock-up agreements described above, we expect that approximately % of our
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outstanding common stock (or % of our outstanding common stock if the underwriters exercise in full their option to purchase additional shares), will be subject to limitations on sales by affiliates under Rule 144 (assuming such affiliates do not purchase any shares in this offering).
Rule 144 also provides that a person who is not deemed to be, or have been, at any time during the three months preceding a sale, our affiliate, and who has for at least six months beneficially owned shares of our common stock that are restricted securities, will be entitled to freely sell such shares of our common stock subject only to the availability of current public information regarding us. A person who is not deemed to be, or have been, at any time during the three months preceding a sale, our affiliate, and who has beneficially owned for at least one year shares of our common stock that are restricted securities, will be entitled to freely sell such shares of our common stock under Rule 144 without regard to the current public information requirements of Rule 144.
Rule 701
Rule 701 under the Securities Act generally applies to stock options and restricted common stock granted by an issuer to its employees, directors, officers, consultants or advisors in connection with a compensatory stock or option plan or other written agreement before the issuer becomes subject to the reporting requirements of the Exchange Act, as well as the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are restricted securities and, beginning 90 days after the date of this prospectus, subject to the contractual restrictions described above, may be sold by persons other than our affiliates without compliance with the current public information and minimum holding period requirement of Rule 144 and by affiliates without compliance with the minimum holding period requirement of Rule 144.
Registration Statement on Form S-8
Upon completion of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act registering all of the shares of common stock reserved for issuance pursuant to awards under the 2006 Stock Option and Equity Compensation Plan and the 2018 Omnibus Incentive Plan, to the extent that Form S-8 is available. Shares covered by such registration statements will be available for sale in the open market, beginning 90 days after the date of this prospectus, except to the extent that the shares are subject to Rule 144 volume limitations, vesting restrictions or the contractual restrictions described above.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF OUR COMMON STOCK
The following is a general discussion of material U.S. federal income and estate tax consequences of the purchase, ownership and disposition of shares of our common stock by a non-U.S. holder (as defined below) that acquires our common stock in this offering and holds it as a capital asset within the meaning of Section 1221 of the Code (defined below).
As used herein, the term non-U.S. holder means a beneficial owner (as defined under U.S. tax laws) of our common stock that is for U.S. federal income tax purposes:
| a non-resident alien; |
| a foreign corporation (or any other entity treated as a corporation for U.S. federal income tax purposes); |
| an estate, the income of which is not subject to U.S. federal income taxation regardless of its source; or |
| a trust that does not have in effect a valid election under the U.S. Treasury regulations, or the Treasury Regulations, to be treated as a United States person and either (a) no court within the United States is able to exercise primary supervision over the trusts administration or (b) no United States person has the authority to control all substantial decisions of that trust. |
This discussion does not address all aspects of U.S. federal income and estate taxation that may be applicable to non-U.S. holders in light of their particular circumstances or status (including, for example, financial institutions, banks, investment funds, broker-dealers or traders in securities, insurance companies, persons subject to the alternative minimum tax, partnerships or other pass-through entities, corporations that accumulate earnings to avoid U.S. federal income tax, certain United States expatriates, tax-exempt organizations, pension plans, persons in special situations, such as those that have elected to mark securities to market or that hold shares of our common stock as part of a straddle, hedge or other integrated investment, foreign governments or agencies, and persons required to accelerate the recognition of any item of gross income for United States federal income tax purposes with respect to our common stock as a result of such item being taken into account in an applicable financial statement).
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a person treated as a partner in the partnership for U.S. federal income tax purposes generally will depend on the status of the partner and the activities of the partnership. Partnerships (and other entities or arrangements so treated for U.S. federal income tax purposes) and their partners should consult their own tax advisors.
This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, referred to herein as the Code, Treasury Regulations (whether final, temporary or proposed) promulgated thereunder, published rulings of the IRS, published administrative positions of the IRS, and U.S. court decisions that are applicable and, in each case, as in effect and available as of the date of this prospectus. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.
If you are considering the purchase, ownership or disposition of our common stock, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation, as well as any consequences arising under the laws of any other taxing jurisdiction.
This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.
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Dividends
If we make a distribution of cash or property with respect to our common stock, any such distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits. Subject to the discussion below under FATCA Withholding and Information Reporting and Backup Withholding, any dividends (including any constructive distributions taxable as dividends) paid to a non-U.S. holder of our common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Dividends that are effectively connected with the conduct of a trade or business within the United States by the non-U.S. holder (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment) are not subject to the withholding tax, provided certain certification and disclosure requirements are satisfied (including furnishing IRS Form W-8ECI to us or to our paying agent). Instead, such dividends are subject to U.S. federal income tax on a net income basis at the regular graduated rates in the same manner as if the non-U.S. holder were a U.S. person as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty.
A non-U.S. holder of our common stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (1) to complete IRS Form W-8BEN or IRS Form W-8BEN-E and certify under penalty of perjury that such holder is not a U.S. person as defined under the Code and is eligible for treaty benefits or (2) if our common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable Treasury Regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.
A non-U.S. holder of our common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
To the extent a distribution with respect to our common stock exceeds our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, the distribution will be treated, first, as a tax-free return of the non-U.S. holders investment, up to the holders adjusted tax basis in its shares of our common stock, and, thereafter, as capital gain, which is subject to the tax treatment described below in Gain on Sale, Exchange or Other Taxable Disposition.
Gain on Sale, Exchange or Other Taxable Disposition
Subject to the discussion below under FATCA Withholding and Information Reporting and Backup Withholding, any gain realized by a non-U.S. holder on the sale, exchange or other taxable disposition of our common stock (including a redemption, but only if the redemption would be treated as a sale or exchange rather than a distribution for U.S. federal income tax purposes) generally will not be subject to U.S. federal income tax or any withholding thereof unless:
| the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base maintained in the United States of the non-U.S. holder), in which case the non-U.S. holder generally will be subject to U.S. federal income tax on a net income basis with respect to such gain in the same manner as if such holder were a resident of the United States and, if the non-U.S. holder is a corporation for U.S. federal income tax purposes, will be subject to an additional branch profits tax at a 30% rate (or at a lower rate under an applicable income tax treaty); |
| the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition and certain other conditions are met, in which case the non-U.S. holder generally |
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will be subject to U.S. federal income tax at a 30% rate (or at a lower rate under an applicable income tax treaty) on the gain derived from the sale, which gain may be offset by U.S.-source capital losses for the year; or |
| we are or have been a U.S. real property holding corporation for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding such disposition or such non-U.S. holders holding period for our common stock (the relevant period) and the non-U.S. holder (i) disposes of our common stock during a calendar year when our common stock is no longer regularly traded on an established securities market or (ii) owned (directly, indirectly and constructively) more than 5% of our common stock at any time during the relevant period, in which case such a non-U.S. holder will be subject to tax on the gain on the disposition of shares of our common stock generally as if the gain were effectively connected with the conduct of a trade or business in the United States, except that the branch profits tax will not apply. |
We believe we are not and do not anticipate becoming a U.S. real property holding corporation for U.S. federal income tax purposes. Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its United States real property interests (as defined in the Code) equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business.
FATCA Withholding
Sections 1471 through 1474 of the Code (commonly referred to as the Foreign Account Tax Compliance Act of 2009, or FATCA) generally impose a 30% withholding tax on U.S. source payments, such as dividends on our shares paid to, and the gross proceeds derived from the sale or other disposition of, such shares on or after January 1, 2019 by, a foreign entity unless the foreign entity (1) is a foreign financial institution (as defined under FATCA) that (a) undertakes specified due diligence, reporting, withholding and certification obligations or (b) is a resident in a jurisdiction that has entered into an intergovernmental agreement with the United States relating to FATCA and complies with the diligence and reporting requirements of the intergovernmental agreement and local implementing rules, (2) is a non-financial foreign entity (as defined under FATCA) and identifies certain of its U.S. investors or that it does not have such U.S. investors, generally on IRS Form W-8BEN-E, or (3) otherwise is exempted from withholding under FATCA.
Under certain circumstances, a non-U.S. holder will be eligible for refunds or credits of withholding taxes imposed under FATCA by filing a United States federal income tax return. You are encouraged to consult with your own tax advisor regarding the possible implications of this legislation on your investment in our shares.
Information Reporting and Backup Withholding
Except as described below, a non-U.S. holder generally will be exempt from backup withholding and information reporting requirements with respect to dividend payments and the payment of the proceeds from the sale of shares or our common stock, as long as the payor or broker does not have actual knowledge or reason to know that the holder is a United States person and has furnished to the payor or broker:
| a valid IRS Form W-8BEN or Form W-8BEN-E on which the non-U.S. holder certifies, under penalties of perjury, that it is a non-United States person; or |
| other documentation upon which it may rely to treat the payments as made to a non-United States person in accordance with Treasury regulations; |
or the non-U.S. holder otherwise establishes an exemption.
However, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required.
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Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty or exchange of information agreement.
A non-U.S. holder will be subject to backup withholding, currently at the rate of 24%, for dividends paid to the holder unless such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a U.S. person as defined under the Code), or such holder otherwise establishes an exemption from backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a non-U.S. holders U.S. federal income tax liability, provided that the required information is furnished to the IRS in a timely manner.
Federal Estate Taxes
The estates of nonresident alien decedents generally are subject to U.S. federal estate tax on property with a United States situs. Because we are a United States corporation, our common stock will be United States situs property and therefore will be included in the taxable estate of a nonresident alien decedent at the time of the decedents death, unless an applicable estate tax treaty between the United States and the decedents country of residence provides otherwise. An estate tax credit is available to reduce the net tax liability of a nonresident aliens estate, but the estate tax credit for a nonresident alien is generally much smaller than the applicable credit for computing the estate tax of a United States resident. Nonresident aliens should consult their personal tax advisors regarding the U.S. federal estate tax consequences of owning our common stock.
Each prospective non-U.S. holder of our common stock should consult that holders own tax advisor with respect to its particular circumstances.
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UNDERWRITING (CONFLICTS OF INTEREST)
We and the selling shareholders are offering the shares of our common stock described in this prospectus in an underwritten offering in which we, the selling shareholders and Keefe, Bruyette & Woods, Inc., or Keefe, Bruyette & Woods, and Hovde Group, LLC, as representatives for the underwriters named below, are entering into an underwriting agreement with respect to the shares of our common stock being offered hereby. Subject to certain conditions, each underwriter has severally agreed to purchase, and we and the selling shareholders have severally agreed to sell the number of shares of our common stock indicated in the following table:
Number of Shares |
||||
Keefe, Bruyette & Woods, Inc. |
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Hovde Group, LLC |
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Total |
The underwriters are offering the shares of our common stock subject to a number of conditions, including receipt and acceptance of our common stock by the underwriters. The obligations of the underwriters to pay for and accept delivery of the shares offered by this prospectus are subject to these conditions. The underwriting agreement among us, the selling shareholders and the underwriters provides that if any underwriter defaults, the purchase commitments of the non-defaulting underwriters may be increased or this offering may be terminated.
In connection with this offering, the underwriters or securities dealers may distribute offering documents to investors electronically. See Electronic Distribution.
Underwriting Discount
Shares of our common stock sold by the underwriters to the public will be offered at the initial public offering price set forth on the cover page of this prospectus. Any shares of our common stock sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares of our common stock purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all of the shares of our common stock are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Sales of shares of our common stock made outside of the U.S. may be made by affiliates of the underwriters. The underwriters reserve the right to reject an order for the purchase of shares, in whole or in part.
The following table shows the initial public offering price, underwriting discounts and proceeds before expenses to us and to the selling shareholders. The information below assumes either no exercise or full exercise by the underwriters of their option to purchase an additional shares of our common stock, discussed below:
Per Share | No Exercise of Option to Purchase Additional Shares |
Full Exercise of Option to Purchase Additional Shares |
||||||||||
Initial public offering price |
$ | $ | $ | |||||||||
Underwriting discounts |
$ | $ | $ | |||||||||
Proceeds, before expenses, to us |
$ | $ | $ | |||||||||
Proceeds, before expenses, to the selling shareholders |
$ | $ | $ |
We and the selling shareholders estimate the expenses of this offering, not including the underwriting discounts, to be approximately $ million, and such expenses are payable by us. We also have agreed to
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reimburse the underwriters for certain expenses incurred in connection with this offering in an amount up to $600,000. In accordance with Financial Industry Regulatory Authority, Inc., or FINRA, Rule 5110, these reimbursed expenses are deemed underwriting compensation for this offering.
Option to Purchase Additional Shares
We have granted the underwriters an option to buy up to additional shares of our common stock, at the initial public offering price less the underwriting discounts. The underwriters may exercise this option, in whole or in part, from time to time for a period of 30 days from the date of this prospectus. If the underwriters exercise this option, each underwriter will be obligated, subject to the conditions in the underwriting agreement, to purchase a number of additional shares of our common stock proportionate to the number of shares reflected next to such underwriters name in the table above relative to the total number of shares reflected in such table.
Lock-Up Agreements
We, our executive officers and directors, the selling shareholders and certain other shareholders who beneficially own in the aggregate approximately % of our currently outstanding shares of common stock, are entering into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of Keefe, Bruyette & Woods and subject to certain limited exceptions:
| offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or any securities convertible into or exchangeable or exercisable for our common stock, whether now owned or later acquired or with respect to which such person has or acquires the power of disposition, or exercise any right with respect to the registration of thereof, or file or cause to be filed any registration statement under the Securities Act, with respect to any of the foregoing; |
| enter into any swap, hedge, or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the shares of our common stock or such other securities, whether any such swap or transaction is to be settled by delivery of shares of our common stock or other securities, in cash or otherwise; or |
| publicly disclose the intention to make any such offer, pledge, sale or disposition, or to enter into any such swap, hedge, transaction or other arrangement. |
These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without public notice, Keefe, Bruyette & Woods may, in its sole discretion, waive or release all or some of the securities from these lock-up agreements. However, as to any of our executive officers or directors, Keefe, Bruyette & Woods has agreed to notify us at least three business days before the effective date of any release or waiver, and we have agreed to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver.
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us, the selling shareholders and the representatives of the underwriters. In addition to prevailing market conditions, among the factors to be considered in determining the initial public offering price of our common stock will be our historical performance, estimates of our business potential and our earnings prospects, an assessment of our management, and the consideration of the above factors in relation to market valuation of companies in related businesses. The initial public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. An active trading market for the shares of our common stock may not develop. It is also possible that the shares of our common stock will not trade in the public market at or above the initial public offering price following the completion of this offering.
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Exchange Listing
We have applied to list our common stock on the Nasdaq Global Select Market under the symbol CCB.
Indemnification and Contribution
We and the selling shareholders have agreed to indemnify the underwriters and their affiliates, selling agents, and controlling persons against certain liabilities, including under the Securities Act. If we are unable to provide this indemnification, we will contribute to the payments the underwriters and their affiliates, selling agents, and controlling persons may be required to make in respect of those liabilities.
Price Stabilization, Short Positions, and Penalty Bids
To facilitate this offering and in accordance with Regulation M under the Exchange Act, or Regulation M, the underwriters may engage in transactions that stabilize, maintain, or otherwise affect the price of our common stock, including:
| stabilizing transactions; |
| short sales; and |
| purchases to cover positions created by short sales. |
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering. Short sales may be covered short sales, which are short positions in an amount not greater than the underwriters option to purchase additional shares referred to above, or may be naked short sales, which are short positions in excess of that amount.
The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which they may purchase shares through the option to purchase additional shares described above. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market that could adversely affect investors who purchased in this offering.
As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of our common stock in the open market. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing shares of our common stock in this offering, if the syndicate repurchases previously distributed shares of our common stock to cover syndicate short positions or to stabilize the price of our common stock.
As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time without notice. The underwriters may carry out these transactions on the Nasdaq Global Select Market, in the over-the-counter market or otherwise.
Passive Market Making
In connection with this offering, the underwriters may engage in passive market making transactions in our common stock on the Nasdaq Global Select Market in accordance with Rule 103 of Regulation M during a
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period before the commencement of offers or sales of our common stock and extending through the completion of the distribution of this offering. A passive market maker must generally display its bid at a price not in excess of the highest independent bid for that security. However, if all independent bids are lowered below the passive market makers bid, the passive market maker may continue to bid and effect purchases at a price exceeding the then highest independent bid until specified purchase limits are exceeded, at which time such bid must be lowered to an amount no higher than the then highest independent bid. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions. The underwriters and selling shareholders engaged in passive market making are not required to engage in passive market making and may end passive market making activities at any time.
Electronic Distribution
A prospectus in electronic format may be made available by e-mail or on the websites or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters websites and any information contained on any other website maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by the underwriters or us, and should not be relied upon by investors.
Directed Share Program
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares of our common stock offered in this offering for sale to certain of our directors, executive officers, employees and other related persons who have expressed an interest in purchasing our shares of common stock in this offering through a directed share program. Our directed share program will be administered by Keefe, Bruyette & Woods or its affiliate. Reserved shares purchased by our directors and executive officers will be subject to the lock-up provisions described above. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares of our common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus.
Affiliations
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment advisory, investment research, principal investment, hedging, financing, loan referrals, valuation, and brokerage activities. From time to time, the underwriters and/or their respective affiliates have directly and indirectly engaged, and may in the future engage, in various financial advisory, investment banking loan referrals, and commercial banking services with us and our affiliates, for which they received or paid, or may receive or pay, customary compensation, fees, and expense reimbursement. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and those investment and securities activities may involve securities and/or instruments of ours. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of those securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in those securities and instruments.
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Conflicts of Interest
An affiliate of Hovde Group, LLC, or Hovde Group, an underwriter in this offering, beneficially owns more than 10% of our issued and outstanding common stock. As a result, Hovde Group is deemed to have a conflict of interest within the meaning of Rule 5121 of the Financial Industry Regulatory Authority, Inc., or FINRA. Accordingly, this offering will be conducted in compliance with the applicable requirements of Rule 5121, which requires, among other things, that a qualified independent underwriter as defined in Rule 5121 participate in the preparation of, and exercise the usual standards of due diligence with respect to, this prospectus and the registration statement of which this prospectus forms a part. Keefe, Bruyette & Woods has agreed to act as a qualified independent underwriter for this offering. Keefe, Bruyette & Woods will not receive any additional compensation for serving as qualified independent underwriter in connection with this offering. We have agreed to indemnify Keefe, Bruyette & Woods against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act. Pursuant to Rule 5121, Hovde Group will not confirm sales to any account over which it exercises discretionary authority without the specific written approval of the account holder.
In addition, pursuant to an Investment Agreement between us and Steven Hovde, Chairman and Chief Executive Officer at Hovde Group, for so long as Mr. Hovde beneficially owns in aggregate 4.9% or more of our outstanding common stock, Mr. Hovde (or a designated representative) is entitled to serve on the boards of directors of the Company and the Bank, subject to any required regulatory and shareholder approvals. Mr. Hovde is currently a member of our Board.
Selling Restrictions
Prohibition of Sales to European Economic Area Retail Investors
The securities are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area, or EEA. For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU, as amended, referred to as MiFID II; or (ii) a customer within the meaning of Directive 2002/92/EC, as amended, referred to as the Insurance Mediation Directive, where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or (iii) not a qualified investor as defined in Directive 2003/71/EC, as amended, including by Directive 2010/73/EU, referred to as the Prospectus Directive. Consequently no key information document required by Regulation (EU) No 1286/2014, as amended, referred to as the PRIIPs Regulation, for offering or selling the securities or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the securities or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPS Regulation.
European Economic Area
In relation to each member state of the EEA that has implemented the Prospectus Directive, each a Relevant Member State, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, no offer of shares to the public has been or will be made in that Relevant Member State prior to the publication of a prospectus in relation to the shares of our common stock offered hereby that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of shares to the public may be made in that Relevant Member State at any time:
| to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
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| to fewer than 150 natural or legal persons (other than qualified investors, as defined in the Prospectus Directive), subject to obtaining the prior consent of the representatives for any such offer; or |
| in any other circumstances falling within Article 3(2) of the Prospectus Directive. |
For the purposes of this provision, the expression an offer of shares to the public in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe for the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression Prospectus Directive includes any relevant implementing measure in each Relevant Member State.
United Kingdom
The prospectus has only been communicated or caused to have been communicated and will only be communicated or caused to have been communicated as an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended, or the FSMA) received in connection with the issue or sale of the shares of our common stock offered hereby in circumstances in which Section 21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA have been or will be complied with in respect of anything done in relation to the shares of our common stock offered hereby in, from or otherwise involving the United Kingdom.
Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
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Kilpatrick Townsend & Stockton LLP in Washington, D.C., will pass upon the validity of the shares of common stock offered by this prospectus and certain other legal matters for us. Covington & Burling LLP, Washington, D.C. is acting as counsel for the underwriters.
The consolidated financial statements of Coastal Financial Corporation and subsidiary as of December 31, 2017 and 2016, and for the years then ended, included in this prospectus have been so included in reliance on the report of Moss Adams LLP, an independent registered public accounting firm, given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock to be sold in this offering. This prospectus does not contain all the information contained in the registration statement. For further information with respect to us and the shares to be sold in this offering, we refer you to the registration statement, including the agreements, other documents and schedules filed as exhibits to the registration statement. Statements contained in this prospectus as to the contents of any agreement or other document to which we make reference are not necessarily complete. In each instance, we refer you to the copy of the agreement or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by reference to the agreement or document to which it refers.
After completion of this offering, we will file annual, quarterly and current reports, proxy statements and other information with the SEC. We intend to make these filings available on our website at www.coastalbank.com. This reference to our website is for the convenience of investors, as required by the SEC. Information on our website is not incorporated by reference in this prospectus. In addition, we will provide copies of our filings free of charge to our shareholders upon request. Our SEC filings, including the registration statement of which this prospectus is a part, will also be available to you on the SECs website at http://www.sec.gov. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. You can receive copies of these documents upon payment of a duplicating fee by writing to the SEC. We intend to furnish our shareholders with annual reports containing consolidated financial statements audited by an independent registered public accounting firm.
154
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Coastal Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Coastal Financial Corporation and Subsidiary (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated 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.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
Everett, Washington
April 27, 2018, except for Note 20, which is dated June 1, 2018
We have served as the Companys auditor since 2016.
F-2
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, | ||||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Cash and due from banks |
$ | 13,787 | $ | 11,084 | ||||
Interest-bearing deposits with other banks |
75,964 | 75,891 | ||||||
Investment securities, available for sale, at fair value |
36,927 | 33,106 | ||||||
Investment securities, held to maturity, at amortized cost |
1,409 | 1,888 | ||||||
Other investments |
3,680 | 3,099 | ||||||
Loans |
656,788 | 596,128 | ||||||
Allowance for loan losses |
(8,017 | ) | (7,544 | ) | ||||
|
|
|
|
|||||
Net loans |
648,771 | 588,584 | ||||||
Premises and equipment, net |
13,121 | 13,095 | ||||||
Other real estate owned and repossessed assets |
- | 1,297 | ||||||
Accrued interest receivable |
2,274 | 1,728 | ||||||
Bank-owned life insurance, net |
6,500 | 6,315 | ||||||
Deferred tax asset, net |
2,092 | 3,413 | ||||||
Other assets |
1,228 | 1,111 | ||||||
|
|
|
|
|||||
Total assets |
$ | 805,753 | $ | 740,611 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
LIABILITIES |
||||||||
Deposits |
$ | 703,295 | $ | 648,662 | ||||
Federal Home Loan Bank (FHLB) advances |
20,000 | 15,000 | ||||||
Subordinated debt |
||||||||
Principal amount $10,000 (less unamortized debt issuance costs of $50 and $64 at December 31, 2017 and 2016, respectively) |
9,950 | 9,936 | ||||||
Junior subordinated debentures |
||||||||
Principal amount $3,609 (less unamortized debt issuance costs of $30 and $32 at December 31, 2017 and 2016, respectively) |
3,579 | 3,577 | ||||||
Deferred compensation |
1,175 | 1,266 | ||||||
Accrued interest payable |
228 | 224 | ||||||
Other liabilities |
1,815 | 2,049 | ||||||
|
|
|
|
|||||
Total liabilities |
740,042 | 680,714 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 12) |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock, no par value: |
||||||||
Authorized: 25,000,000 and 500,000 shares at December 31, 2017 and 2016, respectively; issued and outstanding: zero shares in 2017 and 2016 |
- | - | ||||||
Common stock, no par value: |
||||||||
Authorized: 300,000,000 shares at December 31, 2017 and 2016; 8,887,457 voting and 361,444 non-voting shares at December 31, 2017 issued and outstanding and 8,877,344 voting and 361,444 non-voting shares at December 31, 2016 issued and outstanding |
52,521 | 52,215 | ||||||
Retained earnings |
14,134 | 8,698 | ||||||
Accumulated other comprehensive loss, net of tax |
(944 | ) | (1,016 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
65,711 | 59,897 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 805,753 | $ | 740,611 | ||||
|
|
|
|
See accompanying notes.
F-3
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per share data)
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
INTEREST INCOME |
||||||||
Interest and fees on loans |
$ | 30,775 | $ | 27,570 | ||||
Interest on investment securities |
672 | 488 | ||||||
Interest on interest-bearing deposits with other banks |
666 | 402 | ||||||
|
|
|
|
|||||
Total interest income |
32,113 | 28,460 | ||||||
INTEREST EXPENSE |
||||||||
Interest on deposits |
2,139 | 2,118 | ||||||
Interest on borrowed funds |
736 | 405 | ||||||
|
|
|
|
|||||
Total interest expense |
2,875 | 2,523 | ||||||
Net interest income |
29,238 | 25,937 | ||||||
PROVISION FOR LOAN LOSSES |
870 | 1,919 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan losses |
28,368 | 24,018 | ||||||
NONINTEREST INCOME |
||||||||
Deposit service charges and fees |
2,617 | 2,123 | ||||||
Loan referral fees |
439 | 423 | ||||||
Mortgage broker fees |
255 | 346 | ||||||
Sublease and lease income |
222 | 234 | ||||||
Gain on sales of loans, net |
102 | 790 | ||||||
Gain on sale of securities, net |
- | 160 | ||||||
Other |
519 | 901 | ||||||
|
|
|
|
|||||
Total noninterest income |
4,154 | 4,977 | ||||||
NONINTEREST EXPENSE |
||||||||
Salaries and employee benefits |
13,383 | 11,988 | ||||||
Occupancy |
3,037 | 2,694 | ||||||
Data processing |
1,777 | 1,995 | ||||||
Director and staff expenses |
561 | 543 | ||||||
Excise taxes |
459 | 357 | ||||||
Marketing |
446 | 437 | ||||||
Legal and professional fees |
355 | 380 | ||||||
Federal Deposit Insurance Corporation (FDIC) assessments |
331 | 367 | ||||||
Business development |
294 | 294 | ||||||
Other real estate owned and repossessed assets operations, net |
(23 | ) | 342 | |||||
Other |
1,813 | 2,141 | ||||||
|
|
|
|
|||||
Total noninterest expense |
22,433 | 21,538 | ||||||
Income before provision for income tax |
10,089 | 7,457 | ||||||
PROVISION FOR INCOME TAXES |
4,653 | 2,454 | ||||||
|
|
|
|
|||||
NET INCOME |
$ | 5,436 | $ | 5,003 | ||||
|
|
|
|
|||||
Earnings per common share |
||||||||
Basic |
$ | 0.59 | $ | 0.54 | ||||
Diluted |
$ | 0.59 | $ | 0.54 | ||||
Weighted average number of common shares outstanding: |
||||||||
Basic |
9,234,552 | 9,221,513 | ||||||
Diluted |
9,237,629 | 9,222,526 |
See accompanying notes.
F-4
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
NET INCOME |
$ | 5,436 | $ | 5,003 | ||||
OTHER COMPREHENSIVE INCOME, before tax |
||||||||
Securities available-for-sale |
||||||||
Unrealized holding gain (loss) during the year |
108 | (1,352 | ) | |||||
Income tax (provision) benefit related to unrealized holding gain (loss) |
(36 | ) | 460 | |||||
Reclassification adjustment for realized gain included in net income |
- | (160 | ) | |||||
Income tax provision related to reclassification for realized gain |
- | 54 | ||||||
|
|
|
|
|||||
OTHER COMPREHENSIVE INCOME (LOSS) , net of tax |
72 | (998 | ) | |||||
|
|
|
|
|||||
COMPREHENSIVE INCOME |
$ | 5,508 | $ | 4,005 | ||||
|
|
|
|
See accompanying notes.
F-5
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(dollars in thousands)
Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Total | ||||||||||||||||
BALANCE, December 31, 2015 |
9,232,939 | $ | 52,076 | $ | 3,695 | $ | (18 | ) | $ | 55,753 | ||||||||||
Net income |
- | - | 5,003 | - | 5,003 | |||||||||||||||
Issuance of restricted stock awards |
4,800 | - | - | - | - | |||||||||||||||
Issuance of vested stock awards |
1,600 | - | - | - | - | |||||||||||||||
Stock repurchase |
(551 | ) | (4 | ) | - | - | (4 | ) | ||||||||||||
Stock-based compensation |
- | 143 | - | - | 143 | |||||||||||||||
Other comprehensive loss |
- | - | - | (998 | ) | (998 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE, December 31, 2016 |
9,238,788 | 52,215 | 8,698 | (1,016 | ) | 59,897 | ||||||||||||||
Net income |
- | - | 5,436 | - | 5,436 | |||||||||||||||
Issuance of restricted stock awards |
6,208 | - | - | - | - | |||||||||||||||
Issuance of vested stock awards |
600 | - | - | - | - | |||||||||||||||
Stock repurchase |
(375 | ) | (3 | ) | - | - | (3 | ) | ||||||||||||
Stock-based compensation |
- | 285 | - | - | 285 | |||||||||||||||
Stock options exercised |
3,680 | 24 | - | - | 24 | |||||||||||||||
Other comprehensive income |
- | - | - | 72 | 72 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE, December 31, 2017 |
9,248,901 | $ | 52,521 | $ | 14,134 | $ | (944 | ) | $ | 65,711 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 5,436 | $ | 5,003 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Provision for loan losses |
870 | 1,919 | ||||||
Gain on sales of available-for-sale securities, net |
- | (160 | ) | |||||
Depreciation and amortization |
993 | 895 | ||||||
Loss on disposal of premises and equipment |
38 | 3 | ||||||
Write-downs on repossessed assets |
- | 100 | ||||||
Gain on sales of loans, net |
(102 | ) | (790 | ) | ||||
Net premium amortization on investment securities |
(2 | ) | 21 | |||||
(Gain) loss on sales of other real estate owned, net |
(32 | ) | 188 | |||||
Deferred tax benefit |
1,284 | (323 | ) | |||||
Stock-based compensation |
285 | 143 | ||||||
Bank-owned life insurance earnings |
(185 | ) | (188 | ) | ||||
Change in other assets and liabilities |
(968 | ) | 306 | |||||
|
|
|
|
|||||
Total adjustments |
2,181 | 2,114 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
7,617 | 7,117 | ||||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Increase in interest-bearing deposits with other banks |
(73 | ) | (665 | ) | ||||
Purchases of investment securities available-for-sale |
(5,011 | ) | (57,945 | ) | ||||
Purchases of other stock investments, net |
(581 | ) | (71 | ) | ||||
Maturities and calls of investment securities available-for-sale |
1,326 | 12,125 | ||||||
Proceeds from sale of securities available-for-sale |
- | 25,358 | ||||||
Maturities and calls of investment securities held-to-maturity |
454 | 245 | ||||||
Purchases of loans |
(24,942 | ) | (4,493 | ) | ||||
Increase in loans, net |
(36,013 | ) | (93,320 | ) | ||||
Purchases of premises and equipment, net |
(1,057 | ) | (911 | ) | ||||
Cash proceeds from sales of other real estate owned |
1,329 | 991 | ||||||
|
|
|
|
|||||
Net cash used by investing activities |
(64,568 | ) | (118,686 | ) | ||||
|
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase in demand deposits, Now and money market, and savings |
41,107 | 119,676 | ||||||
Net increase (decrease) in time deposits |
13,526 | (14,596 | ) | |||||
Net proceeds from short-term FHLB advances |
5,000 | 5,000 | ||||||
Repayment of FHLB long-term borrowings |
- | (6,800 | ) | |||||
Net proceeds from subordinated debt |
- | 9,929 | ||||||
Proceeds from stock option exercises |
24 | - | ||||||
Repurchase of common stock |
(3 | ) | (4 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
59,654 | 113,205 | ||||||
|
|
|
|
|||||
NET INCREASE IN CASH AND DUE FROM BANKS |
2,703 | 1,636 | ||||||
CASH AND DUE FROM BANKS, beginning of year |
11,084 | 9,448 | ||||||
|
|
|
|
|||||
CASH AND DUE FROM BANKS, end of year |
$ | 13,787 | $ | 11,084 | ||||
|
|
|
|
|||||
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES |
||||||||
Interest paid |
$ | 2,871 | $ | 2,542 | ||||
Income taxes paid |
3,820 | 2,369 | ||||||
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS |
||||||||
Fair value adjustment of securities available-for-sale, gross |
$ | 108 | $ | (1,352 | ) |
See accompanying notes.
F-7
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of Business - Coastal Financial Corporation (Corporation or Company) is a registered bank holding company whose wholly owned subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.
The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 13 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Banks main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Banks deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (FDIC). The vast majority of the Banks loans and deposits are within the greater Puget Sound area, and the Banks primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.
Principles of consolidation - The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation.
Financial statement presentation - These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and practices within the banking industry. In accordance with applicable accounting standards, the Company does not consolidate statutory trusts established for the sole purposes of issuing trust preferred securities and related trust common securities. See Note 9, Junior Subordinated Debentures, for additional discussion. Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded and presented in dollars.
Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses and the accounting for deferred income taxes. Actual results could differ from those estimates.
Subsequent events - Other than those subsequent events disclosed in Note 20, there are no additional subsequent events to report between April 27, 2018, the previous issued date of the financial statements, and June 1, 2018, the date the consolidated financial statements were issued.
Cash equivalents and cash flows - For the purpose of presentation in the statements of cash flows, the Company considers all amounts included in the balance sheet under cash and due from banks as cash equivalents, and have maturity dates of three months or less. Interest-bearing deposits at other financial institutions, federal funds sold, and cash flows from loans and deposits are reported as net increases or decreases under cash flows from investing activities or from financing activities.
The Company maintains its cash in depository institution accounts, which, at times, may exceed federally insured limits. The Company monitors these institutions and has not experienced any losses in such accounts.
F-8
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Investment securities - Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using the interest method or methods approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as available-for-sale. Such securities may be sold to facilitate the Companys asset/liability management strategies and in response to changes in interest rates and similar forces. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment in other comprehensive income. Gains and losses on sales of securities are recorded on the trade date and are determined on the specific-identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their amortized cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Other investments - Other investments on the balance sheet consists of investments in stock of Federal Home Loan Bank, Federal Reserve Bank, and Pacific Coast Bankers Bancshares.
In July 2008, the Bank became a member of the Federal Reserve. As a Federal Reserve member bank, the Bank is required to own stock in the Federal Reserve Bank of San Francisco (FRB) in an amount based on its capital. The recorded amount of the FRB stock equals its fair value because the shares can only be redeemed by the FRB at their par value. The investment in FRB stock was $1,891,000 and $1,651,000 at December 31, 2017 and 2016, respectively.
The Bank, as a member of the Federal Home Loan Bank of Des Moines (FHLB), is required to maintain an investment in capital stock of FHLB in an amount equal to 4% of advances outstanding, plus 0.12% of total assets from the prior fiscal year end. The recorded amount of FHLB stock equals its fair value because the shares can only be redeemed by FHLB at the $1 per share par value. The investment in FHLB stock was $1,689,000 and $1,347,000 at December 31, 2017 and 2016, respectively.
The investment in Pacific Coast Bankers Bancshares (PCBB) stock consists of an equity security. This investment is carried at its cost of $100,000 at December 31, 2017 and 2016, which approximates its fair value.
Loans and allowance for loan losses - Loans are stated at the principal amount outstanding less the allowance for loan losses and net of any deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the level yield methodology and a method that approximates the level yield methodology. Interest income on loans is recognized based upon the principal amounts outstanding. Generally the accrual of interest on loans is discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due or when they are 90 days past due as to either principal or interest, unless they are well secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed against current income. If management determines that the
F-9
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
ultimate collectability of principal or interest is in doubt, cash receipts on nonaccrual loans are applied to reduce the principal balance on a cash-basis method, until the loans qualify for return to accrual status or principal is paid in full. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current, borrower has demonstrated ability to make regular payments, generally a period of at least six months, and future payments are reasonably assured. Past due status is determined based on contractual terms.
The allowance for loan losses is comprised of amounts charged against income in the form of the provision for loan losses, less charged-off loans, net of recoveries. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: (1) the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; (2) the Company has no recourse to the borrower or if it does, the borrower has insufficient assets to pay the debt; (3) the estimated fair value of the loan collateral is significantly below the current loan balance; and (4) there is little or no near-term prospect for improvement. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as substandard or doubtful. For such loans that are also classified as impaired (including troubled debt restructurings), 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 general component covers various loans and is based on the probability of default and loss given default, type of loan, peer information, risk rating and adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Homogenous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment; accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement.
A troubled debt restructuring (TDR) is a loan for which the Company, for reasons related to the borrowers financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs
F-10
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a TDR is considered to be a collateral-dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired. The Company incorporates recent historical experience with TDRs including the performance of TDRs that subsequently default into the calculation of the allowance by loan portfolio segment.
Periodically, regulatory agencies review the Companys allowance for loan losses as an integral part of their examination process, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examination.
Loans held-for-sale - Loans held-for-sale consist of the guaranteed portion of Small Business Administration (SBA) loans the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. Loans are generally sold with servicing of the sold portion retained by the Company. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a gain on sale of loans in noninterest income. There were no loans held for sale at December 31, 2017 and 2016.
Loan sales recognition - The Company recognizes a sale on loans if the transferred portion (or portions) and any portion that continues to be held by the transferor are participating interests. Participating interest is defined as a portion of a financial asset that (a) conveys proportionate ownership rights with equal priority to each participating interest holder, (b) involves no recourse (other than standard representations and warranties), and (c) does not entitle any participating interest holder to receive cash before any other participating interest holder. The transfer of the participating interest (or participating interests) must also meet the conditions for surrender of control.
To determine the gain or loss on sale of loans, the Companys investment in the loan is allocated among the retained portion of the loan, the servicing retained, and the sold portion of the loan, based on the relative fair market value of each portion. The gain or loss on the sold portion of the loan is based on the difference between the sale proceeds and the allocated investment in the sold portion of the loan. A discount is recorded against the carrying value of the retained portion of the loan to offset the fair value allocation of said retained portion.
The Company retains the servicing on the sold guaranteed portion of SBA loans. The Company receives a fee for servicing the loan.
SBA servicing assets - The Company accounts for SBA servicing rights as separately recognized servicing right and initially measure them at fair value. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company subsequently measures each SBA servicing asset using the amortization method. Under the amortization method, servicing assets are amortized into noninterest income in proportion to, and over the period of, estimated net servicing income. The amortized assets are assessed for impairment or increased obligations, at the loan level, based on the fair value of each reporting date. As of December 31, 2017 and 2016, SBA servicing assets totaled $406,000 and $593,000, respectively, included in other assets on the balance sheets, and SBA loans serviced totaled $23,774,000 and $32,209,000, respectively.
Reserve for unfunded commitments - A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Companys commitment to
F-11
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
lend funds under existing agreements, such as letters or lines of credit. Management determines the adequacy of the reserve for unfunded commitments based on review of individual credit facilities, current economic conditions, and risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and adjustments are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for loan losses. Provision for unfunded commitments losses are added to the reserve for unfunded commitments, which is included in the other liabilities section of the consolidated balance sheets.
Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method based upon the estimated useful lives of the assets. Asset lives range from three to thirty-nine years. Leasehold improvements are amortized over the expected term of the lease or the estimated useful life of the improvement, whichever is less.
Maintenance and repairs are charged to operating expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts. These assets are reviewed for impairment when events indicate their carrying value may not be recoverable. If management determines impairment exists, the asset is reduced with an offsetting charge to expense.
Transfers of financial assets - Transfers of an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other real estate owned and repossessed assets - Other real estate owned and repossessed assets are foreclosed property held pending disposition and is initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. At foreclosure, if the fair value of the asset acquired less estimated selling costs is less than the Companys recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to income, if necessary, to reduce the carrying value of the property to its fair value less estimated selling costs.
Federal income taxes - The Company and the Bank file a consolidated federal income tax return. Deferred federal income taxes result from temporary differences between the tax basis of assets and liabilities, and their reported amounts in the financial statements. Deferred taxes are temporary differences that will be recognized in future periods. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Taxes are paid by the Bank to the Company based on the separate taxable income of the Bank. The Company and Bank maintain their records on the accrual basis of accounting for financial reporting and for income tax reporting purposes. With few exceptions, the Company is no longer subject to income tax examination for years before 2014.
F-12
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
As of December 31, 2017 and 2016, the Company has no unrecognized tax benefits. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in other noninterest expense. There were no interest and penalties assessed during 2017 or 2016.
Stock-based compensation - Compensation expense is recognized for stock options and restricted stock awards, based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Companys common stock at the grant date is used for restricted stock awards and is determined on the basis of objective criteria including trade data. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Earnings per common share - Earnings per common share is computed under the two-class method. Pursuant to the two-class method, nonvested stock based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Application of the two-class method resulted in the equivalent earnings per share to the treasury method.
Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock options to issue common stock if exercised into common stock using the treasury stock method. Some stock options are anti-dilutive and therefore are not included in the calculation of diluted EPS.
Comprehensive income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of the shareholders equity section of the balance sheets. Accumulated other comprehensive loss consists of only one component: unrealized gains or losses on investment securities available-for-sale.
Business Segments - The Company is managed by legal entity and not by lines of business. The entitys primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to their customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Companys primary source of revenue, and is supplemented by interest income from investment securities, deposit service charges, and other service provided activities. The performance of the Company is reviewed and monitored by the Companys executive management and Board of Directors on a monthly basis. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.
Advertising costs - Advertising costs are expensed as incurred or over the period of the campaign/promotion. Advertising costs in the amount of $446,000 and $437,000 were expensed during 2017 and 2016, respectively.
Reclassifications - Certain prior-year amounts have been reclassified to conform to the 2017 presentation, with no effect on net income and shareholders equity as previously reported.
F-13
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Recent accounting standards - In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that any entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The new standard will not result in material change from our current accounting for revenue, as recognition of interest income and larger sources of noninterest income from our current financial instruments are not impacted by the guidance. Additional disclosure regarding the composition of the Companys revenue sources will be required.
In January 2016, the FASB issued ASU No. 2016-01 Financial InstrumentsOverall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require the exit price notion of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is require to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as own credit) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The adoption of this standard will not have a material effect on the Companys operating results or financial condition. However, it will require expansion of disclosures concerning the Companys valuation techniques.
In February 2016, FASB issued ASU 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. The ASU is effective for public business entities in fiscal years beginning after December 15, 2018, inkling interim periods within those fiscal years. The Company is in the early stages of its implementation assessment, which includes identifying the population of Companys leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements.
In March 2016, the FASB issued ASU No. 2016-07, InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations, and retained
F-14
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The adoption of this standard did not have a material effect on the Companys operating results or financial condition.
In March 2016, the FASB issued ASU No. 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update seek to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Companys operating results or financial condition.
In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by reporting entities. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organizations portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public business entities that do not file with the U.S. Securities and Exchange Commission (SEC) this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. It is effective for SEC filers for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, a consensus of the FASBs Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company does not expect this ASU to have a material impact on the Companys consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation, Interests Held through Related Parties
That Are under Common Control. The ASU was issued to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has
F-15
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted this new authoritative guidance on January 1, 2017 and it did not have an impact on the Companys consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgement. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard will not have a material effect on the Companys operating results or financial condition.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company will record a reclass of approximately $186,000 from retained earnings to AOCI in the first quarter of 2018.
Note 2 - Restriction on Cash and Due From Banks
Federal Reserve Board regulations require that the Company maintain reserve funds in cash or on deposit with the FRB, based on a percentage of certain deposits. The required reserve at December 31, 2017 and 2016 was $17,332,000 and $14,525,000, respectively.
F-16
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investment Securities
The amortized cost and fair values of investment securities at the date indicated are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2017 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 34,794 | $ | - | $ | (1,398 | ) | $ | 33,396 | |||||||
U.S. Government agencies |
3,000 | - | (30 | ) | 2,970 | |||||||||||
U.S. Agency collateralized mortgage obligations |
224 | - | (3 | ) | 221 | |||||||||||
U.S. Agency residential mortgage-backed securities |
79 | 1 | - | 80 | ||||||||||||
Municipals |
261 | - | (1 | ) | 260 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
38,358 | 1 | (1,432 | ) | 36,927 | |||||||||||
Held-to-maturity |
||||||||||||||||
U.S. Agency residential mortgage-backed securities |
1,409 | - | (35 | ) | 1,374 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities |
$ | 39,767 | $ | 1 | $ | (1,467 | ) | $ | 38,301 | |||||||
|
|
|
|
|
|
|
|
The amortized cost and fair values of investment securities at the date indicated are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2016 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 29,746 | $ | - | $ | (1,498 | ) | $ | 28,248 | |||||||
U.S. Government agencies |
4,000 | - | (39 | ) | 3,961 | |||||||||||
U.S. Agency collateralized mortgage obligations |
290 | - | (1 | ) | 289 | |||||||||||
U.S. Agency residential mortgage-backed securities |
119 | 2 | - | 121 | ||||||||||||
Municipals |
490 | - | (3 | ) | 487 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
34,645 | 2 | (1,541 | ) | 33,106 | |||||||||||
Held-to-maturity |
||||||||||||||||
U.S. Agency residential mortgage-backed securities |
1,888 | - | (72 | ) | 1,816 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities |
$ | 36,533 | $ | 2 | $ | (1,613 | ) | $ | 34,922 | |||||||
|
|
|
|
|
|
|
|
F-17
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investment Securities (continued)
The amortized cost and fair value of debt securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Amounts maturing in |
||||||||||||||||
One year or less |
$ | - | $ | - | $ | - | $ | - | ||||||||
After one year through five years |
7,995 | 7,807 | - | - | ||||||||||||
After five years through ten years |
30,060 | 28,819 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
38,055 | 36,626 | - | - | |||||||||||||
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations |
303 | 301 | 1,409 | 1,374 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 38,358 | $ | 36,927 | $ | 1,409 | $ | 1,374 | |||||||||
|
|
|
|
|
|
|
|
Investment securities with carrying values of $14,526,000 and $9,387,000 at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
There were no sales of investment securities during 2017. Total proceeds from sales of available for sale securities totaled $25,358,000 during 2016. Gross realized gains totaled $163,000 and a gross realized loss totaled $3,000 in 2016.
F-18
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investment Securities (continued)
Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Treasury securities |
$ | 4,934 | $ | (77 | ) | $ | 28,463 | $ | (1,321 | ) | $ | 33,397 | $ | (1,398 | ) | |||||||||
U.S. Government agencies |
- | - | 2,970 | (30 | ) | 2,970 | (30 | ) | ||||||||||||||||
U.S. Agency collateralized mortgage obligations |
220 | (3 | ) | - | - | 220 | (3 | ) | ||||||||||||||||
Municipals |
260 | (1 | ) | - | - | 260 | (1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale securities |
5,414 | (81 | ) | 31,433 | (1,351 | ) | 36,847 | (1,432 | ) | |||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | 1,374 | (35 | ) | 1,374 | (35 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities |
$ | 5,414 | $ | (81 | ) | $ | 32,807 | $ | (1,386 | ) | $ | 38,221 | $ | (1,467 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2016 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Treasury securities |
$ | 28,248 | $ | (1,498 | ) | $ | - | $ | - | $ | 28,248 | $ | (1,498 | ) | ||||||||||
U.S. Government agencies |
3,961 | (39 | ) | - | - | 3,961 | (39 | ) | ||||||||||||||||
U.S. Agency collateralized mortgage obligations |
289 | (1 | ) | - | - | 289 | (1 | ) | ||||||||||||||||
Municipals |
487 | (3 | ) | - | - | 487 | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale securities |
32,985 | (1,541 | ) | - | - | 32,985 | (1,541 | ) | ||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | 1,816 | (72 | ) | 1,816 | (72 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities |
$ | 32,985 | $ | (1,541 | ) | $ | 1,816 | $ | (72 | ) | $ | 34,801 | $ | (1,613 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 and 2016, there were 11 and 12 securities, respectively, in an unrealized loss position. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at December 31, 2017 and 2016.
F-19
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses
The composition of the loan portfolio is as follows as of December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Commercial and industrial loans |
$ | 88,688 | $ | 71,397 | ||||
Real estate loans |
||||||||
Construction, land, and land development |
41,641 | 55,565 | ||||||
Residential real estate |
87,031 | 77,361 | ||||||
Commercial real estate |
437,717 | 391,046 | ||||||
Consumer and other loans |
2,058 | 1,276 | ||||||
|
|
|
|
|||||
Loans |
657,135 | 596,645 | ||||||
Net deferred origination fees |
(347 | ) | (517 | ) | ||||
|
|
|
|
|||||
Loans, net |
$ | 656,788 | $ | 596,128 | ||||
|
|
|
|
Included in loans are overdrafts of $76,000 and $67,000 at December 31, 2017 and 2016, respectively. The Company has pledged loans totaling $147,008,000 and $136,904,000 at December 31, 2017 and 2016, respectively, for borrowing lines at the FHLB and FRB. See Note 7 for more details on FHLB, FRB borrowings and available lines of credit.
The balance of SBA loans and participations serviced for others totaled $29,910,000 and $37,297,000 at December 31, 2017 and 2016, respectively.
The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans totaled $51,337,000 and $31,650,000 as of December 31, 2017 and 2016, respectively. Unamortized premiums totaled $718,000 and $392,000 as of December 31, 2017 and 2016, respectively, and are amortized into interest income over the life of the loans.
The following is a summary of the Companys loan portfolio segments:
Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment to businesses located generally in our primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Companys investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Companys investment is dependent upon the borrowers ability to collect amounts due from its customers.
Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and CRE properties in our market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Companys ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrowers ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans for the purpose of facilitating the ultimate construction
F-20
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
of a home or commercial building. The primary risks include the borrowers ability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.
Residential real estate - Residential real estate includes various types of loans which the Company holds real property as collateral. Included in this segment are multi-family loans, first lien single family loans, which we occasionally purchase to diversify our loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrowers inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.
Commercial real estate (includes owner occupied and non-owner occupied) - Commercial real estate includes various types of loans which the Company holds real property as collateral. The primary risks of real estate loans include the borrowers inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
Consumer and other loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. Repayment of these loans is dependent on the borrowers ability to pay and the fair value of the underlying collateral.
F-21
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
The following table illustrates an age analysis of past due loans as of the dates indicated:
30-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment 90 Days or More Past Due and Still Accruing |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 791 | $ | 372 | $ | 1,163 | $ | 87,525 | $ | 88,688 | $ | - | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Construction, land and land development |
218 | - | 218 | 41,423 | 41,641 | - | ||||||||||||||||||
Residential real estate |
76 | - | 76 | 86,955 | 87,031 | - | ||||||||||||||||||
Commercial real estate |
333 | 345 | 678 | 437,039 | 437,717 | - | ||||||||||||||||||
Consumer and other loans |
- | - | - | 2,058 | 2,058 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 1,418 | $ | 717 | $ | 2,135 | $ | 655,000 | 657,135 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Less net deferred origination fees |
(347 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Loans, net |
$ | 656,788 | ||||||||||||||||||||||
|
|
30-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment 90 Days or More Past Due and Still Accruing |
|||||||||||||||||||
December 31, 2016 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 9 | $ | 28 | $ | 37 | $ | 66,360 | $ | 66,397 | $ | - | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Construction, land and land development |
- | 122 | 122 | 55,443 | 55,565 | 122 | ||||||||||||||||||
Residential real estate |
145 | 98 | 243 | 77,216 | 77,459 | - | ||||||||||||||||||
Commercial real estate |
753 | - | 753 | 390,293 | 391,046 | - | ||||||||||||||||||
Consumer and other loans |
- | - | - | 6,178 | 6,178 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 907 | $ | 248 | $ | 1,155 | $ | 595,490 | 596,645 | $ | 122 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Less net deferred origination fees |
(517 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Loans, net |
$ | 596,128 | ||||||||||||||||||||||
|
|
F-22
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
A summary of information pertaining to impaired loans is as follows as of and for the period indicated:
Unpaid Contractual Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 1,123 | $ | 1,065 | $ | - | $ | 1,064 | $ | - | $ | 1,157 | $ | 56 | ||||||||||||||
Real estate loans |
||||||||||||||||||||||||||||
Construction, land, and land development |
- | - | - | - | - | - | - | |||||||||||||||||||||
Residential real estate |
94 | 89 | - | 88 | - | 93 | - | |||||||||||||||||||||
Commercial real estate |
2,249 | 1,660 | - | 1,660 | - | 1,888 | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 3,466 | $ | 2,814 | $ | - | $ | 2,812 | $ | - | $ | 3,138 | $ | 67 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2016 |
||||||||||||||||||||||||||||
Commercial and industrial loans |
$ | 28 | $ | 28 | $ | - | $ | 28 | $ | - | $ | 2 | $ | - | ||||||||||||||
Real estate loans |
||||||||||||||||||||||||||||
Construction, land, and land development |
1,406 | 1,406 | - | 1,406 | - | 1,298 | 61 | |||||||||||||||||||||
Residential real estate |
98 | 98 | - | 98 | - | 8 | - | |||||||||||||||||||||
Commercial real estate |
5,542 | 5,405 | - | 5,405 | - | 5,464 | 175 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 7,074 | $ | 6,937 | $ | - | $ | 6,937 | $ | - | $ | 6,772 | $ | 236 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loans collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.
The following tables present troubled debt restructurings by accrual versus nonaccrual status and by loan class as of the period indicated:
Accrual Status |
Nonaccrual Status |
Total Restructured Loans |
||||||||||
(dollars in thousands) | ||||||||||||
December 31, 2017 |
||||||||||||
Commercial real estate |
$ | - | $ | 1,315 | $ | 1,315 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2016 |
||||||||||||
Commercial real estate |
$ | 5,326 | $ | 1,363 | $ | 6,689 | ||||||
|
|
|
|
|
|
No loans were restructured in 2017 or 2016 as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were troubled debt restructurings at December 31, 2017.
F-23
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was place on nonaccrual.
An analysis of nonaccrual loans by category consisted of the following at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Commercial and industrial loans |
$ | 372 | $ | 28 | ||||
Real estate loans |
||||||||
Residential real estate |
88 | 98 | ||||||
Commercial real estate |
1,660 | 1,363 | ||||||
|
|
|
|
|||||
Total nonaccrual loans |
$ | 2,120 | $ | 1,489 | ||||
|
|
|
|
Credit Quality and Credit Risk
Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Companys regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the Pass column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.
F-24
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
Loans by credit quality risk rating are as follows as of the periods indicated:
Pass | Other Loans Especially Mentioned |
Sub- Standard |
Doubtful | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||
Commercial and industrial loans |
$ | 87,247 | $ | 376 | $ | 902 | $ | 163 | $ | 88,688 | ||||||||||
Real estate loans |
||||||||||||||||||||
Construction, land, and land development |
39,081 | 2,560 | - | - | 41,641 | |||||||||||||||
Residential real estate |
86,464 | 479 | 88 | - | 87,031 | |||||||||||||||
Commercial real estate |
434,421 | 1,636 | 1,315 | 345 | 437,717 | |||||||||||||||
Consumer and other loans |
2,058 | - | - | - | 2,058 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 649,271 | $ | 5,051 | $ | 2,305 | $ | 508 | 657,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Less net deferred origination fees |
(347 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Loans, net |
$ | 656,788 | ||||||||||||||||||
|
|
|||||||||||||||||||
December 31, 2016 |
||||||||||||||||||||
Commercial and industrial loans |
$ | 68,606 | $ | 1,890 | $ | 901 | $ | - | $ | 71,397 | ||||||||||
Real estate loans |
||||||||||||||||||||
Construction, land, and land development |
54,324 | 1,119 | 122 | - | 55,565 | |||||||||||||||
Residential real estate |
77,057 | - | 304 | - | 77,361 | |||||||||||||||
Commercial real estate |
384,892 | 811 | 5,343 | - | 391,046 | |||||||||||||||
Consumer and other loans |
1,276 | - | - | - | 1,276 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 586,155 | $ | 3,820 | $ | 6,670 | $ | - | 596,645 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Less net deferred origination fees |
(517 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Loans, net |
$ | 596,128 | ||||||||||||||||||
|
|
Allowance for Loan Losses
The Companys ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Companys credit review process together with data from peer institutions and economic information gathered from published sources.
The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Companys actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each groups aggregate loan balances.
F-25
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the period ended December 31, 2017:
Commercial and Industrial |
Construction, Land, and Land Development |
Residential Real Estate |
Commercial Real Estate |
Consumer and Other |
Unallocated | 2017 Total | ||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses |
|
|||||||||||||||||||||||||||
Balance, beginning of year |
$ | 1,606 | $ | 1,398 | $ | 1,495 | $ | 1,474 | $ | 26 | $ | 1,545 | $ | 7,544 | ||||||||||||||
Provision for loan losses or (recapture) |
336 | (430 | ) | (152 | ) | 948 | 23 | 145 | 870 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,942 | 968 | 1,343 | 2,422 | 49 | 1,690 | 8,414 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans charged-off |
(81 | ) | - | - | (408 | ) | (11 | ) | - | (500 | ) | |||||||||||||||||
Recoveries of loans previously charged-off |
3 | 95 | - | - | 5 | - | 103 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net (charge-offs) recoveries |
(78 | ) | 95 | - | (408 | ) | (6 | ) | - | (397 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of year |
$ | 1,864 | $ | 1,063 | $ | 1,343 | $ | 2,014 | $ | 43 | $ | 1,690 | $ | 8,017 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts allocated to |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Collectively evaluated for impairment |
1,864 | 1,063 | 1,343 | 2,014 | 43 | 1,690 | 8,017 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of year |
$ | 1,864 | $ | 1,063 | $ | 1,343 | $ | 2,014 | $ | 43 | $ | 1,690 | $ | 8,017 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,065 | $ | - | $ | 89 | $ | 1,660 | $ | - | $ | 2,814 | ||||||||||||||||
Collectively evaluated for impairment |
87,623 | 41,641 | 86,942 | 436,057 | 2,058 | 654,321 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Ending balance total loans |
$ | 88,688 | $ | 41,641 | $ | 87,031 | $ | 437,717 | $ | 2,058 | $ | 657,135 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-26
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the period ended December 31, 2016:
Commercial and Industrial |
Construction, Land, and Land Development |
Residential Real Estate |
Commercial Real Estate |
Consumer and Other |
Unallocated | 2016 Total |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses |
||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 1,311 | $ | 1,031 | $ | 1,744 | $ | 1,509 | $ | 35 | $ | 359 | $ | 5,989 | ||||||||||||||
Provision for loan losses or (recapture) |
|
421 |
|
|
367 |
|
|
(170 |
) |
|
115 |
|
|
- |
|
|
1,186 |
|
|
1,919 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,732 | 1,398 | 1,574 | 1,624 | 35 | 1,545 | 7,908 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans charged-off |
(128 | ) | - | (79 | ) | (150 | ) | (10 | ) | - | (367 | ) | ||||||||||||||||
Recoveries of loans previously charged-off |
2 | - | - | - | 1 | - | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net (charge-offs) recoveries |
|
(126 |
) |
|
- |
|
|
(79 |
) |
|
(150 |
) |
|
(9 |
) |
|
- |
|
|
(364 |
) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of year |
$ | 1,606 | $ | 1,398 | $ | 1,495 | $ | 1,474 | $ | 26 | $ | 1,545 | $ | 7,544 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts allocated to |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
| |||||||
Collectively evaluated for impairment |
|
1,606 |
|
|
1,398 |
|
|
1,495 |
|
|
1,474 |
|
|
26 |
|
|
1,545 |
|
|
7,544 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, end of year |
$ | 1,606 | $ | 1,398 | $ | 1,495 | $ | 1,474 | $ | 26 | $ | 1,545 | $ | 7,544 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 28 | $ | 1,406 | $ | 98 | $ | 5,405 | $ | - | $ | 6,937 | ||||||||||||||||
Collectively evaluated for impairment |
71,369 | 54,159 | 77,263 | 385,641 | 1,276 | 589,708 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Ending balance total loans |
$ | 71,397 | $ | 55,565 | $ | 77,361 | $ | 391,046 | $ | 1,276 | $ | 596,645 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-27
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Premises and Equipment
The investment in premises and equipment consisted of the following at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Land |
$ | 2,426 | $ | 2,426 | ||||
Buildings |
7,392 | 7,392 | ||||||
Leasehold improvements |
3,421 | 3,066 | ||||||
Furniture |
1,821 | 1,737 | ||||||
Equipment |
3,134 | 3,044 | ||||||
Software |
508 | 356 | ||||||
Projects in process |
132 | 63 | ||||||
|
|
|
|
|||||
18,834 | 18,084 | |||||||
Less accumulated depreciation and amortization |
(5,713 | ) | (4,989 | ) | ||||
|
|
|
|
|||||
Premises and equipment, net |
$ | 13,121 | $ | 13,095 | ||||
|
|
|
|
Depreciation and amortization on premises and equipment charged to expense totaled $993,000 and $895,000 for the years ended December 31, 2017 and 2016, respectively.
The Company leases certain branch and office facilities under operating leases with lease terms from three to twenty years. Many of these leases include renewal options and provide for rate adjustments based on changes in various economic indicators. The Company leases its Silver Lake and Everett facilities from related parties (Note 11). Gross rental expense for branch facilities was $1,065,000 and $1,017,000 for 2017 and 2016, respectively. Office space at several branches is leased and sub-leased to various tenants on month-to-month and multi-year leases. Lease and sublease income was $223,000 and $234,000 for 2017 and 2016, respectively.
The Company entered into a capital lease in 2017 for the purchase of ATM equipment totaling $18,000. There were no capital lease purchases in 2016. Depreciation totaled $52,000 and $51,000 for the years ended December 31, 2017 and 2016, respectively, related to the capitalized equipment. The lease obligation is included in other liabilities on the consolidated balance sheet.
The following table sets forth, as of December 31, 2017, the future minimum lease payments under noncancelable operating leases, capital leases, and future minimum income receivable under noncancelable operating leases and subleases:
Operating Lease Payments |
Capital Lease Payments |
Lease and Sublease Income |
||||||||||
(dollars in thousands) | ||||||||||||
2018 |
$ | 995 | $ | 66 | $ | 85 | ||||||
2019 |
982 | 66 | 41 | |||||||||
2020 |
988 | 5 | 42 | |||||||||
2021 |
911 | - | 44 | |||||||||
2022 |
915 | - | 41 | |||||||||
Thereafter |
2,065 | - | - | |||||||||
|
|
|
|
|
|
|||||||
$ | 6,856 | $ | 137 | $ | 253 | |||||||
|
|
|
|
|
|
F-28
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Deposits
The composition of consolidated deposits consisted of the following at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Demand, noninterest-bearing |
$ | 242,358 | $ | 223,955 | ||||
Now and money market |
326,412 | 308,934 | ||||||
Savings |
43,876 | 38,650 | ||||||
Time deposits less than $250,000 |
60,445 | 58,048 | ||||||
Time deposits $250,000 and over |
30,204 | 19,075 | ||||||
|
|
|
|
|||||
Total deposits |
$ | 703,295 | $ | 648,662 | ||||
|
|
|
|
Maturities of time deposits for each of the next five years are as follows (dollars in thousands):
2018 |
$ | 44,473 | ||
2019 |
32,957 | |||
2020 |
6,372 | |||
2021 |
4,447 | |||
2022 |
2,400 | |||
|
|
|||
$90,649 | ||||
|
|
Note 7 - Federal Home Loan Bank Advances and Other Borrowings
At December 31, 2017 the Company had $20,000,000 in overnight FHLB advances, compared to $15,000,000 in overnight FHLB advances at December 31, 2016. The advances are secured by a blanket pledge of eligible collateral including first lien single family and multi-family mortgages with a carrying value of $103,092,000 and $96,153,000 at December 31, 2017 and 2016, respectively. The Company has available borrowing capacity of an additional $39,256,000 from FHLB at December 31, 2017, subject to certain collateral requirements and with interest at the then stated rate.
The following table summarizes activities in advances from the FHLB for the periods indicated:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Average balance outstanding |
$ | 1,752 | $ | 5,791 | ||||
Maximum amount oustanding at any month-end during the year |
20,000 | 15,800 | ||||||
Balance outstanding at year end |
20,000 | 15,000 | ||||||
Weighted average interest rate during the year |
1.34 | % | 0.84 | % |
The Company has established an $8,000,000 unsecured line of credit, with interest payable at the then-stated rate, with PCBB, which expires in June 2018. There were no borrowings on this line at December 31, 2017 or 2016.
The Company has established a Borrower-in-Custody (BIC) arrangement with the FRB, which is secured by eligible loans, with interest payable at the then-stated rate. At December 31, 2017, the Company had pledged commercial real estate loans totaling $43,916,000, which provided available borrowing capacity of $21,140,000.
F-29
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Federal Home Loan Bank Advances and Other Borrowings (continued)
At December 31, 2016, the Company had pledged commercial real estate loans totaling $40,751,000, which provided available borrowing capacity of $21,861,000. There were no borrowings outstanding on this line of credit at December 31, 2017 or 2016.
Note 8 - Subordinated Debt
On July 29, 2016, the Company issued a subordinated note payable to Banterra Bank. The $10,000,000 note, maturing on August 1, 2026, is fixed for five years at 5.65%, and thereafter is variable at a floating rate, calculated quarterly, based on the Wall Street Journal prime rate plus 2.5%. Interest is paid quarterly. Principal payments of $500,000 per quarter commence November 1, 2021, in conjunction with the floating rate period. Interest expense of $587,000 and $252,000 was recognized during 2017 and 2016, respectively, and accrued interest payable on this note totaled $96,000 at December 31, 2017 and 2016.
Note 9 Junior Subordinated Debentures
At December 31, 2017 and 2016, the Companys junior subordinated debentures were as follows:
Coastal (WA) Statutory Trust I |
Aggregate Principal Amount 2017 |
Aggregate Principal Amount 2016 |
||||||
(dollars in thousands) | ||||||||
Total liability, at par |
$ | 3,609 | $ | 3,609 | ||||
Less: unamortized debt issuance costs |
(30 | ) | (32 | ) | ||||
|
|
|
|
|||||
Total liability, at carrying value |
$ | 3,579 | $ | 3,577 | ||||
|
|
|
|
Stated Maturity: |
December 15, 2034 | |||||
Interest Rate Spread: |
Three-month LIBOR + 2.10% |
On December 15, 2004, the Company issued $3,609,000 floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.10% (3.69% and 3.06% at December 31, 2017 and 2016, respectively). Interest is payable quarterly. Interest expense of $122,000 and $102,000 was recognized during 2017 and 2016, respectively, and accrued interest payable on these securities totaled $6,000 and $5,000 at December 31, 2017 and 2016, respectively. There are no principal payments due on these debentures in the next five years.
The Trust is not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trust as liabilities. The Company owns all of the common securities of the trust. The trust preferred securities issued by the trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the note has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
F-30
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Federal Income Taxes
The components of the federal income tax for consisted of the following at December 31:
Company | Bank | Total | ||||||||||
(dollars in thousands) | ||||||||||||
2017 |
||||||||||||
Current tax expense (benefit) |
$ | (271 | ) | $ | 3,640 | $ | 3,369 | |||||
Deferred tax benefit |
17 | 1,267 | 1,284 | |||||||||
|
|
|
|
|
|
|||||||
Total tax expense (benefit) |
$ | (254 | ) | $ | 4,907 | $ | 4,653 | |||||
|
|
|
|
|
|
|||||||
2016 |
||||||||||||
Current tax expense (benefit) |
$ | (91 | ) | $ | 2,868 | $ | 2,777 | |||||
Deferred tax benefit |
(16 | ) | (307 | ) | (323 | ) | ||||||
|
|
|
|
|
|
|||||||
Total tax expense (benefit) |
$ | (107 | ) | $ | 2,561 | $ | 2,454 | |||||
|
|
|
|
|
|
The principal factors causing a variation from the statutory tax rate are as follows:
2017 | 2016 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Federal income taxes at statutory rate of 34% |
$ | 3,431 | 34.0 | % | $ | 2,535 | 34.0 | % | ||||||||
Remeasurement of deferred tax assets for federal rate change |
1,295 | 12.8 | - | - | ||||||||||||
Effect of tax-exempt interest |
(120 | ) | (1.2 | ) | (95 | ) | (1.3 | ) | ||||||||
Bank owned life insurance earnings |
(63 | ) | (0.6 | ) | (41 | ) | (0.6 | ) | ||||||||
Nondeductible expenses |
42 | 0.4 | 35 | 0.5 | ||||||||||||
Stock-based compensation |
68 | 0.7 | 19 | 0.3 | ||||||||||||
Other |
- | - | 1 | 0.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 4,653 | 46.1 | % | $ | 2,454 | 32.9 | % | |||||||||
|
|
|
|
|
|
|
|
F-31
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Federal Income Taxes (continued)
The net deferred tax asset consists of the following temporary differences and carryforward items at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Deferred tax asset |
||||||||
Allowance for loan losses |
$ | 1,683 | $ | 2,565 | ||||
Net unrealized loss on available-for-sale securities |
301 | 523 | ||||||
Deferred compensation |
247 | 430 | ||||||
Nonqualified stock options |
56 | 74 | ||||||
Interest on nonaccrual loans |
56 | 48 | ||||||
Deferred income |
46 | 65 | ||||||
Allowance for unfunded commitments |
44 | 66 | ||||||
Accrued Expense |
15 | 31 | ||||||
Other real estate owned writedowns |
- | 19 | ||||||
|
|
|
|
|||||
Total deferred tax asset |
2,448 | 3,821 | ||||||
Deferred tax liability |
||||||||
Depreciation and amortization |
(356 | ) | (408 | ) | ||||
|
|
|
|
|||||
Total deferred tax liability |
(356 | ) | (408 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 2,092 | $ | 3,413 | ||||
|
|
|
|
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% 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, including recent profitability, management has determined that it is more likely than not that the Companys deferred income tax assets as of December 31, 2017 will be fully realized and therefore no valuation allowance was recorded.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the Act) was signed into law. Among other things, the Act reduces the Companys corporate federal tax rate from 34% to 21% effective January 1, 2018. As a result, the Company is required to re-measure, through income tax expense, our deferred tax assets and liabilities using the enacted rate at which management expects going forward. The re-measurement of the Companys net deferred tax asset resulted in additional income tax expense of approximately $1,295,000.
Note 11 - Related Party Transactions
During 2017 and 2016, the Company had transactions made in the ordinary course of business with certain of its executive officers and directors. All loans included in such transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
F-32
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Related Party Transactions (continued)
A summary of loan transactions follows:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Beginning Balance January 1 |
$ | 3,989 | $ | 4,684 | ||||
Additions |
2,260 | 590 | ||||||
Amounts Collected |
(1,060 | ) | (1,285 | ) | ||||
|
|
|
|
|||||
Ending Balance December 31 |
$ | 5,189 | $ | 3,989 | ||||
|
|
|
|
The Company held deposits of $4,007,000 and $2,725,000 from directors, principal shareholders and executive officers at December 31, 2017 and 2016, respectively.
As discussed in Note 5, the Company leases two facilities from related parties. The Silver Lake facility is leased under a noncancelable operating lease from an entity that is owned by a director. The lease term for the Silver Lake facility is for ten years, through June 2018, and is leased for $17,000 monthly. There are four renewal options, of five years each, included in the lease terms. Subsequent to year end, the lease was renewed and amended at a market rate for ten years, with two renewal options of five years each. Payments are $15,000 a month and increase annually based on changes in the Consumer Price Index. The director has a related party loan with the Company that is secured by the Silver Lake facility and totals $1,906,000 at December 31, 2017, and subsequent to year end the loan was renewed at a market rate. The Everett branch facility is leased from a group of investors, one of which is a director. The Everett lease originated in 1997 for ten years and has been renewed through March 2024. Monthly rent under the Everett lease is $40,000 through March 2018, and increases to $46,000 for the remaining lease term. Rents paid during 2017 and 2016 under these related party leases totaled $684,000 each year.
Note 12 - Commitments and Contingencies
In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not reflected in the consolidated financial statements. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.
At December 31, 2017 and 2016, the Company had a reserve for unfunded commitments of $210,000 and $195,000, respectively, included in other liabilities on the consolidated balance sheet.
F-33
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Commitments and Contingencies (continued)
Financial instruments whose contract amount represents credit risk were as follows at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Commitments to extend credit |
||||||||
Commercial and industrial |
$ | 38,958 | $ | 29,352 | ||||
Construction - residential real estate |
27,447 | 12,488 | ||||||
Residential real estate |
12,488 | 11,436 | ||||||
Construction - commercial real estate |
3,343 | 6,367 | ||||||
Other |
5,603 | 8,007 | ||||||
|
|
|
|
|||||
Total commitments to extend credit |
$ | 87,839 | $ | 67,650 | ||||
|
|
|
|
|||||
Standby letters of credit |
$ | 2,004 | $ | 611 |
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 many 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 customers 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 managements credit evaluation. The type of collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Companys policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. No losses were incurred in 2017 or 2016 under these commitments.
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the Company.
Note 13 - Concentration of Credit Risk
Most of the Companys business activity is with customers who are concentrated in the state of Washington. Investments in municipal securities involve governmental entities within the state. Generally, amounts placed or invested in bank accounts are insured by the FDIC up to $250,000 per bank. Uninsured deposits in bank accounts at December 31, 2017 and 2016, totaled $6,717,000 and $5,604,000, respectively. Loans are generally limited, by state banking regulations, to 20% of the Banks equity, excluding accumulated other comprehensive income (loss). The Company manages asset quality and controls credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Company regularly utilizes real estate as collateral to reduce the risk of credit loss in the loan portfolio. As of December 31, 2017 and 2016, the Company has a concentration of credit in commercial real estate. Commercial
F-34
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Concentration of Credit Risk (continued)
real estate loans are typically secured by the Banks first lien position on the subject property. Standby letters of credit were granted primarily to commercial borrowers.
Note 14 - Stock-Based Compensation
Stock Options and Restricted Stock
In April 2006, the Company adopted the 2006 Stock Option and Equity Compensation Plan (Plan), which is unlimited in duration. Provisions of the Plan and Internal Revenue Service (IRS) Code limit Incentive Stock Options to be granted on a date that is not more than ten years from the Plan date or the date the Plan was amended to increase the shares available. The Plan provides for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units. Stock awards may be issued to directors, officers, and employees of the Company and the Bank. The Plan permits revisions and amendments, requiring approval of shareholders of the Company. Shares available to be granted in the plan were 434,760 at December 31, 2017.
On April 30, 2018, the Companys shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (2018 Plan). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. The 2018 Plan replaces both the 2006 Plan and our Directors Stock Bonus Plan. Existing awards will vest under the terms granted and no further awards will be made under these plans.
Stock Option Awards
In January 2017, the Company granted 33,825 nonqualified stock options to an employee, which vests ratably over 10 years. The Company also granted 82,300 qualified options to employees during 2017, which vest ratably over 10 years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Companys stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following assumptions were used to estimate the value of options granted for the years ended December 31:
2017 | 2016 | |||||||
Expected term |
10.0 years | 10.0 years | ||||||
Expected stock price volatility |
43.41 | % | 43.70 | % | ||||
Risk-free interest rate |
2.51 | % | 1.75 | % | ||||
Expected dividends |
Zero | Zero | ||||||
Weighted average grant date fair value |
$3.70 | $3.45 |
Subsequent to year end, the Company granted 28,546 nonqualified stock options to an employee with a grant date fair value of $3.95, which vests ratably over 10 years. The Company also granted 87,500 qualified options to employees with a weighted average grant date fair value of $3.95, which vest ratably over 10 years.
F-35
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Stock-Based Compensation (continued)
A summary of stock option activity under the Companys Plan during the period ended December 31, 2017:
Options |
Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
|||||||||
Outstanding at January 1, 2017 |
563,149 | $ | 6.05 | 6.79 | ||||||||
Granted |
116,125 | 6.50 | - | |||||||||
Exercised |
(3,680 | ) | 6.65 | - | ||||||||
Forfeited or expired |
(6,660 | ) | 6.35 | - | ||||||||
|
|
|
|
|
|
|||||||
Outstanding at December 31, 2017 |
668,934 | $ | 6.10 | 6.36 | ||||||||
|
|
|
|
|
|
|||||||
Exercisable at December 31, 2017 |
216,231 | $ | 6.00 | 4.87 | ||||||||
|
|
|
|
|
|
There were no tax benefits realized related to options exercised and the related intrinsic value is not significant. There were no stock options exercised during 2016.
As of December 31, 2017, there was $1,333,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Total unrecognized compensation costs will be adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately six years.
Restricted Stock Awards
The fair value of restricted stock awards is equal to the fair value of the Companys stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.
During 2017 one employee received 2,000 shares, of which 600 vested immediately and the remaining will vest ratably over the next seven years. Total compensation recognized on restricted stock awards during 2017 was $4,000. Total unrecognized compensation costs total $8,000 as of December 31, 2017. Fair value of shares vested during 2017 was $4,000.
A summary of the Companys nonvested shares at December 31, 2017, and changes during the year is presented below:
Nonvested Shares |
Shares | Weighted- Average Grant Date Fair Value |
||||||
Nonvested at December 31, 2016 |
- | $ | - | |||||
Granted |
2,000 | 6.25 | ||||||
Forfeited |
- | - | ||||||
Vested |
(600 | ) | 6.25 | |||||
|
|
|
|
|||||
Nonvested at December 31, 2017 |
1,400 | $ | 6.25 | |||||
|
|
|
|
F-36
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Stock-Based Compensation (continued)
Directors Stock Bonus
The Company adopted and subsequently amended the Directors Stock Bonus Plan (Bonus Plan). The Bonus Plan was frozen on April 30, 2018, when the shareholders approved the 2018 Omnibus Incentive Plan.
Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who have attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities. Grants immediately vest when a director has attained the retirement age of 72 and retires from the Board.
The Bonus Plan grants shares with total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid. The amended Bonus Plan would have expired on May 31, 2018 if it was not frozen on April 30, 2018.
During 2017, there were 4,808 shares granted to five directors at $6.50 per share. During 2016, there were 6,800 shares granted to seven directors at $6.25 per share. One director resigned from the board during 2016, resulting in the forfeiture of 2,000 unvested shares, and the reversal of $5,000 in expense. Compensation expense recorded related to the Plan totaled $31,000 and $36,000 for the years ended December 31, 2017 and 2016, respectively.
Shares available for grant under the Director Stock Bonus Plan at December 31, 2017 total 13,229.
Note 15 - Employee Benefit Plans
401(k) plan - The Company has a combined 401(k) and profit-sharing plan covering substantially all employees. Contributions to the 401(k) plan may consist of matching contributions for employees, who have completed one year or more of service. Matching contributions are usually equal to a percentage of employee 401(k) contributions, which the Company determines each year. Company matching contributions will be approved by the board of directors annually on a discretionary basis. In 2017 and 2016, the Company provided matching contributions totaling $398,000 and $357,000, respectively.
Deferred compensation plan - The Company established a deferred compensation plan in 2003 for certain management personnel. Two former employees were covered by this plan and the plan is now distributing benefits to these retired individuals. The Plan was designed to help supplement retirement benefits for participants. The benefits may be funded by bank-owned life insurance policies. The life insurance policies had a cash surrender value of $6,500,000 and $6,315,000 at December 31, 2017 and 2016, respectively. Liabilities to employees, which are being accrued over the life of the participants Plan, were $1,175,000 and $1,266,000 at December 31, 2017 and 2016, respectively. Compensation expense related to this Plan was $85,000 and $91,000 for the years ended December 31, 2017 and 2016, respectively. Payments of accrued benefits totaling $175,000 were made during 2017 and 2016.
Note 16 - Regulatory Matters
Banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary)
F-37
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Regulatory Matters (continued)
actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (as defined). According to regulatory guidelines, only the amount of deferred tax assets that can be realized within the next 12 months based on projected taxable income is allowed in the computation. There were no disallowed deferred tax assets at December 31, 2017 and 2016.
Under the capital adequacy guidelines on the regulatory framework for prompt corrective action (as set forth in the table on the next page), the Bank met the criteria to be considered well capitalized as of December 31, 2017 and 2016. Such determination has been made based on the Banks Tier 1, common equity Tier 1 total capital, and leverage ratios. There have been no conditions or events since December 31, 2017, that management believes would change the Banks category.
The final rules implementing Basel Committee on Banking Supervisions capital guidelines for U.S. banks (Basel III rules) became effective for the Bank 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. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2017 is 1.25% and for 2016 is 0.625%. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes the Bank exceeds all capital adequacy requirements to which they are subject, including the Basel III rules, as of December 31, 2017.
F-38
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Regulatory Matters (continued)
The Banks actual and required capital amounts and ratios are as follows:
Actual | Minimum Required for Capital Adequacy Purposes |
Required to be Well Capitalized Under the Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Common Equity Tier I risk-based capital ratio |
||||||||||||||||||||||||
(to risk-weighted assets) |
$ | 77,756 | 11.67 | % | $ | 29,984 | 4.50 | % | $ | 43,311 | 6.50 | % | ||||||||||||
Leverage Capital |
||||||||||||||||||||||||
(to average assets) |
77,756 | 9.94 | % | 31,280 | 4.00 | % | 39,099 | 5.00 | % | |||||||||||||||
Tier I Capital |
||||||||||||||||||||||||
(to risk-weighted assets) |
77,756 | 11.67 | % | 39,979 | 6.00 | % | 53,306 | 8.00 | % | |||||||||||||||
Total Capital |
||||||||||||||||||||||||
(to risk-weighted assets) |
85,983 | 12.90 | % | 53,306 | 8.00 | % | 66,632 | 10.00 | % | |||||||||||||||
December 31, 2016 |
||||||||||||||||||||||||
Common Equity Tier I risk-based capital ratio |
||||||||||||||||||||||||
(to risk-weighted assets) |
$ | 71,525 | 11.60 | % | $ | 27,748 | 4.50 | % | $ | 40,081 | 6.50 | % | ||||||||||||
Leverage Capital |
||||||||||||||||||||||||
(to average assets) |
71,525 | 10.11 | % | 28,293 | 4.00 | % | 35,366 | 5.00 | % | |||||||||||||||
Tier I Capital |
||||||||||||||||||||||||
(to risk-weighted assets) |
71,525 | 11.60 | % | 36,998 | 6.00 | % | 49,330 | 8.00 | % | |||||||||||||||
Total Capital |
||||||||||||||||||||||||
(to risk-weighted assets) |
79,233 | 12.85 | % | 49,330 | 8.00 | % | 61,663 | 10.00 | % |
Note 17 - Shareholders Equity
During 2017, the Articles of Incorporation were amended to increase the total authorized preferred stock from 500,000 shares to 25,000,000 shares. There was zero issued and outstanding preferred stock at December 31, 2017 and 2016.
During 2017, the Articles of Incorporation were amended to increase total authorized common shares to 300,000,000 shares, an increase of 200,000,000 from the 100,000,000 common shares previously authorized. At December 31, 2017 and 2016, there were 8,887,457 and 8,877,344 common shares issued and outstanding.
During 2017, the Articles of Incorporation were amended to provide that 1,000,000 shares of common stock, out of the 300,000,000 shares authorized, be designated as Class B nonvoting common stock. At December 31, 2017 and 2016, there were 100,000 shares of Class B nonvoting common stock issued and outstanding.
Class B nonvoting common stock is identical to and has the same rights as common stock, except that it does not have the right to vote on any matter requiring the approval of shareholders, unless specifically required by law.
During 2017, the Articles of Incorporation were amended to provide that up to 100,000,000 shares of common stock, out of the 300,000,000 shares authorized, may be designated as Class C nonvoting common stock. At
F-39
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Shareholders Equity (continued)
December 31, 2017 and 2016, there were 261,444 shares of Class C nonvoting common stock issued and outstanding.
Class C nonvoting common stock is identical to common stock except with respect to voting rights, restrictions on transfer and conversion rights.
Voting rights - Class C nonvoting common stock has no voting rights, except as may be required by law.
Restrictions on transfer - The shares of Class C nonvoting common stock may not be transferred by the original purchaser of the shares except: (1) to the Company; (2) in a widely distributed public offering that is registered under the Securities Act; (3) to a person that is acquiring a majority of the Companys voting securities (not including voting securities such person is acquiring from the transferor); or (4) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company (including pursuant to a related series of transactions), provided that the transferee or transferees are not affiliated with the original purchaser of the Class C nonvoting common stock.
Conversion rights - Class C nonvoting common stock is not convertible into common stock or any other class or series of the Companys equity by the original purchaser of the shares. Following a permissible transfer of the Class C nonvoting common stock, as described above, with the approval of our board of directors, the Class C nonvoting common stock may be converted into common stock by the transferee or transferees on terms and conditions approved by our board of directors.
Note 18 - Fair Value Measurements
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Companys principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Companys assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on managements judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and the Companys own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing is not indicative of the counterpartys credit quality.
Any changes to valuation methodologies are reviewed by management to ensure that they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.
There are three levels of inputs that may be used to measure fair values:
Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2Either (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.
Level 3Unobservable inputs.
F-40
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Fair Value Measurements (continued)
The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.
The following tables present estimated fair values of the Companys financial instruments as of December 31, whether or not recognized or recorded in the consolidated balance sheets:
2017 | Fair Value Measurements Using | |||||||||||||||||||
Carrying Value |
Estimated Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | 13,787 | $ | 13,787 | $ | 13,787 | $ | - | $ | - | ||||||||||
Interest-bearing deposits |
75,964 | 75,891 | 75,891 | - | - | |||||||||||||||
Investment securities |
38,336 | 38,302 | 33,396 | 4,906 | - | |||||||||||||||
Other investments |
3,680 | 3,680 | - | 3,680 | - | |||||||||||||||
Loans receivable (net) |
648,771 | 636,334 | - | - | 636,334 | |||||||||||||||
Accrued interest receivable |
2,274 | - | - | 2,274 | - | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
$ | 703,295 | $ | 702,525 | $ | - | $ | 702,525 | $ | - | ||||||||||
FHLB advances |
20,000 | 20,000 | - | 20,000 | - | |||||||||||||||
Subordinated debt |
9,950 | 9,601 | - | 9,601 | - | |||||||||||||||
Junior subordinated debentures |
3,579 | 2,978 | - | 2,978 | - | |||||||||||||||
Capital lease |
137 | 134 | - | 134 | - | |||||||||||||||
Accrued interest payable |
228 | - | - | 228 | - | |||||||||||||||
2016 | Fair Value Measurements Using | |||||||||||||||||||
Carrying Value |
Estimated Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | 11,084 | $ | 11,084 | $ | 11,084 | $ | - | $ | - | ||||||||||
Interest-bearing deposits |
75,891 | 75,891 | 75,891 | - | - | |||||||||||||||
Investment securities |
34,994 | 34,922 | 28,248 | 6,674 | - | |||||||||||||||
Other investments |
3,099 | 3,099 | - | 3,099 | - | |||||||||||||||
Loans receivable (net) |
588,584 | 587,778 | - | - | 587,778 | |||||||||||||||
Accrued interest receivable |
1,728 | 1,728 | - | 1,423 | - | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
$ | 648,662 | $ | 648,345 | $ | - | $ | 648,345 | $ | - | ||||||||||
FHLB advances |
15,000 | 15,000 | - | 15,000 | - | |||||||||||||||
Subordinated debt |
9,936 | 9,600 | - | 9,600 | - | |||||||||||||||
Junior subordinated debentures |
3,577 | 2,252 | - | 2,252 | - | |||||||||||||||
Capital lease |
177 | 174 | - | 174 | - | |||||||||||||||
Accrued interest payable |
224 | 224 | - | 224 | - |
F-41
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Fair Value Measurements (continued)
The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value:
Financial instruments with carrying value equal to fair market value - The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value. These instruments include cash and due from banks, interest- bearing deposits with banks, other investments, accrued interest receivable, and accrued interest payable. Other investments, consisting of stock held in other financial institutions for correspondent relationships, are not publicly traded; however, it may be redeemed on a dollar-for-dollar basis, for any amount the Company is not required to hold, subject to the other financial institutions discretion. The fair value therefore approximates carrying value.
Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.
Loans receivable (net) - The fair value of variable rate loans that reprice frequently and have no significant change in credit risk is based on the carrying value. Fair value of fixed rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposits - The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities on such time deposits.
FHLB advances, subordinated debt, junior subordinated debentures, and capital lease - The fair value of the Companys long-term borrowings are estimated using discounted cash flow analyses based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments - Commitments to extend credit represent all off-balance sheet financial instruments. The fair value of these commitments is not significant.
F-42
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Fair Value Measurements (continued)
Items measured at fair value on a recurring basis - The following fair value hierarchy table presents information about the Companys assets that are measured at fair value on a recurring basis at the dates indicated:
Level 1 | Level 2 | Level 3 | Total Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2017 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 33,396 | $ | - | $ | - | $ | 33,396 | ||||||||
U.S. Government agencies |
- | 2,970 | - | 2,970 | ||||||||||||
U.S. Agency collateralized mortgage obligations |
- | 260 | - | 260 | ||||||||||||
U.S. Agency residential mortgage-backed securities |
- | 81 | - | 81 | ||||||||||||
Municipals |
- | 220 | - | 220 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 33,396 | $ | 3,531 | $ | - | $ | 36,927 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2016 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 28,248 | $ | - | $ | - | $ | 28,248 | ||||||||
U.S. Government agencies |
- | 3,961 | - | 3,961 | ||||||||||||
U.S. Agency collateralized mortgage obligations |
- | 289 | - | 289 | ||||||||||||
U.S. Agency residential mortgage-backed securities |
- | 121 | - | 121 | ||||||||||||
Municipals |
- | 487 | - | 487 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 28,248 | $ | 4,858 | $ | - | $ | 33,106 | |||||||||
|
|
|
|
|
|
|
|
Assets measured at fair value using significant unobservable inputs (Level 3)
The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Companys assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:
December 31, | ||||||||
Valuation Technique |
Unobservable Inputs |
2017 Weighted Average Rate |
2016 Weighted Average Rate | |||||
Impaired loans |
Collateral valuations | Discount to appraised value | 13% | n/a | ||||
Other real estate owned and repossessed assets |
Appraisals | Discount to appraised value | n/a | 15% |
F-43
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Fair Value Measurements (continued)
Items measured at fair value on a nonrecurring basis - The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:
Level 1 | Level 2 | Level 3 | Total Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2017 |
||||||||||||||||
Impaired loans |
$ | - | $ | - | $ | 508 | $ | 508 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | - | $ | - | $ | 508 | $ | 508 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2016 |
||||||||||||||||
Other real estated owned and repossessed assets |
$ | - | $ | - | $ | 1,297 | $ | 1,297 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | - | $ | - | $ | 1,297 | $ | 1,297 | ||||||||
|
|
|
|
|
|
|
|
The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.
Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.
Other real estate owned and repossessed assets - The Company records other real estate owned (OREO) and repossessed assets at fair value on a nonrecurring basis. Fair value adjustments on OREO are based on updated real estate appraisals which are based on current market conditions. Fair values on repossessed assets are based on updated independent valuations provided by asset brokers and are based on current market conditions. All OREO and repossessed assets are recorded at the estimated fair value, less expected selling costs. From time to time, nonrecurring fair value adjustments to OREO and repossessed assets are recorded to reflect write-downs based on an observable market price or current appraised value of the property. The Company considers any valuation inputs related OREO and repossessed assets to be Level 3 inputs. The individual carrying amounts of these assets are reviewed at least annually for impairment and any additional impairment charges are expensed to non-interest expense.
F-44
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share at December 31:
2017 | 2016 | |||||||
(dollars in thousands, except share data) |
||||||||
Net Income |
$ | 5,436 | $ | 5,003 | ||||
|
|
|
|
|||||
Basic weighted average number common shares outstanding |
9,234,552 | 9,221,513 | ||||||
Dilutive effect of share-based compensation |
3,077 | 1,013 | ||||||
|
|
|
|
|||||
Diluted weighted average number common shares outstanding |
9,237,629 | 9,222,526 | ||||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.59 | $ | 0.54 | ||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.59 | $ | 0.54 | ||||
|
|
|
|
At December 31, 2017 and 2016 the difference in earnings per share under the two-class method was not significant. Options to purchase additional 648,934 and 543,149 shares, as of December 31, 2017 and 2016, respectively, of common stock were not included in the computation of diluted earnings per common share because their effect resulted in them being anti-dilutive.
Note 20 - Subsequent Events
The Company has evaluated events and transactions subsequent to December 31, 2017 for potential recognition or disclosure.
On January 22, 2018, stock options totaling 116,046 were awarded to employees, as described in Note 14.
On March 26, 2018, the Silver Lake related party lease and loan were renewed, as described in Note 11.
On April 30, 2018 our shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan, or 2018 Plan. The 2018 Plan replaces both our 2006 Plan and our Directors Stock Bonus Plan. No further awards will be made under those plans. See Note 14 for additional information.
On May 4, 2018 the Company effected a 1-for-5 reverse stock split, decreasing the number of issued shares from 46,268,359 to 9,254,073, including 401 additional shares issued to shareholders with fractional shares. Share and per share amounts included in the consolidated financial statements accompanying notes reflect the effect of the split for all periods presented.
F-45
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
ASSETS | ||||||||
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
Cash and due from banks |
$ | 13,589 | $ | 13,787 | ||||
Interest-bearing deposits with other banks |
80,980 | 75,964 | ||||||
Investment securities, available for sale, at fair value |
36,015 | 36,927 | ||||||
Investment securities, held to maturity, at amortized cost |
1,323 | 1,409 | ||||||
Other investments |
3,766 | 3,680 | ||||||
Loans |
678,515 | 656,788 | ||||||
Allowance for loan losses |
(8,423 | ) | (8,017 | ) | ||||
|
|
|
|
|||||
Net loans |
670,092 | 648,771 | ||||||
Premises and equipment, net |
13,000 | 13,121 | ||||||
Accrued interest receivable |
1,968 | 2,274 | ||||||
Bank-owned life insurance, net |
6,546 | 6,500 | ||||||
Deferred tax asset, net |
2,277 | 2,092 | ||||||
Other assets |
1,406 | 1,228 | ||||||
|
|
|
|
|||||
Total assets |
$ | 830,962 | $ | 805,753 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
LIABILITIES |
||||||||
Deposits |
$ | 727,268 | $ | 703,295 | ||||
Federal Home Loan Bank (FHLB) advances |
20,000 | 20,000 | ||||||
Subordinated debt |
||||||||
Principal amount $10,000 (less unamortized debt issuance costs of $46 and $50 at March 31, 2018 and December 31, 2017, respectively) |
9,954 | 9,950 | ||||||
Junior subordinated debentures |
||||||||
Principal amount $3,609 (less unamortized debt issuance costs of $29 and $30 at March 31, 2018 and December 31, 2017, respectively) |
3,580 | 3,579 | ||||||
Deferred compensation |
1,151 | 1,175 | ||||||
Accrued interest payable |
229 | 228 | ||||||
Other liabilities |
1,853 | 1,815 | ||||||
|
|
|
|
|||||
Total liabilities |
764,035 | 740,042 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 10) |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock, no par value: |
||||||||
Authorized: 25,000,000 shares at March 31, 2018 and December 31, 2017; issued and outstanding: zero shares at March 31, 2018 and December 31, 2017 |
- | - | ||||||
Common stock, no par value: |
||||||||
Authorized: 300,000,000 shares at March 31, 2018 and December 31, 2017; 8,891,859 voting and 361,444 non-voting shares at March 31, 2018 issued and outstanding and 8,887,457 voting and 361,444 non-voting shares at December 31, 2017 issued and outstanding |
52,592 | 52,521 | ||||||
Retained earnings |
16,163 | 14,134 | ||||||
Accumulated other comprehensive loss, net of tax |
(1,828 | ) | (944 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
66,927 | 65,711 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 830,962 | $ | 805,753 | ||||
|
|
|
|
See accompanying notes.
F-46
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)
Three months ended March 31, | ||||||||||
2018 | 2017 | |||||||||
INTEREST INCOME |
||||||||||
Interest and fees on loans |
$ | 8,189 | $ | 7,276 | ||||||
Interest on investment securities |
152 | 118 | ||||||||
Interest on interest-bearing deposits with other banks |
266 | 149 | ||||||||
|
|
|
|
|||||||
Total interest income |
8,607 | 7,543 | ||||||||
INTEREST EXPENSE |
||||||||||
Interest on deposits |
646 | 494 | ||||||||
Interest on borrowed funds |
183 | 174 | ||||||||
|
|
|
|
|||||||
Total interest expense |
829 | 668 | ||||||||
Net interest income |
7,778 | 6,875 | ||||||||
PROVISION FOR LOAN LOSSES |
501 | 439 | ||||||||
|
|
|
|
|||||||
Net interest income after provision for loan losses |
7,277 | 6,436 | ||||||||
NONINTEREST INCOME |
||||||||||
Deposit service charges and fees |
575 | 436 | ||||||||
Loan referral fees |
130 | - | ||||||||
Mortgage broker fees |
37 | 41 | ||||||||
Sublease and lease income |
57 | 56 | ||||||||
Gain on sales of loans, net |
64 | 26 | ||||||||
Other |
244 | 272 | ||||||||
|
|
|
|
|||||||
Total noninterest income |
1,107 | 831 | ||||||||
NONINTEREST EXPENSE |
||||||||||
Salaries and employee benefits |
3,735 | 3,282 | ||||||||
Occupancy |
823 | 729 | ||||||||
Data processing |
479 | 401 | ||||||||
Director and staff expenses |
144 | 141 | ||||||||
Excise taxes |
124 | 113 | ||||||||
Marketing |
57 | 67 | ||||||||
Legal and professional fees |
80 | 90 | ||||||||
Federal Deposit Insurance Corporation (FDIC) assessments |
85 | 103 | ||||||||
Business development |
88 | 67 | ||||||||
Other |
452 | 383 | ||||||||
|
|
|
|
|||||||
Total noninterest expense |
6,067 | 5,376 | ||||||||
|
|
|
|
|||||||
Income before provision for income taxes |
2,317 | 1,891 | ||||||||
PROVISION FOR INCOME TAXES |
474 | 578 | ||||||||
|
|
|
|
|||||||
NET INCOME |
$ | 1,843 | $ | 1,313 | ||||||
|
|
|
|
|||||||
Basic and diluted earnings per share |
$ | 0.20 | $ | 0.14 | ||||||
Weighted average number of common shares outstanding: |
||||||||||
Basic |
9,242,839 | 9,232,398 | ||||||||
Diluted |
9,248,428 | 9,235,475 |
See accompanying notes.
F-47
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
Three months ended March 31, | ||||||||
2018 | 2017 | |||||||
NET INCOME |
$ | 1,843 | $ | 1,313 | ||||
OTHER COMPREHENSIVE INCOME, before tax |
||||||||
Securities available-for-sale |
||||||||
Unrealized holding (loss) gain during the quarter |
(883 | ) | 42 | |||||
Income tax benefit (provision) related to unrealized holding gain (loss) |
185 | (14 | ) | |||||
|
|
|
|
|||||
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax |
(698 | ) | 28 | |||||
|
|
|
|
|||||
COMPREHENSIVE INCOME |
$ | 1,145 | $ | 1,341 | ||||
|
|
|
|
See accompanying notes.
F-48
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
(dollars in thousands)
Shares of Common Stock |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | ||||||||||||||||
BALANCE, December 31, 2016 |
9,238,788 | $ | 52,216 | $ | 8,698 | $ | (1,016 | ) | $ | 59,898 | ||||||||||
Net income |
- | - | 1,313 | - | 1,313 | |||||||||||||||
Issuance of vested stock awards |
4,808 | - | - | - | - | |||||||||||||||
Stock repurchase |
(50 | ) | - | - | - | - | ||||||||||||||
Stock-based compensation |
- | 64 | - | - | 64 | |||||||||||||||
Other comprehensive income |
- | - | - | 28 | 28 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE, March 31, 2017 |
9,243,546 | $ | 52,280 | $ | 10,011 | $ | (988 | ) | $ | 61,303 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE, December 31, 2017 |
9,248,901 | $ | 52,521 | $ | 14,134 | $ | (944 | ) | $ | 65,711 | ||||||||||
Net income |
- | - | 1,843 | - | 1,843 | |||||||||||||||
Reclassification of stranded tax effect due to federal tax rate change |
- | - | 186 | (186 | ) | - | ||||||||||||||
Issuance of restricted stock awards |
4,402 | - | - | - | - | |||||||||||||||
Stock-based compensation |
- | 71 | - | - | 71 | |||||||||||||||
Other comprehensive loss |
- | - | - | (698 | ) | (698 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE, March 31, 2018 |
9,253,303 | $ | 52,592 | $ | 16,163 | $ | (1,828 | ) | $ | 66,927 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-49
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three months ended March 31, | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 1,843 | $ | 1,313 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Provision for loan losses |
501 | 439 | ||||||
Depreciation and amortization |
254 | 230 | ||||||
Gain on sales of loans |
(64 | ) | (26 | ) | ||||
Net (discount accretion) and premium amortization on investment securities |
(3 | ) | 7 | |||||
Stock-based compensation |
71 | 64 | ||||||
Bank-owned life insurance earnings |
(46 | ) | (45 | ) | ||||
Change in other assets and liabilities |
148 | (270 | ) | |||||
|
|
|
|
|||||
Total adjustments |
861 | 399 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
2,704 | 1,712 | ||||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Increase in interest-bearing deposits with other banks |
(5,016 | ) | (14,888 | ) | ||||
Purchase of stock investments, net |
(86 | ) | (381 | ) | ||||
Principal paydowns of investment securities available-for-sale |
36 | 41 | ||||||
Principal paydowns of investment securities held-to-maturity |
82 | 185 | ||||||
Purchase of loans |
(5,469 | ) | - | |||||
Increase in loans, net |
(16,289 | ) | (255 | ) | ||||
Purchases of premises and equipment |
(133 | ) | (86 | ) | ||||
|
|
|
|
|||||
Net cash used by investing activities |
(26,875 | ) | (15,384 | ) | ||||
|
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase in demand deposits, Now and money market, and savings |
25,122 | 23,185 | ||||||
Net decrease in time deposits |
(1,149 | ) | (6,771 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
23,973 | 16,414 | ||||||
|
|
|
|
|||||
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS |
(198 | ) | 2,742 | |||||
CASH AND DUE FROM BANKS, beginning of quarter |
13,787 | 11,084 | ||||||
|
|
|
|
|||||
CASH AND DUE FROM BANKS, end of quarter |
$ | 13,589 | $ | 13,826 | ||||
|
|
|
|
|||||
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES |
||||||||
Interest paid |
$ | 828 | $ | 831 | ||||
Income taxes paid |
- | 300 | ||||||
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS |
||||||||
Fair value adjustment of securities available-for-sale, gross |
$ | (883 | ) | $ | 42 |
See accompanying notes.
F-50
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of Business - Coastal Financial Corporation (Corporation or Company) is a registered bank holding company whose wholly owned subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.
The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 13 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Banks main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Banks deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (FDIC). The Banks loans and deposits are primarily within the greater Puget Sound area, and the Banks primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.
Principles of consolidation - The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation.
Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) interim reporting requirements, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes included elsewhere in this report. Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results that may be expected for future periods.
The Company does not consolidate statutory trusts established for the sole purposes of issuing trust preferred securities and related trust common securities. See Note 8, Junior Subordinated Debentures, for additional discussion.
Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded and presented in dollars.
In managements opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period.
Subsequent Events - In preparing these interim condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to March 31, 2018 for potential recognition or disclosure.
On April 30, 2018 our shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan, or 2018 Plan. The 2018 Plan replaces both our 2006 Plan and our Directors Stock Bonus Plan, which expire on May 31, 2018. No further awards will be made under those plans. See Note 11 for additional information.
F-51
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
On May 4, 2018 the Company effected a 1-for-5 reverse stock split, decreasing the number of issued shares from 46,268,359 to 9,254,073, including 401 additional shares issued to shareholders with fractional shares. Share and per share amounts included in the consolidated financial statements and accompanying notes reflect the effect of the split for all periods presented.
There were no subsequent events, other than previously disclosed, to report between March 31, 2018, the date of the financial statements, and June 1, 2018, the date the consolidated financial statements were issued.
Business Segments - The Company is managed by legal entity and not by lines of business. The entitys primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to their customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Companys primary source of revenue, and is supplemented by interest income from investment securities, deposit service charges, and other service provided activities. The performance of the Company is reviewed and monitored by the Companys executive management and Board of Directors on a monthly basis. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.
Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses, the fair value of the Companys investment securities, deferred tax assets, and financial instruments. Actual results could differ significantly from those estimates.
Note 2 - Recent accounting standards
Accounting Standards Adopted in 2018
On January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all related amendments to all contracts using the modified retrospective approach. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company concluded that there is no change to the timing and pattern of revenue recognition for its current revenue streams or the presentation of revenue as gross versus net. No adjustment to retained earnings was required on the adoption date. Because there is no change to the timing and pattern of revenue recognition, there are no material changes to the Companys processes and internal controls.
All of the Companys revenue from contracts with customers within the scope of 606 is recognized within noninterest income. A description of the Companys revenue streams accounted for under ASC 606 is as follows:
Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the
F-52
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Recent accounting standards (continued)
transaction is executed at the point in the time the Company fulfills the customers request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, represented the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
Interchange Income: The Company earns interchange fees from debit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transactions value and are recognized daily, concurrently with the transaction processing services provided by the cardholder. Interchange income is included in Service Charges on Deposit Accounts in the consolidated statements of income.
Merchant Service Fees: The Company earns a percentage of fees from cardholder transactions conducted through a third party payment network provider. The Company is obligated to provide sales, customer support, marketing, deployment and installation of equipment, and savings analysis to merchant service customers. An exclusivity agreement is in place between the Company and the third party payment network provider. Fees are recognized on a monthly basis, as earned. Merchant service fees are included Services Charges on Deposit Accounts in the consolidated statements of income.
Loan Referral Fees: Loan referral fees are governed by contract arrangements executed with third party banks. The Company earns loan referral fees when our loan client enters into interest rate swap agreement with third party banks and the rate on the swap is in excess of prevailing market rates. The spread or a portion of the spread, between the interest rate swap agreement and the prevailing market rate can be monetized and recognized as loan referral fee income.
Mortgage Broker Fees: Mortgage broker fees are governed by contract arrangement executed with a third party mortgage company. The Company earns broker fees by partially underwriting mortgage loans and referring qualified loans to the third party mortgage company. Revenue is recognized at the date the mortgage company funds the mortgage loan. The contract arrangement includes a fee reimbursement requirement for funded mortgage loans that pay off within three months of origination.
As of January 1, 2018, the Company applied FASB ASU No. 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 15Fair Value Measurements, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of March 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be
F-53
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Recent accounting standards (continued)
disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Companys consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, a consensus of the FASBs Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard did not have a material impact on the Companys consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgement. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Companys operating results or financial condition.
In February 2018, the FASB issued ASU No. 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company elected to early adopt in the first quarter of 2018. Accordingly, the Company recorded an increase to retained earnings and a decrease to AOCI of $186,000 for stranded tax effects on investment available for sale securities in the first quarter of 2018.
Recent Accounting Guidance Not Yet Effective
In February 2016, FASB issued ASU 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. The ASU is effective in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the early stages of its implementation assessment, which includes identifying the population of Companys leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements.
F-54
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 - Recent accounting standards (continued)
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. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
Note 3 - Investment Securities
The amortized cost and fair values of investment securities at the date indicated are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
March 31, 2018 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 34,803 | $ | - | $ | (2,253 | ) | $ | 32,550 | |||||||
U.S. Government agencies |
3,000 | - | (52 | ) | 2,948 | |||||||||||
U.S. Agency collateralized mortgage obligations |
215 | - | (6 | ) | 209 | |||||||||||
U.S. Agency residential mortgage-backed securities |
50 | - | - | 50 | ||||||||||||
Municipals |
261 | - | (3 | ) | 258 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
38,329 | - | (2,314 | ) | 36,015 | |||||||||||
Held-to-maturity |
||||||||||||||||
U.S. Agency residential mortgage-backed securities |
1,323 | - | (67 | ) | 1,256 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities |
$ | 39,652 | $ | - | $ | (2,381 | ) | $ | 37,271 | |||||||
|
|
|
|
|
|
|
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2017 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 34,794 | $ | - | $ | (1,398 | ) | $ | 33,396 | |||||||
U.S. Government agencies |
3,000 | - | (30 | ) | 2,970 | |||||||||||
U.S. Agency collateralized mortgage obligations |
224 | - | (3 | ) | 221 | |||||||||||
U.S. Agency residential mortgage-backed securities |
79 | 1 | - | 80 | ||||||||||||
Municipals |
261 | - | (1 | ) | 260 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
38,358 | 1 | (1,432 | ) | 36,927 | |||||||||||
Held-to-maturity |
||||||||||||||||
U.S. Agency residential mortgage-backed securities |
1,409 | - | (35 | ) | 1,374 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities |
$ | 39,767 | $ | 1 | $ | (1,467 | ) | $ | 38,301 | |||||||
|
|
|
|
|
|
|
|
F-55
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Investment Securities (continued)
The amortized cost and fair value of debt securities at March 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Amounts maturing in |
||||||||||||||||
One year or less |
$ | - | $ | - | $ | - | $ | - | ||||||||
After one year through five years |
7,995 | 7,721 | - | - | ||||||||||||
After five years through ten years |
30,069 | 28,034 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
38,064 | 35,755 | - | - | |||||||||||||
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations |
265 | 260 | 1,323 | 1,256 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 38,329 | $ | 36,015 | $ | 1,323 | $ | 1,256 | |||||||||
|
|
|
|
|
|
|
|
Investment securities with carrying values of $15,023,000 and $14,526,000 at March 31, 2018 and December 31, 2017 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
There were no sales of investment securities during the three months ended March 31, 2018 and March 31, 2017.
Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
March 31, 2018 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Treasury securities |
$ | 4,738 | $ | (273 | ) | $ | 27,812 | $ | (1,980 | ) | $ | 32,550 | $ | (2,253 | ) | |||||||||
U.S. Government agencies |
- | - | 2,948 | (52 | ) | 2,948 | (52 | ) | ||||||||||||||||
U.S. Agency collateralized mortgage obligations |
209 | (6 | ) | - | - | 209 | (6 | ) | ||||||||||||||||
Municipals |
258 | (3 | ) | - | - | 258 | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale securities |
5,205 | (282 | ) | 30,760 | (2,032 | ) | 35,965 | (2,314 | ) | |||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | 1,256 | (67 | ) | 1,256 | (67 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities |
$ | 5,205 | $ | (282 | ) | $ | 32,016 | $ | (2,099 | ) | $ | 37,221 | $ | (2,381 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-56
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Investment Securities (continued)
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Treasury securities |
$ | 4,934 | $ | (77 | ) | $ | 28,463 | $ | (1,321 | ) | $ | 33,397 | $ | (1,398 | ) | |||||||||
U.S. Government agencies |
- | - | 2,970 | (30 | ) | 2,970 | (30 | ) | ||||||||||||||||
U.S. Agency collateralized mortgage obligations |
220 | (3 | ) | - | - | 220 | (3 | ) | ||||||||||||||||
Municipals |
260 | (1 | ) | - | - | 260 | (1 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale securities |
5,414 | (81 | ) | 31,433 | (1,351 | ) | 36,847 | (1,432 | ) | |||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
U.S. Agency residential mortgage-backed securities |
- | - | 1,374 | (35 | ) | 1,374 | (35 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities |
$ | 5,414 | $ | (81 | ) | $ | 32,807 | $ | (1,386 | ) | $ | 38,221 | $ | (1,467 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018 and December 31, 2017, there were 11 securities in an unrealized loss position. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at March 31, 2018 and December 31, 2017.
Note 4 - Loans and Allowance for Loan Losses
The composition of the loan portfolio is as follows as of the periods indicated:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
(dollars in thousands) | ||||||||
Commercial and industrial loans |
$ | 86,719 | $ | 88,688 | ||||
Real estate loans |
||||||||
Construction, land, and land development |
44,970 | 41,641 | ||||||
Residential real estate |
90,624 | 87,031 | ||||||
Commercial real estate |
453,927 | 437,717 | ||||||
Consumer and other loans |
2,558 | 2,058 | ||||||
|
|
|
|
|||||
Loans |
678,798 | 657,135 | ||||||
Net deferred origination fees |
(283 | ) | (347 | ) | ||||
|
|
|
|
|||||
Loans, net |
$ | 678,515 | $ | 656,788 | ||||
|
|
|
|
Included in loans are overdrafts of $28,000 and $76,000 at March 31, 2018 and December 31, 2017, respectively. The Company has pledged loans totaling $163,090,000 and $147,008,000 at March 31, 2018 and December 31, 2017, respectively, for borrowing lines at the FHLB and FRB. See Note 6 for more details on FHLB, FRB borrowings and available lines of credit.
F-57
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The balance of SBA loans and participations serviced for others totaled $26,058,000 and $29,910,000 at March 31, 2018 and December 31, 2017, respectively.
The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans totaled $48,215,000 and $51,337,000 as of March 31, 2018 and December 31, 2017, respectively. Unamortized premiums totaled $756,000 and $718,000 as of March 31, 2018 and December 31, 2017, respectively, and are amortized into interest income over the life of the loans.
The following is a summary of the Companys loan portfolio segments:
Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment to businesses located generally in our primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Companys investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Companys investment is dependent upon the borrowers ability to collect amounts due from its customers.
Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and CRE properties in our market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Companys ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrowers ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrowers ability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.
Residential real estate - Residential real estate includes various types of loans which the Company holds real property as collateral. Included in this segment are multi-family loans, first lien single family loans, which we occasionally purchase to diversify our loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrowers inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.
Commercial real estate (includes owner occupied and non-owner occupied) - Commercial real estate includes various types of loans which the Company holds real property as collateral. The primary risks of real estate loans include the borrowers inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
Consumer and other loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. Repayment of these loans is dependent on the borrowers ability to pay and the fair value of the underlying collateral.
F-58
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The following table illustrates an age analysis of past due loans as of the dates indicated:
30-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment 90 Days or More Past Due and Still Accruing |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
March 31, 2018 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 219 | $ | 397 | $ | 616 | $ | 86,103 | $ | 86,719 | $ | - | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Construction, land and land development |
- | - | - | 44,970 | 44,970 | - | ||||||||||||||||||
Residential real estate |
75 | - | 75 | 90,549 | 90,624 | - | ||||||||||||||||||
Commercial real estate |
- | - | - | 453,927 | 453,927 | - | ||||||||||||||||||
Consumer and other loans |
4 | - | 4 | 2,554 | 2,558 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 298 | $ | 397 | $ | 695 | $ | 678,103 | 678,798 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Less net deferred origination fees |
(283 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Loans, net |
$ | 678,515 | ||||||||||||||||||||||
|
|
30-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment 90 Days or More Past Due and Still Accruing |
|||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 791 | $ | 372 | $ | 1,163 | $ | 87,525 | $ | 88,688 | $ | - | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Construction, land and land development |
218 | - | 218 | 41,423 | 41,641 | - | ||||||||||||||||||
Residential real estate |
76 | - | 76 | 86,955 | 87,031 | - | ||||||||||||||||||
Commercial real estate |
333 | 345 | 678 | 437,039 | 437,717 | - | ||||||||||||||||||
Consumer and other loans |
- | - | - | 2,058 | 2,058 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 1,418 | $ | 717 | $ | 2,135 | $ | 655,000 | 657,135 | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Less net deferred origination fees |
(347 | ) | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Loans, net |
$ | 656,788 | ||||||||||||||||||||||
|
|
F-59
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
A summary of information pertaining to impaired loans is as follows as of and for the period indicated:
Unpaid Contractual Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment year-to-date |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
March 31, 2018 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 1,137 | $ | 330 | $ | 803 | $ | 1,133 | $ | 241 | $ | 1,352 | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Residential real estate |
352 | 352 | - | 352 | - | 352 | ||||||||||||||||||
Commercial real estate |
1,500 | 1,303 | - | 1,303 | - | 1,309 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,989 | $ | 1,985 | $ | 803 | $ | 2,788 | $ | 241 | $ | 3,013 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 1,123 | $ | 1,065 | $ | - | $ | 1,064 | $ | - | $ | 1,157 | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Residential real estate |
94 | 89 | - | 88 | - | 93 | ||||||||||||||||||
Commercial real estate |
2,249 | 1,660 | - | 1,660 | - | 1,888 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,466 | $ | 2,814 | $ | - | $ | 2,812 | $ | - | $ | 3,138 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
March 31, 2017 |
||||||||||||||||||||||||
Commercial and industrial loans |
$ | 28 | $ | 28 | $ | - | $ | 28 | $ | - | $ | 28 | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Construction, land and land development |
1,278 | 1,278 | - | 1,278 | - | 1,281 | ||||||||||||||||||
Residential real estate |
97 | 96 | - | 96 | - | 97 | ||||||||||||||||||
Commercial real estate |
5,520 | 5,371 | - | 5,371 | - | 5,388 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,923 | $ | 6,773 | $ | - | $ | 6,773 | $ | - | $ | 6,794 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Interest income earned on impaired loans was $21,000 and $44,000 for the three months ended March 31, 2018 and 2017, respectively.
The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loans collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.
F-60
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of the period indicated:
Accrual Status |
Nonaccrual Status |
Total Restructured Loans |
||||||||||
(dollars in thousands) | ||||||||||||
March 31, 2018 |
||||||||||||
Commercial real estate |
$ | - | $ | 1,303 | $ | 1,303 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2017 |
||||||||||||
Commercial real estate |
$ | - | $ | 1,315 | $ | 1,315 | ||||||
|
|
|
|
|
|
No loans were restructured in the three months ended March 31, 2018 or for the three months ended March 31, 2017 as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were troubled debt restructurings at March 31, 2018.
When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.
An analysis of nonaccrual loans by category consisted of the following at the periods indicated:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
(dollars in thousands) | ||||||||
Commercial and industrial loans |
$ | 396 | $ | 372 | ||||
Real estate loans |
||||||||
Residential real estate |
- | 88 | ||||||
Commercial real estate |
1,303 | 1,660 | ||||||
|
|
|
|
|||||
Total nonaccrual loans |
$ | 1,699 | $ | 2,120 | ||||
|
|
|
|
Credit Quality and Credit Risk
Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Companys regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged
F-61
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the Pass column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.
Loans by credit quality risk rating are as follows as of the periods indicated:
Pass | Other Loans Especially Mentioned |
Sub- Standard |
Doubtful | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
March 31, 2018 |
||||||||||||||||||||
Commercial and industrial loans |
$ | 85,194 | $ | 392 | $ | 1,133 | $ | - | $ | 86,719 | ||||||||||
Real estate loans |
||||||||||||||||||||
Construction, land, and land development |
42,417 | 2,553 | - | - | 44,970 | |||||||||||||||
Residential real estate |
90,146 | 126 | 352 | - | 90,624 | |||||||||||||||
Commercial real estate |
450,316 | 2,308 | 1,303 | - | 453,927 | |||||||||||||||
Consumer and other loans |
2,558 | - | - | 2,558 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 670,631 | $ | 5,379 | $ | 2,788 | $ | - | 678,798 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Less net deferred origination fees |
(283 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Loans, net |
$ | 678,515 | ||||||||||||||||||
|
|
|||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||
Commercial and industrial loans |
$ | 87,247 | $ | 376 | $ | 902 | $ | 163 | $ | 88,688 | ||||||||||
Real estate loans |
||||||||||||||||||||
Construction, land, and land development |
39,081 | 2,560 | - | - | 41,641 | |||||||||||||||
Residential real estate |
86,464 | 479 | 88 | - | 87,031 | |||||||||||||||
Commercial real estate |
434,421 | 1,636 | 1,315 | 345 | 437,717 | |||||||||||||||
Consumer and other loans |
2,058 | - | - | - | 2,058 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 649,271 | $ | 5,051 | $ | 2,305 | $ | 508 | 657,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Less net deferred origination fees |
(347 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Loans, net |
$ | 656,788 | ||||||||||||||||||
|
|
Allowance for Loan Losses
The Companys ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Companys credit review process together with data from peer institutions and economic information gathered from published sources.
The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Companys actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each groups aggregate loan balances.
F-62
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the period ended March 31, 2018:
Commercial and Industrial |
Construction, Land, and Land Development |
Residential Real Estate |
Commercial Real Estate |
Consumer and Other |
Unallocated | Total March 31, 2018 |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses |
||||||||||||||||||||||||||||
Balance, December 31, 2017 |
$ | 1,864 | $ | 1,063 | $ | 1,343 | $ | 2,014 | $ | 43 | $ | 1,690 | $ | 8,017 | ||||||||||||||
Provision for loan losses or (recapture) |
172 | 70 | (15 | ) | 158 | 13 | 103 | 501 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2,036 | 1,133 | 1,328 | 2,172 | 56 | 1,793 | 8,518 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans charged-off |
(9 | ) | - | - | (84 | ) | (5 | ) | - | (98 | ) | |||||||||||||||||
Recoveries of loans previously charged-off |
1 | - | - | - | 2 | - | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net (charge-offs) recoveries |
(8 | ) | - | - | (84 | ) | (3 | ) | - | (95 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, March 31, 2018 |
$ | 2,028 | $ | 1,133 | $ | 1,328 | $ | 2,088 | $ | 53 | $ | 1,793 | $ | 8,423 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts allocated to |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 241 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 241 | ||||||||||||||
Collectively evaluated for impairment |
1,787 | 1,133 | 1,328 | 2,088 | 53 | 1,793 | 8,182 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, March 31, 2018 |
$ | 2,028 | $ | 1,133 | $ | 1,328 | $ | 2,088 | $ | 53 | $ | 1,793 | $ | 8,423 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,133 | $ | - | $ | 352 | $ | 1,303 | $ | - | $ | 2,788 | ||||||||||||||||
Collectively evaluated for impairment |
85,586 | 44,970 | 90,272 | 452,624 | 2,558 | 676,010 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, March 31, 2018 total loans |
$ | 86,719 | $ | 44,970 | $ | 90,624 | $ | 453,927 | $ | 2,558 | $ | 678,798 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-63
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the period ended December 31, 2017:
Commercial and Industrial |
Construction, Land, and Land Development |
Residential Real Estate |
Commercial Real Estate |
Consumer and Other |
Unallocated | Total December 31, 2017 |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses |
||||||||||||||||||||||||||||
Balance, December 31, 2016 |
$ | 1,606 | $ | 1,398 | $ | 1,495 | $ | 1,474 | $ | 26 | $ | 1,545 | $ | 7,544 | ||||||||||||||
Provision for loan losses or (recapture) |
336 | (430 | ) | (152 | ) | 948 | 23 | 145 | 870 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
1,942 | 968 | 1,343 | 2,422 | 49 | 1,690 | 8,414 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans charged-off |
(81 | ) | - | - | (408 | ) | (11 | ) | - | (500 | ) | |||||||||||||||||
Recoveries of loans previously charged-off |
3 | 95 | - | - | 5 | - | 103 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net (charge-offs) recoveries |
(78 | ) | 95 | - | (408 | ) | (6 | ) | - | (397 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2017 |
$ | 1,864 | $ | 1,063 | $ | 1,343 | $ | 2,014 | $ | 43 | $ | 1,690 | $ | 8,017 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts allocated to |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Collectively evaluated for impairment |
1,864 | 1,063 | 1,343 | 2,014 | 43 | 1,690 | 8,017 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2017 |
$ | 1,864 | $ | 1,063 | $ | 1,343 | $ | 2,014 | $ | 43 | $ | 1,690 | $ | 8,017 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,065 | $ | - | $ | 89 | $ | 1,660 | $ | - | $ | 2,814 | ||||||||||||||||
Collectively evaluated for impairment |
87,623 | 41,641 | 86,942 | 436,057 | 2,058 | 654,321 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, December 31, 2017 total loans |
$ | 88,688 | $ | 41,641 | $ | 87,031 | $ | 437,717 | $ | 2,058 | $ | 657,135 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
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F-64
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - Loans and Allowance for Loan Losses (continued)
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the period ended March 31, 2017:
Commercial and Industrial |
Construction, Land, and Land Development |
Residential Real Estate |
Commercial Real Estate |
Consumer and Other |
Unallocated | Total March 31, 2017 |
||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses |
||||||||||||||||||||||||||||
Balance, December 31, 2016 |
$ | 1,606 | $ | 1,398 | $ | 1,495 | $ | 1,474 | $ | 26 | $ | 1,545 | $ | 7,544 | ||||||||||||||
Provision for loan losses or (recapture) |
5 | (277 | ) | (156 | ) | 194 | 3 | 660 | 429 | |||||||||||||||||||
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1,611 | 1,121 | 1,339 | 1,668 | 29 | 2,205 | 7,973 | ||||||||||||||||||||||
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|
|||||||||||||||
Loans charged-off |
(15 | ) | - | - | (173 | ) | (3 | ) | - | (191 | ) | |||||||||||||||||
Recoveries of loans previously charged-off |
- | - | - | - | - | - | - | |||||||||||||||||||||
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|
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Net (charge-offs) recoveries |
(15 | ) | - | - | (173 | ) | (3 | ) | - | (191 | ) | |||||||||||||||||
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|
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Balance, March 31, 2017 |
$ | 1,596 | $ | 1,121 | $ | 1,339 | $ | 1,495 | $ | 26 | $ | 2,205 | $ | 7,782 | ||||||||||||||
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Amounts allocated to |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Collectively evaluated for impairment |
1,596 | 1,121 | 1,339 | 1,495 | 26 | 2,205 | 7,782 | |||||||||||||||||||||
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Balance, March 31, 2017 |
$ | 1,596 | $ | 1,121 | $ | 1,339 | $ | 1,495 | $ | 26 | $ | 2,205 | $ | 7,782 | ||||||||||||||
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Loans |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 28 | $ | 1,278 | $ | 96 | $ | 5,371 | $ | - | $ | 6,773 | ||||||||||||||||
Collectively evaluated for impairment |
71,376 | 43,754 | 73,458 | 399,712 | 1,724 | 590,024 | ||||||||||||||||||||||
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Balance, March 31, 2017 total loans |
$ | 71,404 | $ | 45,032 | $ | 73,554 | $ | 405,083 | $ | 1,724 | $ | 596,797 | ||||||||||||||||
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F-65
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 5 - Deposits
The composition of consolidated deposits consisted of the following at the periods indicated:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
(dollars in thousands) | ||||||||
Demand, noninterest-bearing |
$ | 254,000 | $ | 242,358 | ||||
Now and money market |
335,823 | 326,412 | ||||||
Savings |
47,945 | 43,876 | ||||||
Time deposits less than $250,000 |
59,946 | 60,445 | ||||||
Time deposits $250,000 and over |
29,554 | 30,204 | ||||||
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|
|
|
|||||
Total deposits |
$ | 727,268 | $ | 703,295 | ||||
|
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|
|
The following table presents the maturity distribution of time deposits as of March 31, 2018 (dollars in thousands):
Twelve months |
$ | 44,357 | ||
One to two years |
31,271 | |||
Two to three years |
8,369 | |||
Three to four years |
3,323 | |||
Four to five years |
2,180 | |||
|
|
|||
$ | 89,500 | |||
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|
Note 6 - Federal Home Loan Bank Advances and Other Borrowings
At March 31, 2018 and December 31, 2017 the Company had $20,000,000 in overnight FHLB advances. The advances are secured by a blanket pledge of eligible collateral including first lien single family and multi-family mortgages with a carrying value of $119,385,000 and $103,092,000 at March 31, 2018 and December 31, 2017, respectively. The Company has available borrowing capacity of an additional $49,744,000 from FHLB at March 31, 2018, subject to certain collateral requirements and with interest at the then stated rate.
The following table discloses the Companys outstanding advances from the FHLB for the periods indicated:
March 31, 2018 | December 31, 2017 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
(dollars in thousands) | ||||||||||||||||
FHLB short-term advances |
$ | 20,000 | 1.91 | % | $ | 20,000 | 1.63 | % |
The Company has established an $8,000,000 unsecured line of credit, with interest payable at the then-stated rate, with PCBB, which expires in June 2018. There were no borrowings on this line at March 31, 2018 or December 31, 2017.
The Company has established a Borrower-in-Custody (BIC) arrangement with the FRB, which is secured by eligible loans, with interest payable at the then-stated rate. At March 31, 2018, the Company had pledged commercial real estate loans totaling $43,705,000, which provided available borrowing capacity of $21,472,000. At December 31, 2017, the Company had pledged commercial real estate loans totaling $43,916,000, which provided available borrowing capacity of $21,140,000. There were no borrowings outstanding on this line of credit at March 31, 2018 or December 31, 2017.
F-66
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 7 - Subordinated Debt
On July 29, 2016, the Company issued a subordinated note payable to Banterra Bank. The $10,000,000 note, maturing on August 1, 2026, is fixed for five years at 5.65%, and thereafter is variable at a floating rate, calculated quarterly, based on the Wall Street Journal prime rate plus 2.5%. Interest is paid quarterly. Principal payments of $500,000 per quarter commence November 1, 2021, in conjunction with the floating rate period.
Note 8 - Junior Subordinated Debentures
At March 31, 2018 and December 31, 2017, the Companys junior subordinated debentures were as follows:
Coastal (WA) Statutory Trust I | Aggregate Principal Amount March 31, 2018 |
Aggregate Principal Amount December 31, 2017 |
||||||
(dollars in thousands) | ||||||||
Total liability, at par |
$ | 3,609 | $ | 3,609 | ||||
Less: unamortized debt issuance costs |
(29 | ) | (30 | ) | ||||
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|
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Total liability, at carrying value |
$ | 3,580 | $ | 3,579 | ||||
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|
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Stated Maturity: |
December 15, 2034 | |||||||
Interest Rate Spread: |
Three-month LIBOR + 2.10% |
On December 15, 2004, the Company issued $3,609,000 floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.10% (4.22% and 3.69% at March 31, 2018 and December 31, 2017, respectively). Interest is payable quarterly. There are no principal payments due on these debentures in the next five years.
The Trust is not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trust as liabilities. The Company owns all of the common securities of the trust. The trust preferred securities issued by the trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the note has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
Note 9 - Federal Income Taxes
The provision for income tax expense and effective tax rates for the three months ended March 31, 2018 and 2017 are as follows:
For the Three Months Ended March 31 |
||||||||
2018 | 2017 | |||||||
(dollars in thousands) | ||||||||
Provision for income tax expense |
$ | 474 | $ | 578 | ||||
Effective tax rate |
20.46 | % | 30.57 | % |
The effective tax rate for the first quarter of 2018 was favorably impacted by the reduction of the federal income tax statutory rate from 35% to 21% under the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act effective December 22, 2017.
F-67
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 9 - Federal Income Taxes (continued)
The differences between the stated statutory rates and the effective tax rates presented in the table above were primarily attributable to permanent differences related tax exempt interest, bank-owned life insurance, and stock-based compensation.
Note 10 - Commitments and Contingencies
In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not reflected in the consolidated financial statements. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.
At March 31, 2018 and December 31, 2017, the Company had a reserve for unfunded commitments of $210,000, included in other liabilities on the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk were as follows at March 31, 2018 (dollars in thousands):
Commitments to extend credit |
||||||
Commercial and industrial |
$ | 44,204 | ||||
Constructionresidential real estate |
21,651 | |||||
Residential real estate |
12,772 | |||||
Constructioncommercial real estate |
17,531 | |||||
Other |
6,415 | |||||
|
|
|||||
Total commitments to extend credit |
$ | 102,573 | ||||
|
|
|||||
Standby letters of credit |
$ | 2,116 |
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 many 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 customers 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 managements credit evaluation. The type of collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Companys policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment.
F-68
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 10 - Commitments and Contingencies (continued)
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the Company.
Note 11 - Stock-Based Compensation
Stock Options and Restricted Stock
In April 2006, the Company adopted the 2006 Stock Option and Equity Compensation Plan (Plan), which is unlimited in duration. Provisions of the Plan and Internal Revenue Service (IRS) Code limit Incentive Stock Options to be granted on a date that is not more than ten years from the Plan date or the date the Plan was amended to increase the shares available. The Plan provides for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units. Stock awards may be issued to directors, officers, and employees of the Company and the Bank. The Plan permits revisions and amendments, requiring approval of shareholders of the Company. Shares available to be granted in the plan were 337,444 at March 31, 2018.
On April 30, 2018, the Companys shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (2018 Plan). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. The 2018 Plan replaces both the 2006 Plan and our Directors Stock Bonus Plan. Existing awards will vest under the terms granted and no further awards will be made under these plans.
Stock Option Awards
In January 2018, the Company granted 28,546 nonqualified stock options to an employee, which vest ratably over 10 years. The Company also granted 87,500 qualified stock options to employees, which vest ratably over 10 years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Companys stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture.
The following assumptions were used to estimate the value of options granted during the periods indicated:
Three months ended March 31, 2018 |
Three months ended March 31, 2017 |
|||||||
Expected term |
10.0 years | 10.0 years | ||||||
Expected stock price volatility |
41.89 | % | 43.41 | % | ||||
Risk-free interest rate |
2.66 | % | 2.51 | % | ||||
Expected dividends |
Zero | Zero | ||||||
Weighted average grant date fair value |
$ | 3.95 | $ | 3.70 |
F-69
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 11 - Stock-Based Compensation (continued)
A summary of stock option activity under the Companys Plan during the period ended March 31, 2018:
Options |
Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
|||||||||
Outstanding at December 31, 2017 |
668,934 | $ | 6.10 | 6.36 | ||||||||
Granted |
116,046 | 7.10 | - | |||||||||
Exercised |
- | - | - | |||||||||
Forfeited or expired |
(16,130 | ) | 6.40 | - | ||||||||
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Outstanding at March 31, 2018 |
768,850 | $ | 6.25 | 6.84 | ||||||||
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Exercisable at March 31, 2018 |
242,274 | $ | 6.02 | 5.22 | ||||||||
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There were no options exercised during the three months ended March 31, 2018 and March 31, 2017.
As of March 31, 2018, there was $1,838,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Total unrecognized compensation costs will be adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 7.5 years.
Restricted Stock Awards
The fair value of restricted stock awards is equal to the fair value of the Companys stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.
The Companys nonvested shares at March 31, 2018 and December 31, 2017 totaled 1,400 shares, and were issued with weighted average grant date fair value of $6.25.
Directors Stock Bonus
The Company adopted and subsequently amended the Directors Stock Bonus Plan (Bonus Plan). The Bonus Plan was frozen on April 30, 2018, when the shareholders approved the 2018 Omnibus Incentive Plan.
Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who have attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities. Grants immediately vest when a director has attained the retirement age of 72 and retires from the Board.
The Bonus Plan grants shares with total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid. The amended Bonus Plan would have expired on May 31, 2018 if it was not frozen on April 30, 2018.
F-70
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 11 - Stock-Based Compensation (continued)
In January 2018, there were 4,405 shares granted to five directors at an estimated fair value of $7.10 per share. During 2017, there were 4,808 shares granted to five directors at an estimated fair value of $6.50 per share. Compensation expense recorded related to the Plan totaled $8,000 for the three months ended March 31, 2018 and 2017.
Existing awards will vest under the terms granted and no further awards will be made under this plan.
Note 12 - Employee Benefit Plans
401(k) plan - The Company has a combined 401(k) and profit-sharing plan covering substantially all employees. Contributions to the 401(k) plan may consist of matching contributions for employees, who have completed one year or more of service. Matching contributions are usually equal to a percentage of employee 401(k) contributions, which the Company determines each year. Company matching contributions will be approved by the board of directors annually on a discretionary basis. For the three months ended March 31, 2018 and 2017, the Company provided matching contributions totaling $111,000 and $100,000, respectively.
Deferred compensation plan - The Company established a deferred compensation plan in 2003 for certain management personnel. Two former employees were covered by this plan and the plan is now distributing benefits to these retired individuals. The Plan was designed to help supplement retirement benefits for participants. The benefits may be funded by bank-owned life insurance policies. The life insurance policies had a cash surrender value of $6,546,000 and $6,500,000 at March 31, 2018 and December 31, 2017, respectively. Liabilities to employees, which are being accrued over the life of the participants Plan, were $1,151,000 and $1,175,000 at March 31, 2018 and December 31, 2017, respectively. Compensation expense related to this Plan was $20,000 and $22,000 for the three months ended March 31, 2018 and 2017, respectively. Payments of accrued benefits totaling $44,000 were made during for the three months ended March 31, 2018 and 2017.
Note 13 - Regulatory Matters
Banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet 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 Banks financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (as defined). According to regulatory guidelines, only the amount of deferred tax assets that can be realized within the next 12 months based on projected taxable income is allowed in the computation. There were no disallowed deferred tax assets at March 31, 2018 and December 31, 2017.
Under the capital adequacy guidelines on the regulatory framework for prompt corrective action (as set forth in the table on the next page), the Bank met the criteria to be considered well capitalized as of March 31, 2018 and December 31, 2017. Such determination has been made based on the Banks Tier 1, common equity Tier 1 total
F-71
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 13 - Regulatory Matters (continued)
capital, and leverage ratios. There have been no conditions or events since March 31, 2018, that management believes would change the Banks category.
The final rules implementing Basel Committee on Banking Supervisions capital guidelines for U.S. banks (Basel III rules) became effective for the Bank 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. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes the Bank exceeds all capital adequacy requirements to which they are subject, including the Basel III rules, as of March 31, 2018.
The Banks actual and required capital amounts and ratios are as follows:
Actual | Minimum Required for Capital Adequacy Purposes |
Required to be Well Capitalized Under the Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
March 31, 2018 |
||||||||||||||||||||||||
Common Equity Tier I risk-based capital ratio (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 68,565 | 9.75 | % | $ | 31,650 | 4.50 | % | $ | 45,717 | 6.50 | % | ||||||||||||
Bank Only |
79,977 | 11.37 | % | 31,642 | 4.50 | % | 45,706 | 6.50 | % | |||||||||||||||
Leverage Capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
72,065 | 9.07 | % | 31,786 | 4.00 | % | 39,733 | 5.00 | % | |||||||||||||||
Bank Only |
79,977 | 10.09 | % | 31,719 | 4.00 | % | 39,649 | 5.00 | % | |||||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
72,065 | 10.25 | % | 42,201 | 6.00 | % | 56,267 | 8.00 | % | |||||||||||||||
Bank Only |
79,977 | 11.37 | % | 42,190 | 6.00 | % | 56,253 | 8.00 | % | |||||||||||||||
Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
90,698 | 12.90 | % | 56,267 | 8.00 | % | 70,334 | 10.00 | % | |||||||||||||||
Bank Only |
88,611 | 12.60 | % | 56,253 | 8.00 | % | 70,317 | 10.00 | % | |||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Common Equity Tier I risk-based capital ratio (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 66,494 | 9.98 | % | $ | 29,990 | 4.50 | % | $ | 43,319 | 6.50 | % | ||||||||||||
Bank Only |
77,756 | 11.67 | % | 29,984 | 4.50 | % | 43,311 | 6.50 | % | |||||||||||||||
Leverage Capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
69,994 | 8.95 | % | 31,286 | 4.00 | % | 39,107 | 5.00 | % | |||||||||||||||
Bank Only |
77,756 | 9.94 | % | 31,280 | 4.00 | % | 39,099 | 5.00 | % | |||||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
69,994 | 10.50 | % | 39,987 | 6.00 | % | 53,316 | 8.00 | % | |||||||||||||||
Bank Only |
77,756 | 11.67 | % | 39,979 | 6.00 | % | 53,306 | 8.00 | % | |||||||||||||||
Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
88,222 | 13.24 | % | 53,316 | 8.00 | % | 66,645 | 10.00 | % | |||||||||||||||
Bank Only |
85,983 | 12.90 | % | 53,306 | 8.00 | % | 66,632 | 10.00 | % |
F-72
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 14 - Shareholders Equity
During 2017, the Articles of Incorporation were amended to increase the total authorized preferred stock from 500,000 shares to 25,000,000 shares. There was zero issued and outstanding preferred stock at December 31, 2017 and 2016.
During 2017, the Articles of Incorporation were amended to increase total authorized common shares to 300,000,000 shares, an increase of 200,000,000 from the 100,000,000 common shares previously authorized. At March 31, 2018 and December 31, 2017, there were 8,891,859 and 8,887,457 common shares issued and outstanding.
During 2017, the Articles of Incorporation were amended to provide that 1,000,000 shares of common stock, out of the 300,000,000 shares authorized, be designated as Class B nonvoting common stock. At March 31, 2018 and December 31, 2017, there were 100,000 shares of Class B nonvoting common stock issued and outstanding.
Class B nonvoting common stock is identical to and has the same rights as common stock, except that it does not have the right to vote on any matter requiring the approval of shareholders, unless specifically required by law.
During 2017, the Articles of Incorporation were amended to provide that up to 100,000,000 shares of common stock, out of the 300,000,000 shares authorized, may be designated as Class C nonvoting common stock. At March 31, 2018 and December 31, 2017, there were 261,444 shares of Class C nonvoting common stock issued and outstanding.
Class C nonvoting common stock is identical to common stock except with respect to voting rights, restrictions on transfer and conversion rights.
Voting rights - Class C nonvoting common stock has no voting rights, except as may be required by law.
Restrictions on transfer - The shares of Class C nonvoting common stock may not be transferred by the original purchaser of the shares except: (1) to the Company; (2) in a widely distributed public offering that is registered under the Securities Act of 1933; (3) to a person that is acquiring a majority of the Companys voting securities (not including voting securities such person is acquiring from the transferor); or (4) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company (including pursuant to a related series of transactions), provided that the transferee or transferees are not affiliated with the original purchaser of the Class C nonvoting common stock.
Conversion rights - Class C nonvoting common stock is not convertible into common stock or any other class or series of the Companys equity by the original purchaser of the shares. Following a permissible transfer of the Class C nonvoting common stock, as described above, with the approval of our board of directors, the Class C nonvoting common stock may be converted into common stock by the transferee or transferees on terms and conditions approved by our board of directors.
F-73
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 15 - Fair Value Measurements
The following tables present estimated fair values of the Companys financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:
March 31, 2018 | Fair Value Measurements Using | |||||||||||||||||||
Carrying Value |
Estimated Fair Value |
|||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | 13,589 | $ | 13,589 | $ | 13,589 | $ | - | - | |||||||||||
Interest-bearing deposits |
80,980 | 80,980 | 80,980 | - | - | |||||||||||||||
Investment securities |
37,338 | 37,271 | 32,550 | 4,721 | - | |||||||||||||||
Other investments |
3,766 | 3,766 | - | 3,766 | - | |||||||||||||||
Loans (net) (1) |
670,092 | 651,451 | - | - | 651,451 | |||||||||||||||
Accrued interest receivable |
1,968 | - | - | 1,968 | - | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits (1) |
$ | 727,268 | $ | 726,154 | $ | - | $ | 726,154 | $ | - | ||||||||||
FHLB advances |
20,000 | 20,000 | - | 20,000 | - | |||||||||||||||
Subordinated debt |
9,954 | 9,034 | - | 9,034 | - | |||||||||||||||
Junior subordinated debentures |
3,580 | 2,976 | - | 2,976 | - | |||||||||||||||
Capital lease |
121 | 118 | - | 118 | - | |||||||||||||||
Accrued interest payable |
229 | - | - | 229 | - |
(1) | The estimated fair value of loans, net and and deposits for March 31, 2018 reflect exit price assumptions. The December 31, 2017 fair value estimates are not based on exit price assumptions. |
December 31, 2017 | Fair Value Measurements Using | |||||||||||||||||||
Carrying Value |
Estimated Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | 13,787 | $ | 13,787 | $ | 13,787 | $ | - | $ | - | ||||||||||
Interest-bearing deposits |
75,964 | 75,891 | 75,891 | - | - | |||||||||||||||
Investment securities |
38,336 | 38,301 | 33,396 | 4,905 | - | |||||||||||||||
Other investments |
3,680 | 3,680 | - | 3,680 | - | |||||||||||||||
Loans (net) |
648,771 | 636,334 | - | - | 636,334 | |||||||||||||||
Accrued interest receivable |
2,274 | - | - | 2,274 | - | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
$ | 703,295 | $ | 702,525 | $ | - | $ | 702,525 | $ | - | ||||||||||
FHLB advances |
20,000 | 20,000 | - | 20,000 | - | |||||||||||||||
Subordinated debt |
9,950 | 9,601 | - | 9,601 | - | |||||||||||||||
Junior subordinated debentures |
3,579 | 2,978 | - | 2,978 | - | |||||||||||||||
Capital lease |
137 | 134 | - | 134 | - | |||||||||||||||
Accrued interest payable |
228 | - | - | 228 | - |
The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements.
F-74
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 15 - Fair Value Measurements (continued)
Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys estimates for market assumptions. These two types of inputs create the following fair value hierarchy:
| Level 1 Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. |
| Level 2 Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. |
| Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not corroborated by observable market data. |
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Items measured at fair value on a recurring basis The following fair value hierarchy table presents information about the Companys assets that are measured at fair value on a recurring basis at the dates indicated:
Level 1 | Level 2 | Level 3 | Total Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
March 31, 2018 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 32,550 | $ | - | $ | - | $ | 32,550 | ||||||||
U.S. Government agencies |
- | 2,948 | - | 2,948 | ||||||||||||
U.S. Agency collateralized mortgage obligations |
- | 257 | - | 257 | ||||||||||||
U.S. Agency residential mortgage-backed securities |
- | 50 | - | 50 | ||||||||||||
Municipals |
- | 210 | - | 210 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 32,550 | $ | 3,465 | $ | - | $ | 36,015 | |||||||||
|
|
|
|
|
|
|
|
F-75
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 15 - Fair Value Measurements (continued)
Level 1 | Level 2 | Level 3 | Total Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
December 31, 2017 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury securities |
$ | 33,396 | $ | - | $ | - | $ | 33,396 | ||||||||
U.S. Government agencies |
- | 2,970 | - | 2,970 | ||||||||||||
U.S. Agency collateralized mortgage obligations |
- | 260 | - | 260 | ||||||||||||
U.S. Agency residential mortgage-backed securities |
- | 81 | - | 81 | ||||||||||||
Municipals |
- | 220 | - | 220 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 33,396 | $ | 3,531 | $ | - | $ | 36,927 | |||||||||
|
|
|
|
|
|
|
|
The following methods were used to estimate the fair value of the class of financial instruments above:
Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.
Limitations: The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2018 and December 31, 2017. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Assets measured at fair value using significant unobservable inputs (Level 3)
The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Companys assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:
Valuation Technique |
Unobservable Inputs |
March 31, 2018 Weighted Average Rate |
December 31, 2017 Weighted Average Rate |
|||||||||
Impaired loans |
Collateral valuations | Discount to appraised value | 11 | % | 13 | % |
Items measured at fair value on a nonrecurring basis The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:
Level 1 | Level 2 | Level 3 | Total Fair Value |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
March 31, 2018 |
||||||||||||||||
Impaired loans |
$ | - | $ | - | $ | 415 | $ | 415 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | - | $ | - | $ | 415 | $ | 415 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2017 |
||||||||||||||||
Impaired loans |
$ | - | $ | - | $ | 508 | $ | 508 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | - | $ | - | $ | 508 | $ | 508 | ||||||||
|
|
|
|
|
|
|
|
F-76
COASTAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 15 - Fair Value Measurements (continued)
The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.
Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.
Note 16 - Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share at the period indicated:
March 31, 2018 | March 31, 2017 | |||||||
(dollars in thousands, except share data) | ||||||||
Net Income |
$ | 1,843 | $ | 1,313 | ||||
|
|
|
|
|||||
Basic weighted average number common shares outstanding |
9,242,839 | 9,232,398 | ||||||
Dilutive effect of share-based compensation |
5,589 | 3,077 | ||||||
|
|
|
|
|||||
Diluted weighted average number common shares oustanding |
9,248,428 | 9,235,475 | ||||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.20 | $ | 0.14 | ||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.20 | $ | 0.14 | ||||
|
|
|
|
At March 31, 2018 and 2017, the difference in earnings per share under the two-class method was not significant. Options to purchase an additional 763,264 and 648,936 shares of common stock, as of March 31, 2018 and 2017, respectively, of common stock were not included in the computation of diluted earnings per common share because their effect resulted in them being anti-dilutive.
F-77
Shares
Common Stock
Prospectus
, 2018
Joint Book-Running Managers
Keefe, Bruyette & Woods A Stifel Company |
Hovde Group, LLC |
Through and including , 2018 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution. |
Estimated expenses, other than underwriting discounts and commissions, of the sale of our common stock, are as follows:
SEC registration fee |
$ | * | ||
FINRA filing fee |
* | |||
Listing fees and expenses |
* | |||
Transfer agent and registrar fees and expenses |
* | |||
Printing fees and expenses |
* | |||
Legal fees and expenses |
* | |||
Accounting expenses |
* | |||
Miscellaneous expenses |
* | |||
|
|
|||
TOTAL |
$ | * |
* | To be furnished by amendment |
Item 14. | Indemnification of Directors and Officers. |
With the exception of internal claims (those brought against the Company or any person related to or associated with the Company), the Company is obligated under the Second Amended and Restated Articles of Incorporation to indemnify any person who is, or is threatened to be made, a party to any action, suit or proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal, and whether by or in the right of the Company or its shareholders or by any other party, by reason of the fact that the person is, as such terms are defined in the Second Amended and Restated Articles of Incorporation, a Director, Officer-Director, or Subsidiary Outside Director against judgements, penalties or penalty taxes, fines, settlements (even if paid or payable to the Company or its shareholders or to, as such term is defined in the Second Amended and Restated Articles of Incorporation, a Subsidiary Corporation) and reasonable expenses, including attorneys fees, actually incurred in connection with such action, suit or proceeding unless the liability and expenses were on account of conduct adjudged by a court having jurisdiction, from which there is no further right to appeal, based upon clear and convincing evidence, or Finally Adjudged, to be an act or omission that involve intentional misconduct or a knowing violation of law, conduct violating Section 23B.08.310 of the Washington Business Corporation Act, as amended, or participation in any transaction from which the person will personally receive a benefit in money, property or services to which the person is not legally entitled, or Egregious Conduct). Such expenses reasonably incurred will be paid or reimbursed by the Company, upon request of such person, in advance of the final disposition of such action, suit or proceeding upon receipt by the Company of a written, unsecured promise by the person to repay such amount if, upon final adjudication, such person is not entitled to indemnification.
Our Second Amended and Restated Articles of Incorporation further provide that the Company will provide indemnification and advancement of expenses in connection with either an administrative proceeding or civil action instituted by a federal banking agency to the extent permitted, and in the manner prescribed by, any state or federal laws or regulations applicable to the Company, or any formal policies adopted by a regulatory agency having jurisdiction over the Company.
To the extent that indemnification for liabilities arising under the Securities Act of 1933, as amended (the Securities Act) may be permitted to our directors and officers, we have been advised that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Finally, our ability to provide indemnification to our directors and officers is limited by federal banking laws and regulations.
Section 23B.08.320 of the Washington Business Corporation Act, as amended, provides that articles of incorporation may contain provisions not inconsistent with law that eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for conduct as a director, provided that such provisions shall not eliminate or limit the liability of a director for acts or omissions that involve intentional
II-1
misconduct by a director or a knowing violation of law by a director, for conduct violating Section 23B.08.310 of the Washington Business Corporation Act, as amended, or for any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective.
The Second Amended and Restated Articles of Incorporation provide that no Director, Officer-Director, former Director or former Officer-Director will be personally liable to the Company or its shareholders for monetary damages for conduct as a Director or Officer-Director occurring after the effective date of Article 10 of the Articles of Incorporation, unless the conduct is Finally Adjudged to be Egregious Conduct.
The Company maintains directors and officers liability insurance which covers certain liabilities and expenses of its directors and officers and covers it for reimbursement of payments to our directors and officers in respect of such liabilities and expenses, in each case subject to certain limits and exceptions.
Item 15. | Recent Sales of Unregistered Securities. |
In the three years preceding the filing of this registration statement, the registrant has not issued any securities that were not registered under the Securities Act, other than in connection with the transactions described herein that were exempt from registration.
Between January 1, 2015 and the filing of this registration statement, the Company granted options to purchase an aggregate of 406,879 shares of its common stock at exercise prices ranging from $6.25 to $7.20 per share under the 2006 Stock and Equity Compensation Option Plan.
On February 24, 2016, the Company granted 1,600 shares of restricted stock to an employee.
Between January 1, 2015 and the filing of this registration statement, the Company issued 27,408 shares of restricted stock under the Directors Stock Bonus Plan.
The issuances of securities described in the preceding paragraphs were made in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act or Rule 701 under the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation.
On July 29, 2016, the Company issued a 5.65% Fixed-to-Floating Subordinated Note due 2026 in the aggregate principal amount of $10.0 million. The issuances of such security was made in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving any public offering.
Item 16. | Exhibits and Financial Statement Schedules. |
The exhibits filed as a part of this Registration Statement are as follows:
(a) | List of Exhibits |
Exhibit |
Description | |
1.1 | Form of Underwriting Agreement* | |
3.1 | Second Amended and Restated Articles of Incorporation of Coastal Financial Corporation | |
3.2 | Articles of Amendment to the Second Amended and Restated Articles of Incorporation of Coastal Financial Corporation | |
3.3 | Amended and Restated Bylaws of Coastal Financial Corporation | |
4.1 | Form of common stock certificate of Coastal Financial Corporation | |
Certain instruments defining the rights of holders of long-term debt securities of the Company and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request. |
II-2
II-3
Exhibit |
Description | |
24.1 |
* | To be filed by amendment |
+ | Management contract or compensation plan or arrangement. |
# | Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the SEC. |
(b) | Financial Statement Schedules |
All schedules have been omitted as not applicable or not required under the rules of Regulation S-X.
Item 17. | Undertakings. |
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Everett, Washington on the 19th day of June, 2018.
COASTAL FINANCIAL CORPORATION | ||
By: | /s/ Eric M. Sprink | |
Eric M. Sprink President and Chief Executive Officer |
POWER OF ATTORNEY
We, the undersigned directors and officers of Coastal Financial Corporation (the Company) hereby severally constitute and appoint Eric M. Sprink and Joel G. Edwards with full power of substitution, our true and lawful attorneys-in-fact and agents, to do any and all things in our names in the capacities indicated below which said Eric M. Sprink and Joel G. Edwards may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, as amended, and any rules regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 of the Company, including specifically but not limited to, power and authority to sign for us in our names in the capacities indicated below, the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that said Eric M. Sprink and Joel Edwards shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name |
Title |
Date | ||
/s/ Eric M. Sprink Eric M. Sprink |
President, Chief Executive Officer and Director (principal executive officer) |
June 19, 2018 | ||
/s/ Joel G. Edwards Joel G. Edwards |
Executive Vice President, Chief Financial Officer and Director (principal financial and accounting officer) | June 19, 2018 | ||
/s/ Andrew P. Skotdal Andrew P. Skotdal |
Director (Chairman) | June 19, 2018 | ||
/s/ Christopher D. Adams Christopher D. Adams |
Director (Vice Chairman) | June 19, 2018 | ||
/s/ Andrew R. Dale Andrew R. Dale |
Director | June 19, 2018 |
Name |
Title |
Date | ||
/s/ John M. Haugen, Jr. John M. Haugen, Jr. |
Director |
June 19, 2018 | ||
/s/ Steven D. Hovde Steven D. Hovde |
Director |
June 19, 2018 | ||
/s/ Thomas D. Lane Thomas D. Lane |
Director |
June 19, 2018 | ||
/s/ Jack T. Thompson Jack T. Thompson |
Director |
June 19, 2018 | ||
/s/ Gregory A. Tisdel Gregory A. Tisdel |
Director |
June 19, 2018 |
Exhibit 3.1
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
COASTAL FINANCIAL CORPORATION
ARTICLE I
Name
The name of the corporation is COASTAL FINANCIAL CORPORATION.
ARTICLE II
Head Office
The head office and principal place of business of this corporation shall be located in the City of Everett, County of Snohomish, State of Washington 98201.
ARTICLE III
Purpose
The purpose for which the corporation is organized is to carry on such activities as are permitted to corporations under applicable law.
ARTICLE IV
Capitalization
Section 4.1 Authorized Capital. The total number of shares of stock which the corporation is authorized to issue is Three Hundred Twenty-Five Million (325,000,000), of which Three Hundred Million (300,000,000) shares are no par value common stock and Twenty-Five Million (25,000,000) shares are no par value preferred stock.
Section 4.2 Rights and Preferences. The Board of Directors of the corporation shall determine the preferences, limitations and relative rights of any class of shares before issuance of any shares of that class and may designate one or more series within a class as well as the number of shares within that series, before the issuance of any shares within that series.
Section 4.3 Class B Nonvoting Common Stock. Of the Three Hundred Million (300,000,000) shares of Common Stock with no par value per share authorized in Section 4.1 hereof, One Million (1,000,000) shares shall be Class B Nonvoting Common Stock. The Class B Nonvoting Common Stock shall have rights identical with those of the Common Stock, except the Class B Nonvoting Common Stock shall not have the right to vote on any matter requiring approval of the shareholders of the corporation unless specifically required by applicable law.
Section 4.4 Class C Nonvoting Common Stock. Of the Three Hundred Million (300,000,000) shares of Common Stock with no par value per share authorized in Section 4.1 hereof, up to One Hundred Million (100,000,000) shares may be Class C Nonvoting Common Stock. The Class C Nonvoting Common Stock shall have the same rights and privileges as the Companys Common Stock except as follows:
-1-
A. | The Class C Nonvoting Common Stock shall have no voting rights, except as may be required by law; |
B. | The Class C Nonvoting Common Stock shall not be convertible into Common Stock or any other Class or Series of Company equity by the original purchaser of the Class C Nonvoting Common Stock; |
C. | The Class C Nonvoting Common Stock shall not be transferred or disposed of by the original purchaser of the Class C Common Stock except: (A) to the Company; (B) in a widely distributed public offering that is registered under the Securities Act; (C) to a person that is acquiring a majority of the Companys voting securities (not including voting securities such person is acquiring from the transferor); or (D) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any Class of voting securities of the Company (including pursuant to a related series of such transactions), provided such transferee or transferees are not in any way affiliated with the original purchaser of the Class C Nonvoting Common Stock (a -Permissible Transfer); and |
D. | Following a Permissible Transfer. the Class C Nonvoting Common Stock, with the prior approval of the Company Board of Directors. may be convertible to Company Common Stock at the option of the shareholder that obtained ownership of the shares by way of a Permissible Transfer upon terms and conditions approved by the Company Board of Directors. |
ARTICLE V
Shareholder Rights
Section 5.1 No Preemptive Rights. Shareholders shall not have a preemptive right to acquire unissued shares of capital stock of the corporation, whether now or hereafter authorized, or to acquire any obligation issued or sold which are convertible into stock of the corporation, other than such rights, if any, as the Board of Directors, in its discretion, may from time to time determine, and at such price as the Board of Directors may from time to time fix.
Section 5.2 Voting Rights. Other than shares designated as having no voting rights, each share of the capital stock of this corporation shall be entitled to one vote on each matter presented at all meetings of shareholders. Each shareholder entitled to vote at any election for directors has the right to vote. in person or by proxy. the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, and no shareholder shall be entitled to cumulate his votes.
-2-
Section 5.3 Special Meetings of Shareholders. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Chief Executive Officer, President, any member of the Board of Directors, or by holders of not less than one-third (1/3) of all shares of stock of the corporation entitled to vote on any issue proposed to be considered at the meeting. Business transacted at any special meeting shall be confined to the purpose(s) stated in the notice of such meeting.
ARTICLE VI
Board of Directors
Section 6.1 Number. The Board of Directors shall consist of not fewer than seven (7) or more than seventeen (17) persons. The exact number within such minimum and maximum limits shall be fixed and determined by resolution of the Board of Directors. The number of directors elected by the shareholders at the last preceding annual meeting may be increased by not more than three (3) directors by the Board between annual meetings of the shareholders, and no decrease in the number of directors shall have the effect of shortening the term of any incumbent director.
Section 6.2 Classes. The Board of Directors shall be divided into three classes: Class 1, Class 2, and Class 3. Each such Class shall consist, as nearly as possible, of one-third of the total number of directors comprising the entire Board of Directors. Each director shall serve for a term ending on the date of the third annual meeting of shareholders following the annual meeting at which such director was elected or until their successors are duly elected and have qualified or until their earlier resignation, removal from office or death.
Section 6.3 Changes in Number. In the event of an increase or decrease in the number of directors, (1) each director then serving as such shall nevertheless continue as a director of the class in which he or she is a member until the expiration of his or her current term, or his or her earlier resignation, removal from office or death; and (2) the newly created or eliminated directorships resulting from such increase or decrease shall be appointed by the Board of Directors, in its sole discretion, among the three classes of directors so as to maintain such classes as nearly equal as possible.
Section 6.4 Removal. No director may be removed from office by the shareholders without cause except by a vote of 80% of the outstanding shares then entitled to vote. Except as otherwise provided by law, cause for removal shall exist only if the Board of Directors has reasonable grounds to believe that the corporation has suffered or will suffer substantial injury as a result of the gross negligence or dishonesty of the directors whose removal is proposed.
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ARTICLE VII
Fair Price Provision
Section 7.1 Definitions. For purposes of this Article:
(a) An interested shareholder transaction means any merger. share exchange, sale of assets, dissolution or similar transaction between (i) a corporation or any subsidiary thereof, and (ii) an interested shareholder of such corporation or an affiliated person to an interested shareholder, that must be authorized pursuant to applicable law by a vote of the shareholders.
(b) An interested shareholder:
(1) Includes any person or group of affiliated persons who beneficially own twenty percent or more of the outstanding voting shares of a corporation; and
(2) Excludes any person who, in good faith and not for the purpose of circumventing this Article. is an agent, custodial bank, broker, nominee, or trustee for another person, if such other person is not an interested shareholder under Section 7.1(b)(1) of this Article.
(c) An affiliated person is any person who either acts jointly or in concert with, or directly or indirectly controls, is controlled by. or is under common control with another person.
Section 7.2 Special Shareholder Approval. Except as provided in Section 7.3 of this Article, an interested shareholder transaction must be approved by the affirmative vote of the holders of two-thirds of the shares entitled to be counted under this Section 7.2, or if any class of shares is entitled to vote thereon as a class. then by the affirmative vote of two-thirds of the shares of each class entitled to be counted under this Section 7.2 and of the total shares entitled to be counted under this Section 7.2. All outstanding shares entitled to vote under applicable law or the Articles of Incorporation shall be entitled to be counted under this Section 7.2, except shares owned by or voted under the control of an interested shareholder may not be counted to determine whether shareholders have approved a transaction for purposes of this Section 7.2. The vote of the shares owned by or voted under the control of an interested shareholder, however, shall be counted in determining whether a transaction is approved under other provisions of applicable law and for purposes of determining a quorum.
Section 7.3 Exemptions. The special shareholder approval provisions of Section 7.2 of this Article shall not apply to a transaction:
(a) Board Approval. Approved by a majority vote of the board of directors. For such purpose, the vote of directors whose votes are otherwise entitled to be counted under the Articles of Incorporation and applicable law who are directors or officers of, or have a material financial interest in, an interested shareholder, or who were nominated for election as a director as a result of an arrangement with an interested shareholder and first elected as a director within twenty-four months of the proposed transaction. shall not be counted in determining whether the transaction is approved by such directors; or
(b) Fair Value. In which a majority of directors whose votes are entitled to be counted under Section 7.3(a) determines that the fair market value of the consideration to be received by noninterested shareholders for shares of any class of which shares are owned by an interested shareholder is not less than the highest fair market value of the consideration paid by any interested shareholder in acquiring shares of the same class within twenty-four months of the proposed transaction.
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Section 7.4 Amendment or Repeal of Article VII. This Article may be amended or repealed only by the affirmative vote of the holders of two-thirds of the shares entitled to be counted under this Section 7.4. All outstanding shares entitled to vote under applicable law or the Articles of Incorporation shall be entitled to be counted under this Section 7.4, except shares owned by or voted under the control of an interested shareholder may not be counted to determine whether shareholders have voted to approve the amendment or repeal. The vote of the shares owned by or voted under the control of an interested shareholder, however, shall be counted in determining whether the amendment or repeal is approved under other provisions of applicable law and for purposes of determining a quorum.
Section 7.5 Non-Exclusivity. The requirements imposed by this Article are to be in addition to, and not in lieu of, requirements imposed on any transaction by any provision of applicable law, or any other provision of the Articles of Incorporation, or the Bylaws or otherwise.
ARTICLE VIII
Consideration of Non-Monetary Factors
The Board of Directors of the corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effects on the employees, customers, suppliers, and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located.
ARTICLE IX
Contracts
This corporation may enter into contracts and otherwise transact business as a vendor. purchaser, or otherwise, with its directors, officers, and shareholders and with corporations, associations, firms, and entities in which they are or may become interested as directors, officers, shareholders, members or otherwise, as freely as though such adverse interest did not exist, even though the vote, action or presence of such director, officer, or shareholder may be necessary to obligate the corporation upon such contracts or transactions; and in the absence of fraud, no such contract transaction shall be avoided and no such director, officer or shareholder shall be held liable to account to the corporation, by reason of such adverse interest or by reason of any fiduciary relationship to the corporation arising out of such office or stock ownership, for any profit or benefit realized by him through any such contract or transaction; provided, that in the case of directors and officers of the corporation (but not in the case of shareholders who are not directors or officers), the nature of the interest of such director, or officer. though not necessarily the details or extent thereof, be disclosed or known to the Board of Directors of this corporation, at the meeting thereof, at which such contract or transaction is authorized or confirms.
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ARTICLE X
Director Liability and Indemnification
Section 10.1 Definitions: As used in this Article:
(a) The term Egregious Conduct by a person shall mean acts or omissions that involve intentional misconduct or a knowing violation of law, conduct violating Section 23B.08.310 of the Revised Code of Washington, as amended, or participation in any transaction from which the person will personally receive a benefit in money, property, or services to which the person is not legally entitled.
(b) The term Finally Adjudged shall mean stated in a judgment based upon clear and convincing evidence by a court having jurisdiction, from which there is no further right to appeal.
(c) The term Director shall mean any person who is a director of the corporation and any person who, while a director of the corporation, is serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation. partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering an employee of the corporation or of any employer in which it has an ownership interest; and conduct as a Director shall include conduct while a Director is acting in any such capacities.
(d) The term Officer-Director shall mean any person who is simultaneously both an officer and director of the corporation and any person who. while simultaneously both an officer and director of the corporation, is serving at the request of the corporation as a director, officer, manager, partner, trustee, employee, or agent of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of the corporation or of any employer in which it has an ownership interest; and conduct as an Officer-Director shall include conduct while such a person is acting as an officer of the corporation or in any of such other capacities.
(e) The term Subsidiary Corporation shall mean any corporation or limited liability company at least eighty percent of the voting interests of which is held beneficially by this corporation.
(f) The term Subsidiary Outside Director shall mean any person who, while not principally employed by this corporation or any Subsidiary Corporation, is a director or manager of a Subsidiary Corporation and any such person who. while a director or manager of a Subsidiary Corporation, is serving at the request of such corporation as a director, officer, manager. partner, trustee, employee, or agent of another foreign or domestic corporation. limited
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liability company, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of such corporation or of any employer in which it has an ownership interest; and conduct as a Subsidiary Outside Director- shall include conduct while such a person is acting in any of such capacities.
Section 10.2 Liability of Directors. No Director, Officer-Director, former Director or former Officer-Director shall be personally liable to the corporation or its shareholders for monetary damages for conduct as a Director or Officer-Director occurring after the effective date of this Article unless the conduct is Finally Adjudged to have been Egregious Conduct.
Section 10.3 Liability of Subsidiary Outside Directors. No Subsidiary Outside Director or former Subsidiary Outside Director shall be personally liable in any action brought directly by this corporation as a shareholder of the Subsidiary Corporation or derivatively on behalf of the Subsidiary Corporation (or by any shareholder of this corporation double-derivatively on behalf of this corporation and the Subsidiary Corporation) for monetary damages for conduct as a Subsidiary Outside Director occurring after the effective date of this Article unless the conduct is Finally Adjudged to have been Egregious Conduct.
Section 10.4 Mandatory Indemnification of Directors. Subject to Section 10.7 and 10.8 of this Article. the corporation shall indemnify any person who is, or is threatened to be made, a party to any action, suit, or proceeding, whether civil. criminal, administrative, or investigative, and whether formal or informal, and whether by or in the right of the corporation or its shareholders or by any other party, by reason of the fact that the person is or was a Director, Officer-Director, or Subsidiary Outside Director against judgments, penalties or penalty taxes, fines, settlements (even if paid or payable to the corporation or its shareholders or to a Subsidiary Corporation) and reasonable expenses, including attorneys fees, actually incurred in connection with such action, suit or proceeding unless the liability and expenses were on account of conduct Finally Adjudged to be Egregious Conduct.
Section 10.5 Advancing Expenses. Except as prohibited in Section 10.7 and 10.8 of this Article, the reasonable expenses, including attorneys fees, of a Director, Officer-Director, or Subsidiary Outside Director, or person formerly serving in any such capacity, incurred in connection with an action, suit or proceeding in which the individual is entitled to indemnification under Section 10.4 shall be paid or reimbursed by the corporation, upon request of such person, in advance of the final disposition of such action, suit or proceeding upon receipt by the corporation of a written, unsecured promise by the person to repay such amount if it shall be Finally Adjudged that the person is not eligible for indemnification. All expenses incurred by such person in connection with such action, suit or proceeding shall be considered reasonable unless Finally Adjudged to be unreasonable.
Section 10.6 Procedure. Except as required by Section 10.7 and 10.8 of this Article, no action by the Board of Directors, the shareholders, independent counsel, or any other person or persons shall be necessary or appropriate to the determination of the corporations indemnification obligation under this Article in any specific case, to the determination of reasonableness of any expenses incurred by a person entitled to indemnification under this Article, nor to the authorization of indemnification in any specific case.
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Section 10.7 Exception for Internal Claims. Notwithstanding anything else in these Articles, the corporation shall not be obligated to indemnify any person for any expenses, including attorneys fees, incurred to assert any claim against the corporation (except a claim to enforce rights to indemnification) or any person related to or associated with it, including any person who would be entitled to indemnification in connection with the claim.
Section 10.8 Exception for Regulatory Claims.
(a) Regulatory Proceedings Generally. Notwithstanding anything else in these Articles, indemnification of any Director, Officer-Director or Subsidiary Outside Director, or any person formerly serving in any such capacities, and advancement of expenses in connection with either an administrative proceeding or a civil action instituted by a federal banking agency (Regulatory Proceedings) shall be governed by this Section.
(b) Banking Regulations Defined. The term Banking Regulations shall mean any state or federal laws or regulations applicable to the corporation, or any formal policies adopted by a regulatory agency having jurisdiction over the corporation.
(c) Indemnification in Regulatory Proceedings. The corporation shall provide indemnification and advancement of expenses in connection with Regulatory Proceedings to the extent permitted, and in the manner prescribed by Banking Regulations. Insurance and other means to ensure payment of costs and expenses in Regulatory Proceedings may be obtained or provided to the extent permitted and in the manner prescribed by Banking Regulations.
Section 10.9 Enforcement of Rights. The corporation shall indemnify any person granted indemnification rights under this Article against any reasonable expenses incurred by the person to enforce such rights.
Section 10.10 Set-Off of Claims. Any person granted indemnification rights herein may directly assert such rights in set-off of any claim raised against the person by or in the right of the corporation and shall be entitled to have the same tribunal which adjudicates the corporations claim adjudicate the persons entitlement to indemnification by the corporation.
Section 10.11 Continuation of Rights. The indemnification rights provided in this Article shall continue as to a person who has ceased to be a Director, Officer-Director. or Subsidiary Outside Director and shall inure to the benefit of the heirs, executors, and administrators of such person.
Section 10.12 Effect of Amendment or Repeal. Any amendment or repeal of this Article shall not adversely affect any right or protection of a Director. Officer-Director, or Subsidiary Outside Director or person formerly serving in any of such capacities existing at the time of such amendment or repeal with respect to acts or omissions occurring prior to such amendment or repeal.
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Section 10.13 Severability of Provisions. Each of the substantive provisions of this Article is separate and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions.
ARTICLE XI
Repurchase of Shares
To the extent authorized by applicable laws, the corporation may use its unreserved and unrestricted surplus to purchase its own shares. which will be held as authorized but unissued shares.
ARTICLE XII
Amendment to Bylaws
The Board of Directors shall have full power to adopt, alter, amend, or repeal the Bylaws or adopt new Bylaws; provided nothing herein shall deny the concurrent power of the shareholders to adopt, alter, amend, or repeal the Bylaws so long as any Bylaw is not inconsistent with law or these Articles of Incorporation.
ARTICLE XIII
Amendment to Articles of Incorporation
This corporation reserves the right to amend all or change or repeal any provision contained in its Articles of Incorporation in any manner now or hereafter prescribed or permitted by law. All rights of shareholders of this corporation are granted subject to this reservation.
ARTICLE XIV
Registered Agent
The name and location of the initial registered agent of this corporation are Coastal Community Bank located in Everett. Washington.
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ARTICLES OF RESTATEMENT
These Articles of Restatement of Coastal Financial Corporation, Everett, Washington, a Washington corporation, are executed and delivered for filing in accordance with the provisions of Section 23.10.070 of the Washington Business Corporation Act.
1. | The name of the corporation is Coastal Financial Corporation. |
2. | The text of the Second Amended and Restated Articles of Incorporation of the corporation is attached hereto and is incorporated by reference. |
3. | The Second Amended and Restated Articles of Incorporation of the corporation contain amendments to the First Amended and Restated Articles of Incorporation requiring shareholder approval. These amendments were properly approved by the shareholders of the corporation in accordance with the provisions of Section 23B.10.030 and Section 23B.10.040 of the Washington Business Corporation Act. |
These Articles of Restatement are duly executed this 3rd day of May 2018.
COASTAL FINANCIAL CORPORATION |
/s/ Eric M. Sprink |
Eric M. Sprink |
President and Chief Executive Officer |
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Exhibit 3.2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
COASTAL FINANCIAL CORPORATION
THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION (the Amended Articles) of Coastal Financial Corporation, a Washington corporation, are hereby amended in accordance with Section 23B.10.060 of the Washington Business Corporation Act, as follows:
1. Section 4.1 of the Second Amended and Restated Articles of Incorporation of the corporation is hereby amended to read as follows:
Section 4.1 Authorized Capital. The total number of shares of stock which the corporation is authorized to issue is Three Hundred Twenty-Five Million (325,000,000), of which Three Hundred Million (300,000,000) shares are no par value common stock and Twenty-Five Million (25,000,000) shares are no par value preferred stock.
Upon the filing and effectiveness (the Effective Time) of these Articles of Amendment, pursuant to the Washington Business Corporation Act: (i) each five (5) shares of the corporations common stock, no par value per share, issued and outstanding immediately prior to the Effective Time shall automatically be combined into one (1) validly issued, fully paid and non-assessable share of common stock without any further action by the corporation or the holder thereof; (ii) each five (5) shares of the corporations Class B Nonvoting Common Stock, no par value per share, issued and outstanding immediately prior to the Effective Time shall automatically be combined into one (1) validly issued, fully paid and non-assessable share of Class B Nonvoting Common Stock without any further action by the corporation or the holder thereof; and (iii) each five (5) shares of the corporations Class C Nonvoting Common Stock, no par value per share, issued and outstanding immediately prior to the Effective Time shall automatically be combined into one (1) validly issued, fully paid and non-assessable share of Class C Nonvoting Common Stock without any further action by the corporation or the holder thereof, in each case subject to the treatment of fractional share interests as described below (the Reverse Stock Split). No fractional shares shall be issued upon the Reverse Stock Split. If the Reverse Stock Split would result in the issuance of a fraction of a share of common stock, Class B Nonvoting Common Stock or Class C Nonvoting Common Stock, as the case may be, the corporation shall, in lieu of issuing any such fractional share, round up to the nearest whole number of shares in order to bring the number of shares held by such holder up to the next whole number of shares of common stock, Class B Nonvoting Common
Stock or Class C Nonvoting Common Stock, as the case may be. Each certificate that immediately prior to the Effective Time represented shares of common stock, Class B Nonvoting Common Stock or Class C Nonvoting Common Stock, as the case may be (the Old Certificates), shall thereafter represent that number of shares into which the shares of common stock, Class B Nonvoting Common Stock or Class C Nonvoting Common Stock, as the case may be, represented by the Old Certificate shall have been combined, subject to the elimination of fractional share interests as described above.
[Remainder of page intentionally blank]
COASTAL FINANCIAL CORPORATION | ||||||
Dated: May 4, 2018 | /s/ Eric M. Sprink | |||||
Eric M. Sprink | ||||||
President and Chief Executive Officer |
Exhibit 3.3
AMENDED AND RESTATED BYLAWS
OF
COASTAL FINANCIAL CORPORATION
(Incorporated Under the Laws of Washington)
Section 1
SHAREHOLDERS MEETINGS
1.1 Place. Shareholders meetings will be held at such place, in or out of the State of Washington, as shall be determined by the Board of Directors and stated in the notice of meeting.
1.2 Annual Meeting. The annual meeting of the shareholders of the corporation for the election of directors to succeed those whose terms then expire and for the transaction of any other business as may properly come before the meeting will be held each year on the date determined by the Board of Directors. Failure to hold an election of directors at the annual meeting of the shareholders, through oversight or otherwise, does not affect the validity of any corporate action, and a meeting of the shareholders may be held at a later date for the election of directors and for the transaction of any other business that may properly come before the meeting. Any election held or other business transacted at a later meeting will be as valid as if done or transacted at the annual meeting of the shareholders. Any later meeting will be called in the same manner as a special meeting of the shareholders, and notice of the time, place, and purpose of the meeting will be given in the same manner as notice of a special meeting of the shareholders.
1.3 Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Chief Executive Officer, President, any member of the Board of Directors, or by holders of not less than one-third (1/3) of all shares of stock of the corporation entitled to vote on any issue proposed to be considered at the meeting. Business transacted at any special meeting shall be confined to the purpose(s) stated in the notice of such meeting.
1.4 Notices of Meetings. Written notice stating the date, time, and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, unless a purpose of the meeting is to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all or substantially all of the assets of the corporation, or the dissolution of the corporation, in which case notice will be delivered not less than twenty (20) nor more than sixty (60) days before the date of the meeting. Notice of any shareholders meeting will be delivered electronically, personally or by mail, by or at the direction of the Chief Executive Officer, President, the Secretary, or the person or persons calling the meeting, to each shareholder of record entitled to vote at the meeting and to others as required by law. If mailed, the notice will be deemed to be delivered when deposited in the United States mail with postage prepaid, addressed to the shareholder at his or her address as it appears in the current records of the corporation.
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1.5 Waiver of Notice. Notice of any shareholders meeting may be waived by a shareholder, before or after the date and time of the meeting that is the subject of such notice, or in the case of a notice relating to a proposed corporate action without a meeting of shareholders, before or after the corporate action to be approved by executed consent becomes effective. Except as provided by this Section 1.5, the waiver must be delivered by the shareholder entitled to notice to the corporation for inclusion in the minutes or filing with the corporate records, which waiver shall be set forth either (a) in an executed and dated record or (b) if the corporation has designated an address, location, or system to which the waiver may be electronically transmitted and the waiver is electronically transmitted to the designated address, location, or system, in an executed and dated electronically transmitted record. A shareholders attendance at a meeting waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented.
1.6 Adjourned Meetings. An adjournment or adjournments of any shareholders meeting may be taken until the time and place determined by those present, without new notice being given, whether by reason of the failure of a quorum to attend or otherwise. However, any meeting at which directors are to be elected will be adjourned only from day to day until the directors are elected.
1.7 Quorum of Shareholders. A majority of the votes in a voting group entitled to vote on a matter represented at a shareholders meeting in person or by proxy other than solely to object to the meeting or the business to be transacted, having once been in attendance at the meeting, will constitute a quorum for that voting group for action taken during the meeting on that matter. If a quorum is present, action is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number is required by law, the Articles of Incorporation, or these Bylaws. Shareholders may participate in a meeting of the shareholders by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other during the meeting. Participation by such means will constitute presence in person at a meeting.
1.8 Voting of Shares. A shareholder may vote either in person or by proxy executed in writing by the shareholder or his or her duly authorized attorney-in-fact. No proxy will be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy.
1.9 Action Without Meeting. Any action required or permitted to be taken at a meeting of the shareholders of the corporation may be taken without a meeting if a written consent resolution, setting forth the action taken, is signed by all shareholders entitled to vote on the action and is delivered to the corporation. Once delivered, the consent resolution will have the same force and effect as a unanimous vote of the shareholders.
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1.10 Conduct of Business.
(a) The chairman of any meeting of shareholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion. The date and time of the opening and closing of the polls for each matter upon which the shareholders will vote at the meeting shall be announced at the meeting.
(b) At any annual meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any shareholder of the corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 1.10(b). For business to be properly brought before an annual meeting by a shareholder, the business must relate to a proper subject matter for shareholder action and the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholders notice must be delivered or mailed to and received at the principal executive office of the corporation not less than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than one hundred (100) days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholders notice to the Secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporations books, of the shareholder proposing such business, (iii) the class and number of shares of the corporations capital stock that are beneficially owned by such shareholder, (iv) a statement disclosing (A) whether such shareholder is acting with or on behalf of any other person and (B) if applicable, the identity of such person, and (v) any material interest of such shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 1.10(b). The Chairman of the Board or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.10(b) and, if he or she should so determine, he or she shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted.
At any special meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting in accordance with Section 1.3 of these Bylaws.
(c) Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of shareholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 1.10(c). Such nominations, other
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than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the corporation. To be timely, a shareholders notice shall be delivered or mailed to and received at the principal executive office of the corporation not less than ninety (90) days prior to the date of the meeting; provided, however, that in the event that less than one hundred (100) days notice or prior disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholders notice shall set forth (i) as to each person whom such shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the corporations books, of such shareholder, (B) the class and number of shares of the corporations capital stock that are beneficially owned by such shareholder, and (C) a statement disclosing (1) whether such shareholder or any nominee thereof is acting with or on behalf of any other person and (2) if applicable, the identity of such person.
(d) The various requirements set forth in subsections (b) and (c) of this Section 1.10 shall apply to all shareholder proposals and nominations, without regard to whether such proposals or nominations are required to be included in the corporations proxy statement or form of proxy.
Section 2
BOARD OF DIRECTORS
2.1 Number and Qualifications. All corporate powers shall be exercised by, or under the authority of, and the business and affairs of the corporation will be managed by a board of directors, the members of which need not be shareholders of the corporation or residents of the State of Washington. The range in the number of directors will be as set by the Articles of Incorporation with the exact number of directors to be determined by resolution of the Board of Directors from time to time.
2.2 Election - Term of Office. The directors will be elected by the shareholders pursuant to the Articles of Incorporation, to hold office for the terms specified in the Articles of Incorporation.
2.3 Mandatory Retirement. No person who is or will be 72 years old or older during his or her proposed term of office may be nominated, elected, re-elected, or appointed to the Board of Directors. [TO BE DISCUSSED]
2.4 Vacancies. Except as otherwise provided by law, vacancies in the Board of Directors, whether caused by resignation, death, or otherwise, may be filled by the remaining directors, whether constituting a quorum or not, or by the shareholders entitled to vote for the positions vacated. Directors elected to fill vacancies will hold office during the unexpired term of their predecessors and until their successors are elected and qualified.
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2.5 Annual Meeting. The annual meeting of the Board of Directors will be held immediately after and at the same place as the shareholders annual meeting or any later shareholders meeting at which directors are elected.
2.6 Regular Meetings. Regular meetings of the Board of Directors will be held on the dates and at the times and places decided by resolution of the Board of Directors.
2.7 Special Meetings. Special meetings of the Board of Directors may be held at any time and at any place whenever called by the Chairperson, the Chief Executive Officer, the President or any two (2) directors of the corporation.
2.8 Notice of Meetings. Notice of regular meetings of the Board of Directors is not required. Notice of the date, time, and place of special meetings of the Board of Directors must be given, by or at the direction of the Chairperson of the Board, the Chief Executive Officer, the President, the Secretary, or any person or persons calling the meeting, electronically or by mail, facsimile or personal communication over the telephone or otherwise, at least two (2) days prior to the day on which the meeting is to be held. No notice need be given if the time and place of the meeting has been fixed by resolution of the Board of Directors and a copy of the resolution has been mailed to every director at least two (2) days before the meeting.
2.9 Waiver of Notice. Notice of any meeting of the Board of Directors may be waived at any time, either before or after a meeting, if the waiver is in writing, signed by the director entitled to notice, and delivered to the corporation. Notice is waived by any director attending or participating in a meeting unless the director, at the beginning of the meeting or promptly on the directors arrival, objects to holding the meeting or transacting business at the meeting and does not vote for or assent to any action taken at the meeting.
2.10 Quorum of Directors; Attendance. A majority of the number of directors fixed in accordance with the Articles of Incorporation or Bylaws from time to time will constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is present will be the act of the Board of Directors. Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting of the Board or committee by means of a conference telephone or similar communication equipment by which all persons participating in the meeting can hear each other at the meeting. Participation by such means will constitute presence in person at a meeting.
2.11 Dissent by Directors. A director of the corporation who is present at a meeting of its Board of Directors at which action on any corporate matter is taken will be presumed to have assented to the action unless (a) the director objects at the beginning of the meeting, or promptly on his or her arrival, to holding the meeting or transacting business at the meeting; (b) the directors dissent or abstention from the action taken is entered in the minutes of the meeting, or (c) the director delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation within a reasonable time after adjournment. The right of dissent or abstention is not available to a director who votes in favor of the action taken.
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2.12 Action Without Meeting. Any action which may be or is required to be taken at a meeting of the Board of Directors, or any action which may be taken at a meeting of a committee designated by the Board of Directors, may be taken without a meeting if a written consent resolution, setting forth the action taken, is signed by all of the directors or all of the members of the committee, as the case may be, and is delivered to the corporation. The fully signed consent resolution will have the same force and effect as a unanimous vote.
2.13 Removal of Directors. One or more directors may be removed by the shareholders of the corporation in accordance with the provisions of the Articles of Incorporation of the corporation. Any vacancy caused by such removal may be filled by the shareholders at such meeting, and any director elected to fill such vacancy shall serve only for the unexpired term of his predecessor in office.
2.14 Executive Committee. By resolution adopted by a majority of the full Board of Directors, the Board may designate from among its members an Executive Committee of not less than two (2) members, and may designate one of such members as chairperson. Any member of the Board may serve as an alternate member of the Executive Committee in the absence of a regular member or members. The Executive Committee shall have and exercise all of the authority of the Board of Directors during intervals between meetings of the Board except that the Executive Committee shall not have the authority to: (1) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors; (2) approve or propose to shareholders action required to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; (4) amend the Articles of Incorporation of the corporation; (5) adopt, amend, or repeal the Bylaws of the corporation; (6) approve a plan or merger not requiring shareholder approval, or (7) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except as authorized by the Board of Directors within limits specifically prescribed by the Board.
2.15 Other Committees. By resolution adopted by a majority of the full Board of Directors, the Board may designate from among its members such other committees as it may deem necessary, each of which shall consist of not less than two (2) directors and have such powers and duties as may from time to time be prescribed by the Board.
2.16 Rules of Procedure. The majority of the members of any committee may fix its rules of procedure. All actions by any committee shall be reported in written minutes available at any reasonable time to any Board member. Such actions shall be subject to revision, alteration and approval by the Board of Directors; provided, that no rights or acts of third parties who have relied in good faith on the authority granted herein shall be affected by such revision or alteration.
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Section 3
OFFICERS
3.1 Officers Enumerated - Election. The officers of the corporation may include a Chief Executive Officer, President, Secretary, and Treasurer and one or more Vice Presidents, as well as any assistants to the officers as the Board of Directors may determine. The Board of Directors, in its discretion, may also elect a Chairperson of the Board from among the members of the Board. All officers will be elected by the Board of Directors at its annual meeting to hold office until their successors are elected and qualified.
3.2 Qualifications. None of the officers of the corporation need be a director, except the Chairperson of the Board.
3.3 Chairperson of the Board. The Chairperson of the Board, if any, will preside over all shareholder and director meetings at which he or she is present and will perform such other duties as may from time to time be assigned by the Board of Directors; provided, however, that the Chairperson of the Board will not, solely by reason of his or her office, be considered an executive officer of the corporation or be assigned executive responsibilities or participate in the operational management of the corporation
3.4 Chief Executive Officer. The Chief Executive Officer will oversee the operations of the corporation. Subject to the authority of the Board of Directors, the Chief Executive Officer will have general charge, supervision, and control over the business and affairs of the corporation and will be responsible for its management. If no Chairman of the Board is elected, or in the absence of the Chairman or Vice Chairman, if any, of the Board, the Chief Executive Officer will preside at all meetings of the shareholders, and of the Board of Directors if he or she is a member of the Board. Any shares of stock of another corporation held by the corporation will be voted by the Chief Executive Officer, subject to direction from the Board of Directors. The Chief Executive Officer will perform any other duties assigned to that office from time to time by the Board of Directors.
3.5 President. If no Chief Executive Officer is appointed, the President will act as the chief executive officer of the corporation, will have responsibility for the general management of the business of the corporation, and will perform those duties set forth in Section 3.3 of these Bylaws. If the Chief Executive Officer is absent or disabled, the President will have and may exercise and perform the authority and duties of the Chief Executive Officer. If the Board of Directors has appointed a Chief Executive Officer, the President shall manage the day-to-day operations of the corporation as well as perform any other duties assigned to that office from time to time by the Board of Directors or Chief Executive Officer.
3.6 Vice President. If the Chief Executive Officer and President are absent or disabled, the Vice Presidents, if any, in the order designated by the Board of Directors, will have and may exercise and perform the authority and duties of Chief Executive Officer and the President. In addition, the Vice President will perform any other duties assigned to that office by the Board of Directors, Chief Executive Officer or President from time to time. Each Vice President will have the title, seniority, and duties established for him or her by the Board of Directors.
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3.7 Secretary. The Secretary will prepare and keep minutes of meetings of shareholders and directors, will be responsible for authenticating records of the corporation, and will exercise the usual authority pertaining to the office of secretary. The Secretary will keep the stock book of the corporation, a record of certificates representing shares of stock issued by the corporation, and a record of transfers of certificates. The Secretary will keep and, when proper, affix the seal of the corporation, if any, and will perform any other duties assigned to that office by the Board of Directors, Chief Executive Officer or President from time to time.
3.8 Treasurer. The Treasurer will have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer will deposit all such funds in the name of the corporation in the depositories or invest them in the investments designated or approved by the Board of Directors, and will authorize disbursement of the funds of the corporation in payment of just demands against the corporation or as may be ordered by the Board of Directors on securing proper vouchers. The Treasurer will render to the Board of Directors from time to time, as may be required, an account of all transactions as Treasurer, and will perform any other duties assigned to that office from time to time by the Board of Directors, Chief Executive Officer or President.
3.9 Other Officers and Agents. The Board of Directors may appoint other officers and agents as it deems necessary or expedient. Such other officers and other agents will hold their positions for the periods determined from time to time by the Board of Directors. These other officers and agents will exercise the authority and perform the duties prescribed for them by the Board of Directors, which authority and duties may include, in the case of the other officers, one or more of the duties of the named officers of the corporation.
3.10 Removal of Officers. Any officer or agent may be removed by the Board of Directors whenever in its judgment the best interests of the corporation will be served by doing so. Removal will be without prejudice to the contract rights, if any, of the person removed. Election or appointment of an officer or agent will not of itself create contract rights.
3.11 Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting.
3.12 Salaries. Salaries of all officers and agents of the corporation appointed by the Board of Directors will be set by the Board of Directors.
Section 4
BUSINESS OF THE CORPORATION
4.1 Obligations. The Chief Executive Officer or President (or the Vice President in their absence or disability), will have responsibility for and authority to carry out the normal and regular business affairs of the corporation. Any agreements or other documents requiring Board approval will be valid if approved by the Board and signed by the Chairperson of the Board, the Chief Executive Officer, President, or Vice President and attested by the Secretary or an Assistant Secretary.
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4.2 Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. This authority may be general or confined to specific instances.
4.3 Loans to Corporation. No loans will be contracted on behalf of the corporation, and no evidence of indebtedness will be issued in its name, unless authorized by the Board of Directors. This authority may be general or confined to specific instances.
4.4 Checks and Drafts. All checks, drafts, or other orders for the payment of money, notes, or other evidence of indebtedness issued in the name of the corporation will be signed by the officer(s) or agent(s) of the corporation and in the manner prescribed from time to time by the Board of Directors.
Section 5
INDEMNIFICATION
The corporation may provide indemnification consistent with its Articles of Incorporation and applicable state and federal laws.
Section 6
STOCK
6.1 Certificate of Stock. Each shareholder shall be entitled to certificates that represent and certify the shares of stock he or she holds in the corporation. Certificates of stock will be issued in numerical order. Each shareholder will be entitled to a certificate signed, either manually or in facsimile, by the Chief Executive Officer, President or Vice President and the Secretary. The certificate may be sealed with the corporate seal. Every certificate of stock will state:
(a) The name of the corporation and the fact that the corporation is incorporated under the laws of the State of Washington;
(b) The name of the registered holder of the shares represented by the certificate; and
(c) The number and class of the shares and the designation of the series, if any, represented by the certificate.
Notwithstanding anything to the contrary herein, the Board of Directors may provide by resolution that some or all of the shares of any or all classes or series of the corporations capital stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation.
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6.2 Transfer. Shares of stock may be transferred by delivery of the certificate, accompanied by either an assignment in writing on the back of the certificate or a separate written assignment and power of attorney to transfer the same, which in either event is signed by the record holder of the certificate. No transfer will be valid, except as between the parties to the transfer, until the transfer is made on the books of the corporation. Except as otherwise specifically provided in these Bylaws, no shares of stock will be transferred on the books of the corporation until the outstanding certificate or certificates representing the transferred stock have been surrendered to the corporation.
6.3 Shareholders of Record. The corporation will be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact of those shares for all purposes, including the payment of dividends on and the right to vote the stock, unless provided otherwise by the Board of Directors.
6.4 Loss or Destruction of Certificates. If any certificate of stock is lost or destroyed, another may be issued in its place on proof of loss or destruction and on the giving of a satisfactory bond of indemnity to the corporation. A new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper to do so.
6.5 Record Date and Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors will make in advance a record date for any such determination of shareholders. The record date in any case will not be more than seventy (70) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring the determination of shareholders is to be taken. If no record date is fixed for these purposes, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring the dividend is adopted, as the case may be, will be the record date for the determination of shareholders.
6.6 Regulations. The Board of Directors will have the power and authority to make all rules and regulations it deems expedient concerning the issue, transfer, conversion, and registration of certificates for shares of stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the United States or the State of Washington.
Section 7
BOOKS AND RECORDS
7.1 Records of Corporate Meetings and Share Register. The corporation will keep at either its principal place of business, its registered office, or another place permitted by law, as the Board of Directors may designate, (a) complete books and records of account and complete minutes or records of all of the proceedings of the Board of Directors, director committees, and shareholders, and (b) a record of shareholders, giving the names of the shareholders in alphabetical order by class of shares and showing their respective addresses and the number and class of shares held by each.
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7.2 Reliance on Records. Any person dealing with the corporation may rely on a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors, director committees, or shareholders when certified by the Chief Executive Officer, President, Vice President, or Secretary.
Section 8
CORPORATE SEAL
The corporation may adopt, but will not be required to adopt, a corporate seal. If a seal is adopted, it will consist of a flat-faced circular die producing words, letters, and figures in raised form which will state the name of the corporation, the year of its incorporation, and the words corporate seal.
Section 9
AMENDMENTS
9.1 By the Shareholders. These Bylaws may be amended. altered, or repealed at any regular or special meeting of the shareholders in accordance with applicable law if notice of the proposed alteration or amendment is contained in the notice of the meeting.
9.2 By the Board of Directors. The Bylaws may be amended, altered, or repealed by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board; provided, however, the Board of Directors shall not amend, alter, or repeal any Bylaw in such manner as to affect the qualifications, classifications, term of office or compensation of the directors in any way. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the shareholders.
Section 10
FISCAL YEAR
The fiscal year of the corporation shall be the calendar year.
Section 11
EXCLUSIVE FORUM FOR CERTAIN DISPUTES
Unless the corporation consents in writing to the selection of an alternative forum, a state court located within the State of Washington (or, if no state court located within the State of Washington has jurisdiction, the United States District Court for the Western District of Washington) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the corporation, (2) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporations shareholders, (3) any action asserting a claim arising pursuant to any provision of the Washington Business Corporation Act, and (4) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section 11.
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Exhibit 4.1
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT. INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON.
[CUSIP Number]
NUMBER
FINANCIAL CORPORATION
COASTAL FINANCIAL CORPORATION
SHARES
[Restriction]
PAR VALUE: $0.0
THIS CERTIFIES THAT [Name]
IS THE RECORD HOLDER OF
Shares of Coastal Financial Corporation Common Stock transferable on
the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers
Date CHAIRMAN
CORPORATE SECRETARY
COUNTERSIGNED & REGISTERED
TRANSFER ONLINE. INC.
512 SE SALMON ST.
PORTLAND OR 97214
BY: AUTHORIZED SIGNATURE
The Board of Directors of the Company is authorized by resolution(s), from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional, or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Company will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted on any matter.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common |
UNIF GIFTS MIN ACT - custodian | |||
(Cust) (Minor) | ||||
TEN ENT - as tenants by the entireties |
under Uniform Gifts to Minors Act | |||
(State) | ||||
JT TEN - as joint tenants with right of survivorship and not as tenants in common |
Additional abbreviations may also be used though not in the above list.
For value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFICATION NUMBER OF ASSIGNEE
Please print or typewrite name and address including postal zip code of assignee.
_______________________________________________ shares of the common stock represented by this certificate and do hereby irrevocably constitute and appoint _______________________________________________________________________, attorney, to transfer the said stock on the books of the within-named corporation with full power of substitution in the premises.
DATED | ||
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever. |
SIGNATURE GUARANTEED: | ||||
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15 |
Exhibit 10.1
COASTAL FINANCIAL CORPORATION
2006 STOCK OPTION AND EQUITY COMPENSATION PLAN
1. Purpose of the Plan
The purpose of the Plan is to enhance the value of shares of stock in Coastal Financial Corporation for the benefit of its shareholders by providing opportunities for employees and directors of the corporation and its subsidiaries to participate in the corporations growth and success, thereby encouraging the individuals to exert maximum efforts on behalf of the corporation and helping to attract and retain the best available personnel for positions of responsibility with the corporation and its subsidiaries.
2. Definitions
As used herein, the following definitions shall apply:
Award means an Option, Restricted Stock, Restricted Stock Unit or Stock Appreciation Right.
Award Agreement means a written agreement entered into by and between each Grantee and Company setting forth terms and conditions relating to an Award granted to such Grantee. The agreement shall take such form, and contain such terms and conditions, as shall be determined from time to time by the Committee in its sole discretion.
Board means the board of directors of Company.
Cause means any of the following: (i) dishonesty in performing ones duties to Company or a Subsidiary, (ii) willful misconduct, or a willful failure to act, with the intent of injuring, or having the effect of injuring, the reputation, business or business relationships of Company or a Subsidiary, or any of their officers, directors or employees; (iii) conviction of a felony or of any crime involving moral turpitude or that reflects unfavorably on Company or a Subsidiary; (iv) willful or prolonged absence from work or failure for any reason to perform duties as an Employee or Director, unless excused by Company or a Subsidiary, whichever is the entity for which services are performed; and (v) breach of any material terms of an employment or service agreement with Company or a Subsidiary, including an Award Agreement.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the no par value common stock Company.
Committee has the meaning given such term in Section 4.a.
Company means Coastal Financial Corporation, a Washington corporation.
Director means a person elected or appointed as a member of the Board or the board of directors of a Subsidiary.
Disability has the meaning given to such term in Code Section 22(e)(3).
Employee means a person employed by Company or a Subsidiary.
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Exchange Act means the Securities Exchange Act of 1934, as amended.
Fair Market Value means, as of any date, the value of Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq Small Market of the Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid price, if no sales were reported) as quoted on such exchange or system for such date (or, if such pricing information is not published for such date, the last date prior to such date for which pricing information is published), as reported in The Wall Street Journal or such other source as the Committee deems reliable; or
(2) If the Common Stock is regularly quoted by recognized securities dealers but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for such stock on such date, as reported in The Wall Street Journal or such other source as the Committee deems reliable; or
(3) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Committee and using such methods and procedures as are required by Code Section 409A and the regulations issued thereunder.
Grantee means a person who has been granted an Award.
Incentive Stock Option means an Option that qualifies as an incentive stock option, as that term is defined in Code Section 422.
Nonqualified Stock Option means an Option, other than an Incentive Stock Option.
Option means a right granted under the Plan to purchase Common Stock. Options granted under this Plan may be either Incentive Stock Options or Nonqualified Stock Options; and the term means either or both an Incentive Stock Option and/or a Nonqualified Stock Option, as the context requires. Each Award Agreement shall state whether an Option subject to the agreement is an Incentive Stock Option or a Nonqualified Stock Option.
Plan means this Coastal Financial Corporation 2006 Stock Option and Equity Compensation Plan.
Restricted Stock means a share of Common Stock, issued under the Plan, that is subject to such restrictions and conditions as are set forth in the Plan and the related Award Agreement.
Restricted Stock Unit means a right granted under the Plan to receive a payment in cash or Common Stock, as determined by the Committee at the time Grantee exercises the right to receive such payment, of an amount equal to the Fair Market Value, on the date of exercise of the right, of one share of Common Stock per Restricted Stock Unit. Such Fair Market Value shall not be increased or otherwise adjusted because of dividends or other distributions paid at any time on or with respect to shares of stock of Company.
SEC means the U.S. Securities and Exchange Commission.
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Shareholder-Employee means an Employee who owns, at the time an Incentive Stock Option is granted, stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of Company or a Subsidiary. For this purpose, the attribution of stock ownership rules of Code Section 424(d) shall apply.
Stock Appreciation Right means a right granted under the Plan to receive a payment in cash or Common Stock, as determined by the Committee at the time Grantee exercises the right to receive such payment, of an amount equal to the excess of (i) the Fair Market Value, on the date of exercise of the right, of one share of Common Stock per Stock Appreciation Right, over (ii) the Fair Market Value, on the date of grant of the right, of such share of Common Stock. Such Fair Market Value shall not be increased or otherwise adjusted because of dividends or other distributions paid at any time on or with respect to shares of stock of Company.
Subsidiary means, (i) in the case of an Incentive Stock Option, a corporation having a relationship with Company described in Code Section 424(f), and (ii) in the case of any other type of Award, a corporation with which Company is considered a single employer under Code Section 414(b).
Vest means that the Grantee has satisfied all conditions precedent imposed by the Plan and the related Award Agreement to his right to exercise an Option, to hold Restricted Stock free of any obligation to forfeit or retransfer the same to Company or to receive payments under a Restricted Stock Unit or Stock Appreciation Right.
3. Stock Subject to Plan
a. General. Subject to the adjustments provided in Section 16, the maximum number of shares of Common Stock that may be subject to Awards of all types shall be two hundred thousand (200,000) shares. For purposes of the foregoing sentence, shares of Common Stock that are or were made subject to an Award of Restricted Stock Units or of Stock Appreciation Rights shall be counted against such number, unless and until the Grantee has forfeited rights in such Award by failing to satisfy any condition to Vesting. The aggregate number of shares of Common Stock that may be issued under Incentive Stock Options shall equal the maximum number of shares of Common Stock that may be subject to Awards, as described in the first sentence of this Section 3.a, reduced by the number of shares of Common Stock that have been made subject to other types of Awards.
b. Unused Shares. If any shares of Common Stock subject to an Award are not issued (for example, because the Award is forfeited or cancelled, or the Award is settled in cash, or a portion of the Award is used to satisfy applicable tax withholding obligations), then such shares shall again be available to be made subject to Awards.
4. Administration of the Plan
a. The Committee. The power and authority to administer the Plan is vested in a committee (the Committee) in accordance with this Section 4. The Committee shall be selected by the Board and shall consist of at least three directors, each of whom shall be a non-employee director within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and an outside director within the meaning of Section
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162(m) of the Code. If the Committee does not exist or the Board, for any reason determined by it, desires to directly administer the Plan, then the Board may take any action under the Plan that would otherwise be the responsibility of the Committee. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause), appoint individuals in substitution therefor, and fill vacancies however caused. The Committee shall select one of its members as chairman, and shall hold meetings at such times and places as the chairman or a majority of the Committee may determine.
b. Delegation of Responsibilities. Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may delegate all or some of its power and authority to administer the Plan to one or more of its members, or to any other person or persons selected by it. The Committee may revoke such delegation at any time.
c. Reports. At least annually, the Committee shall present a written report to the Board setting forth the following information relating to Awards granted since the date of the last such report: the date or dates of each Award; the type of each Award; the number of shares subject to each Award; and the exercise price for, and Fair Market Value on the date of grant of, shares of Common Stock subject to Awards.
d. Powers of the Committee. Subject to the terms and conditions explicitly set forth in the Plan, the Committee shall have the authority and discretion to do the following:
(1) determine the persons to whom Awards are to be granted, the times of grant, and the number of shares subject to each Award;
(2) determine the exercise price for shares of Common Stock to be issued pursuant to the exercise of an Option; the purchase price, if any, of Restricted Stock; and the Fair Market Value of Common Stock used to determine the amount required to be paid under a Restricted Stock Unit or Stock Appreciation Right;
(3) determine all other terms and conditions (which need not be identical between or among Grantees) of each Award;
(4) modify or amend the terms of any Award previously granted, or grant substitute Options, subject to the provisions of Sections 14 and 19;
(5) cancel or suspend Awards, subject to the restrictions imposed by Section 19;
(6) interpret the Plan;
(7) authorize any person or persons to execute and deliver Award Agreements, or to take any other actions deemed by the Committee to be necessary or appropriate, to effectuate the grant of Awards;
(8) waive any conditions to Vesting; and
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(9) make all other determinations, and take all other actions that the Committee deems necessary or appropriate, to administer the Plan in accordance with its terms and conditions.
All decisions, determinations and interpretations of the Committee relating to the Plan and Awards shall be final and binding upon all persons, including all Grantees and any other persons interested in any Awards, unless otherwise expressly determined by a vote of a majority of the entire Board. No member of the Committee or the Board shall be liable to any person for any action or determination made in good faith with respect to the Plan or any Awards.
e. Section 16(b) Compliance and Bifurcation of Plan. It is the intention of Company that the Plan comply in all respects with Rule 16b-3 under the Exchange Act, and the Plan shall be construed in favor of its so complying. If any Plan provision is determined to not comply with such Rule 16b-3, the provision shall be deemed null and void. Notwithstanding any contrary provisions of the Plan, the Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to participants who are officers and directors subject to Section 16(b) of the Exchange Act, without so restricting, limiting, or conditioning the use of such provision of the Plan with respect to other participants.
5. Eligibility
All Employees and Directors are eligible to be selected to be granted an Award. Notwithstanding any contrary provisions of this Plan, a Director who is not also Employee may not be selected to be granted an Incentive Stock Option.
6. Granting of Awards
a. General. Only Employees and Directors selected by the Committee, in its sole discretion, shall be granted Awards. An Award may consist solely of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights or any combination of the foregoing. All Awards are subject to the terms and conditions of the Plan.
b. Award Agreement. Each Award shall be evidenced by an Award Agreement that sets forth the terms and conditions of the Award. A person who is granted an Award shall have no rights under the Award, unless and until such person duly executes and delivers to Company an Award Agreement. An Award shall expire, and the Company shall have no further obligations with respect thereto, if the person does not so execute and deliver an Award Agreement within any period of time prescribed by the Company.
c. Consideration. The Committee shall determine the form and amount, if any, of consideration required to be paid by a Grantee with respect to an Award. Such consideration may take the form of cash, property, shares of Common Stock or services.
d. Arrangements to Cancel Restricted Stock. Company may make such arrangements as it deems necessary or appropriate to hold shares of Restricted Stock in escrow until Grantee satisfies all conditions to Vesting and to automatically cancel such shares if Grantee fails to satisfy such conditions.
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7. Vesting of Awards
The Committee may impose any terms and conditions on the Vesting of an Award that it determines to be appropriate, including requiring the Grantee to continue to provide services as an Employee or Director for a specified period of time or to meet performance goals established by the Committee. Such terms and conditions shall be set forth in an Award Agreement.
8. Exercise and Settlement of Awards
a. Options. Grantee shall pay the full exercise price for shares of Common Stock purchased under an Option, at the time the Option is exercised, in cash or other consideration of comparable value deemed acceptable by the Committee (including by tendering, by either actual delivery of shares or by attestation, shares of Common Stock acceptable to the Committee and valued at Fair Market Value as of the date of exercise), or in any combination thereof, as determined by the Committee. The Committee may permit a Grantee to elect to pay the exercise price upon the exercise of an Option by irrevocably authorizing a third party to sell shares of Common Stock (or a portion of the shares of Common Stock sufficient to pay the exercise price) acquired upon exercise of the Option and remit to Company the sale proceeds therefrom sufficient to pay the entire exercise price and any tax withholding resulting from such exercise.
b. Restricted Stock. Company shall take such actions as it determines to be reasonably necessary to release Restricted Stock from forfeiture restrictions as soon as practicable after the Restricted Stock Vests.
c. Other Awards. Company shall settle payment of any amounts due under a Restricted Stock Unit or Stock Appreciation Right upon exercise of such right by the Grantee; provided, however, that notwithstanding any contrary provisions of the Plan, Restricted Stock Units and Stock Appreciation Rights that become Vested shall be settled by payment of amounts owed thereunder on or before the later of (1) the date that is two and one-half (2 1⁄2) months after the end of the Grantees first taxable year in which such amounts are no longer subject to a substantial risk of forfeiture, or (ii) the date that is two and one-half (2 1⁄2) months after the end of the first taxable year of the person for whom the Grantee performed services in which such amounts are no longer subject to a substantial risk of forfeiture.
9. Terms Applicable to Options
a. Limit on Value of Options Granted. Subject to Section 3.c, any number of Options may be granted from time to time to a person eligible to receive the same hereunder, except that in the case of Incentive Stock Options the aggregate Fair Market Value (determined as of the date each Option is granted) of all shares of Common Stock with respect to which Incentive Stock Options become exercisable for the first time by the Grantee in any one calendar year (under all incentive stock option plans of Company and all Subsidiaries taken together) shall not exceed $100,000.
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b. Exercise Price. The exercise price for shares of Common Stock subject to an Option shall not be less than 100% of the Fair Market Value of a share of Common Stock as of the date of grant of the Option; provided, however, that in the case of an Incentive Stock Option granted to an Employee who immediately before the grant of such Incentive Stock Option is a Shareholder-Employee, the Incentive Stock Option exercise price shall be at least 110% of the Fair Market Value of the Common Stock as of the date of grant of the Incentive Stock Option.
c. Term of Option. No Incentive Stock Option granted under the Plan shall in any event be exercisable after the expiration of ten (10) years from the date such Option is granted; provided, however, that in the case of an Incentive Stock Option granted to an Employee who immediately before such Incentive Stock Option is granted is a Shareholder-Employee, the term of such Incentive Stock Option shall be for not more than five (5) years from the date such Option is granted. Subject to the foregoing and other applicable provisions of the Plan, the Committee shall determine the term of each Option in its sole discretion.
d. Exercise During Lifetime of Grantee. During the lifetime of a Grantee, only the Grantee may exercise such Option.
10. Termination of Employment.
a. Unvested Awards. Grantee shall forfeit all rights in, to and under all Awards that have not Vested prior to the time the Grantee first ceases to be an Employee or Director. Such forfeiture shall occur without the need for further action by any person.
b. Vested Awards - Other than Options. All Awards, other than Options, that are Vested at the time a Grantee first ceases to be an Employee or Director shall be settled immediately.
c. Vested Awards - Employee Options. Options that are Vested at the time a Grantee first ceases to be an Employee shall terminate on, if not exercised before, the earlier of (i) the same day of the third month after the date of termination of his status as an Employee, or (ii) the expiration date of the Option provided in the Award Agreement. Notwithstanding the immediately preceding sentence:
(i) Upon the death of a Grantee who at the time of his death is and has been an Employee at all times since the date of grant of the Option, the Option shall terminate, and may no longer be exercised, on the earlier of (a) one year after the date of death of the Grantee or at such later date as the Committee may set, in is sole discretion; or (b) the expiration date of the Option provided in the Award Agreement, except that if the expiration date of an Option should occur during the 90-day period immediately following the Grantees death, such Option shall terminate at the end of such 90-day period. The Option shall be exercisable at any time prior to such termination by the Grantees estate, or by any person or persons who acquire the right to exercise the Option by bequest, inheritance or otherwise by reason of the death of the Grantee;
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(ii) If a Grantee ceases to be an Employee at any time during the Option period by reason of a Disability and the Grantee has been an Employee at all times since the date of grant of the Option, the Option shall terminate, and may no longer be exercised, on the earlier of N one year after the date the Grantee ceases to be an Employee, or (ii) the expiration date of the Option provided in his Award Agreement; and (iii) If Grantee ceases to be an Employee for Cause, then all Options held by Grantee shall terminate, and may no longer be exercised, immediately upon his ceasing to be an Employee.
d. Vested Awards - Director Options. Options that are Vested at the time a Grantee first ceases to be a Director shall terminate, and may no longer be exercised, at such time as the Committee shall determine, but in no event more than six (6) months after the person ceases to be a Director. Notwithstanding the immediately preceding sentence:
(i) Upon the death of a Grantee who at the time of his death is and has been a Director at all times since the date of grant of the Option, the Option shall terminate, and may no longer be exercised, on the earlier of (a) one year after the date of death of the Grantee or at such later date as the Committee may set, in is sole discretion; or (b) the expiration date of the Option provided in the Award Agreement, except that if the expiration date of an Option should occur during the 90-day period immediately following the Grantees death, such Option shall terminate at the end of such 90-day period. The Option shall be exercisable at any time prior to such termination by the Grantees estate, or by any person or persons who acquire the right to exercise the Option by bequest, inheritance or otherwise by reason of the death of the Grantee;
(ii) If a Grantee ceases to be a Director at any time during the Option period by reason of a Disability and the Grantee has been a Director at all times since the date of grant of the Option, the Option shall terminate, and may no longer be exercised, on the earlier of (1) one year after the date the Grantee ceases to be a Direction, or (ii) the expiration date of the Option provided in his Award Agreement; and
(iii) If Grantee ceases to be a Director for Cause, then all Options held by Grantee shall terminate, and may no longer be exercised, immediately upon his ceasing to be a Director.
e. Permitted Absences From Work. A person shall not be treated as ceasing to be an Employee or Director if the interruption of his services as such is caused by military leave, sick leave or any other bona fide leave of absence approved by Company or a Subsidiary, whichever is the entity for which the person performs services; provided, however, that in the case of Incentive Stock Options, the foregoing is subject any restrictions of laws or regulations applicable to such options.
11. Compliance with Applicable Law.
Shares of Common Stock shall not be issued pursuant to the Plan or any Award granted thereunder, unless the issuance and delivery of the shares will not violate, and can otherwise be done in a manner that complies with, the provisions of applicable law (including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act), and the rules regulations of any stock exchange on which the Common Stock may then be listed. Issuance of shares of Common Stock is further subject to the approval of counsel for Company with respect to such compliance.
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12. Tax Compliance.
Company, in its sole discretion, may take any actions that it deems to be necessary or advisable to comply with all tax reporting and withholding requirements applicable under law to Awards, including, but not limited to, withholding or causing to be withheld from any form of compensation or other amount due a Grantee such amount as Company determines is required to be withheld under law.
13. Non-Transferability.
No Award or rights under an Award may be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner, other than by will or by the laws of descent or distribution if permitted herein. Restricted Stock, may be sold, pledged, assigned, hypothecated, transferred, or disposed of only after such shares Vest.
14. Merger, Sale of Assets, Etc.
Except as otherwise provided in the Award Agreement, in the event of a merger or other reorganization of Company with and into another corporation following which Company does not survive (other than a reorganization where the ownership of the surviving company is substantially the same as that of Company immediately before the reorganization), or in the event of a proposed sale of all or substantially all of the assets of Company, or in the event of a proposed dissolution or liquidation of Company, then all Awards shall immediately Vest as of the date of the closing of such transaction, unless the Committee elects to Vest the Awards as of an earlier date. Notwithstanding the immediately preceding sentence, if the surviving, successor or acquiring corporation in the transaction (or its parent) agrees to replace Awards with rights to its shares that confer substantially the same benefits as those represented by the Awards, as determined by the Committee, then the Awards shall not Vest but shall be so replaced. The Committee shall notify each Grantee in writing of any action to Vest or replace Awards hereunder not less than sixty (60) days prior to the expected closing date of the transaction that prompts such action.
15. Rights as a Shareholder.
No person shall have any rights as a Shareholder by reason of an Award, until and unless Company actually issues and delivers shares of Common Stock to such person pursuant to the Award. In the case of Restricted Stock, the Grantee thereof shall have all the rights of a shareholder (including voting, dividend and liquidation rights) with respect to shares of Restricted Stock that are issued and delivered to the Grantee, until such shares are forfeited or reacquired by the Company in accordance with the terms of the Award.
16. Adjustments Upon Changes in Capitalization
Subject to any required action by the shareholders of Company, the number of shares of Common Stock subject to Awards, the number of shares of Common Stock available for grants under additional Awards, the exercise price for shares of Common Stock specified in each outstanding Option, and the value of Common Stock used to determine amounts required to be paid under Restricted Stock Units and Stock Appreciation Rights shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or other subdivision or consolidation of shares, the payment of any stock
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dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares of Common Stock effected without receipt of consideration by Company; provided, however, that conversion of any convertible securities of Company shall not be deemed to have been effected without receipt of consideration. The Committee shall make such adjustments and its determination in that respect shall be final, binding and conclusive. No Incentive Stock Option shall be adjusted by the Committee pursuant to this Section 16 in a manner that causes the Incentive Stock Option to fail to continue to qualify as an incentive stock option within the meaning of Code Section 422. Except as otherwise expressly provided in this Section 16, no Grantee shall have any rights by reason of any stock split or other subdivision or consolidation of shares, any payment of a stock dividend, or any other increase or decrease in the number of such shares of Common Stock. Except as otherwise expressly provided in this Section 16, any issuance by Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect the number of shares or price of Common Stock subject to any Award, and no adjustments in Awards shall be made by reason thereof. The grant of an Award shall not affect in any way the right or power of Company to adjust, reclassify, reorganize or change its capital or business structure.
17. Term of the Plan
The Plan shall become effective on the earlier of the date it is (i) adopted by the Board; or (II) approved by the shareholders. Revisions and amendments to the Plan requiring the approval of shareholders of Company, as described in Section 19, shall be effective when approved by the shareholders. Subject to Section 19, the Plan shall be unlimited in duration. In the event the Plan is terminated as provided in Section 19, it shall remain in effect with respect to any Awards granted under it that are outstanding at the time of such termination. Notwithstanding the foregoing provisions of this Section 17, to the extent required by the Code, no Incentive Stock Option may be granted under the Plan on a date that is more than ten (10) years from the date the Plan (or amendment increasing shares available under the Plan) is adopted or, if earlier, the date the Plan (or amendment increasing shares available under the Plan) is approved by shareholders.
18. No Right to Employment.
Neither the adoption of the Plan nor the granting of an Award shall (i) confer upon any person a right to be employed by or to provide services to Company or any Subsidiary, or to continue such employment or service; or (ii) interfere in any way with the right of a person, or the right of Company or a Subsidiary, to terminate such employment relationship or service at any time.
19. Amendment or Early Termination of the Plan
a. Amendment or Early Termination. The Board may terminate the Plan at any time. The Board may amend the Plan from time to time in such respect as the Board deems advisable, except that, without proper approval of the shareholders of Company, no such revision or amendment shall:
(1) increase the number of shares of Common Stock subject to the Plan, other than in connection with an adjustment under Section 16; or
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(2) modify the Plan in a manner that would require shareholder approval under any applicable laws or regulations.
b. Modification and Amendment of Awards. The Board or Committee may modify or amend outstanding Awards granted under the Plan, provided, however that the modification or amendment shall not, without the consent of the Grantee, impair or diminish any of his rights or any of the obligations of Company under such Award. Except as otherwise provided in this Plan, no outstanding Award shall be terminated without the consent of the Grantee. Unless the Grantee otherwise agrees, any changes or adjustments made to outstanding Incentive Stock Options granted under this Plan shall be prospective only and shall be made in a manner that will not constitute a modification, as defined in Code Section 424(h), and will not cause such Incentive Stock Options to fail to qualify as incentive stock options under Code Section 422.
c. Re-pricing. The exercise price of outstanding Options may not be changed, except (1 with the approval of shareholders of Company, or (ii) as otherwise required or permitted in the Plan.
20. Nature of Awards
All Awards are unfunded and unsecured obligations of Company. Any bookkeeping entries maintained by Company with respect to Awards are merely for the convenience of Company. Company is not required to segregate any assets that may at any time represent an Award and no Grantee or other person shall have any rights or interests in any particular assets of Company by reason of an Award. A Grantee is a mere general unsecured creditor of Company with respect to an Award.
21. Construction of Certain Terms
The term Section or Sections, as used herein, shall mean a Section or Sections of this Plan, unless otherwise required by the context. The masculine form of words shall include the feminine, and vice-versa, as required by the context.
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* * * * *
CERTIFICATE OF ADOPTION
I certify that the foregoing Plan was duly adopted by the Compensation Committee of the board of directors of Coastal Financial Corporation on March 16, 2006 and duly approved by the shareholders of Coastal Financial Corporation on April 19, 2006.
/s/ Jennifer Lang |
Jennifer Lang, Secretary |
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Exhibit 10.2
COASTAL FINANCIAL CORPORATION
DIRECTORS STOCK BONUS PLAN
ARTICLE 1. PURPOSE OF THE PLAN
The purpose of this Coastal Financial Corporation Directors Stock Bonus Plan (Plan) is to promote the long-term success of Coastal Financial Corporation (Corporation) and to create shareholder value by (a) encouraging Non-Employee Directors (Directors) to focus on critical long-range objectives; (b) encouraging the attraction and retention of Directors with exceptional qualifications and (c) linking Directors directly to shareholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for automatic and non-discretionary grants of stock to Directors.
The Plan will be governed by, and construed in accordance with, the laws of the State of Washington.
ARTICLE 2. ADMINISTRATION
2.1 | Board Administration. The Plan will be administered by the Board of Directors of the Corporation (Board). |
2.2 | Responsibilities. The Board shall interpret the Plan and make all decisions relating to the operation of the Plan. The Board may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Boards determinations under the Plan will be final and binding on all persons. |
ARTICLE 3. RESTRICTED STOCK
3.1 | Shares Available for Grants. The maximum number of shares of the Corporations Common Stock (Restricted Stock) that may be issued under the Plan shall not be more than 50,000, subject to adjustment as provided in section 3.2. In the event shares of the Restricted Stock are forfeited prior to the end of the period during which the restrictions on the Restricted Stock expire, the forfeited shares of Restricted Stock will become available for future issuance under the Plan. |
3.2 | Stock Certificate. Each Director who receives shares of Restricted Stock hereunder may, but need not, be issued a stock certificate in respect of such shares of Restricted Stock. Each certificate, if any, issued to a Director shall be registered in the name of such Director and, during the applicable Restricted Period, shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such shares of Restricted Stock, substantially in the following form: |
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The transferability of the certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Coastal Financial Corporation Directors Stock Bonus Plan. A copy of such Plan is on file in the offices of Coastal Financial Corporation, 2817 Colby Avenue, Everett, Washington, 98201.
The Committee may require that any stock certificate issued in the name of a Director evidencing shares of Restricted Stock be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of the issuance of a certificate for Restricted Stock, the Director shall have delivered to the Corporation a stock power, endorsed in blank, relating to the shares covered by such certificate.
In lieu of the issuance of a certificate for any shares of Restricted Stock during the applicable Restricted Period, a book entry (i.e., a computerized or manual entry) may be made in the records of the Corporation to evidence the ownership of such shares of Restricted Stock in the name of the applicable Director.
3.3 | Stock Restrictions and Conditions. The shares of Restricted Stock received by a Director under the Plan shall be subject to the following restrictions and conditions: |
a) | Subject to the provisions of this Plan, shares of Restricted Stock received hereunder may not be sold, transferred, pledged or assigned until the shares are vested. Shares of Restricted Stock will vest two years from the date of grant, so long as the Director is a Director of the Corporation at the time of vesting. |
b) | The Director will have the right to vote or direct the vote of his or her shares of Restricted Stock, whether vested or unvested, and will have the right to receive any regular cash dividends on all such shares of Restricted Stock. Shares of Common Stock received as a result of a stock dividend or stock split with respect to shares of unvested Restricted Stock will be treated as additional shares of unvested Restricted Stock. The Board will in its sole discretion determine the Directors rights with respect to any other extraordinary dividends on the shares of unvested Restricted Stock. |
c) | Certificates for shares of Restricted Stock will be delivered to the Director promptly after they are vested. If certificates evidencing such shares of Restricted Stock were previously issued bearing the legend set forth in section 3.2 hereof, such certificates will be canceled, and new certificates not bearing such legend will be issued for delivery to the Director. |
d) | Upon termination of a Directors engagement with the Company for any reason other than death, total and permanent disability (i.e., unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year) (Disability) or retirement at age 72, such Director will forfeit all unvested Restricted Stock, and shall be entitled to receive nothing in lieu thereof. |
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e) | In the event of the removal of the Director from the Corporation as the result of the death or Disability of such Director, the rights of such Director in and to the shares of Restricted Stock held by or for the account of such Director will immediately vest and such shares of Restricted Stock will no longer be subject to forfeiture hereunder. |
f) | In the event of a Directors retirement from the Board of the Corporation at age 72 pursuant to the Corporations Director retirement policy, the rights of such Director in and to the shares of Restricted Stock held by or for the account of such Director will immediately vest and such shares of Restricted Stock will no longer be subject to forfeiture hereunder. |
g) | Any other provision of the Plan notwithstanding, the obligation of the Corporation to issue shares of Restricted Stock under the Plan will be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. |
ARTICLE 4. AUTOMATIC STOCK GRANTS TO NON-EMPLOYEE DIRECTORS
4.1 | Annual Grant. Within 3 weeks following the conclusion of the year, each Director who has attended a minimum of seventy-five percent (75%) of the regular and special meetings of the Board in the prior year will receive a grant of that number of shares of Restricted Stock having a value of $2,000.00 as of that date, as determined by the Board (Grant). |
4.2 | Notice of Restricted Stock Award. Each Grant under the Plan will be evidenced will be evidenced by a Notice of Restricted Stock Award between the Grantee and the Corporation. Such Grant will be subject to all applicable terms of the Plan and may be subject to other terms that are not inconsistent with the Plan. |
ARTICLE 5. PROTECTION AGAINST DILUTION
5.1 | Adjustments. In the event of any change in the outstanding capital stock of the Corporation by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event and such change equitably requires an adjustment in the number or kind of shares that may be issued under the Plan, such adjustment will be made by the Board and will be conclusive and binding for all purposes of the Plan. |
5.2 | Dissolution or Liquidation. If the Corporation or the shareholders of the Corporation enter into an agreement to dispose of all or substantially all of the assets or shares by means of a sale, a reorganization, a liquidation, or otherwise, all restrictions on any shares of Restricted Stock granted hereunder will be immediately removed and such shares will be deemed fully vested and no longer subject to forfeiture. |
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ARTICLE 6. FUTURE OF THE PLAN
6.1 | Term of the Plan. The Plan, as set forth herein, will become effective upon the date of the adoption of the Plan by the Board as specified in Article 7 and shall continue for a period of 10 years. |
6.2 | Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Grants will be granted under the Plan after the termination thereof. Neither an amendment to the Plan nor the termination of the Plan will adversely affect any right of any Director with respect to any Restricted Stock theretofore received hereunder without such Directors written consent. |
ARTICLE 7. EXECUTION
To record the adoption of the Plan by the Board on May 21, 2003, the Corporation has caused its duly authorized officer to execute this document in the name of the Corporation.
COASTAL FINANCIAL CORPORATION | ||
By: | /s/ Lee A. Pintar | |
Lee A. Pintar, Chairman & CEO |
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Exhibit 10.3
COASTAL FINANCIAL CORPORATION
2018 OMNIBUS INCENTIVE PLAN
Section 1. Purpose. The purpose of the Coastal Financial Corporation 2018 Omnibus Incentive Plan (the Plan) is to motivate and reward employees and other individuals to perform at the highest level and contribute significantly to the success of Coastal Financial Corporation (together with its subsidiaries and any and all successor entities, the Company), thereby furthering the best interests of the Company and its shareholders.
Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
Award means any Option, SAR, Restricted Stock, RSU, or Performance Award granted under the Plan.
Award Agreement means any agreement, contract or other instrument or document evidencing any Award granted under the Plan, which may, but need not, be executed or acknowledged by a Participant.
Beneficial Owner has the meaning ascribed to such term in Rule 13d-3 under the Exchange Act.
Beneficiary means a Person entitled to receive payments or other benefits or exercise rights that are available under the Plan in the event of the Participants death. If no such Person can be named or is named by the Participant, or if no Beneficiary designated by such Participant is eligible to receive payments or other benefits or exercise rights that are available under the Plan at the Participants death, such Participants Beneficiary shall be such Participants estate.
Board means the board of directors of the Company.
Change of Control means the occurrence of any one or more of the following events, except as otherwise provided in the Participants Award Agreement:
(a) Merger. The Company merges into or consolidates with another entity, or merges another entity into the Company and, as a result, less than a majority of the combined voting power of the resulting entity or, if applicable, the ultimate parent thereof, immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation;
(b) Acquisition of Significant Share Ownership. The acquisition by any person (within the meaning of Section 13(d) of the Exchange Act), other any employee benefit plan or trust maintained by the Company, of fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors of the Companys then outstanding voting securities;
(c) Change in Board Composition. During any period of two consecutive years, individuals who constitute the Companys Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Companys Board of Directors; provided, however, that for purposes of this clause (c), each director who is first elected by the Board (or first nominated by the Board for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or
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(d) Sale of Assets. A sale, transfer, or other disposition of all or substantially all of the assets of the Company which is consummated and immediately following which the persons who were the owners of the Company immediately prior to such sale, transfer, or disposition, do not own, directly or indirectly and in substantially the same proportions as their ownership immediately prior to the sale, transfer, or disposition, more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of (i) the entity or entities to which such assets or ownership interest are sold or transferred or (ii) an entity that, directly or indirectly, owns more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the entities described in clause (i).
Notwithstanding the foregoing or any provision of any Award Agreement to the contrary, for any Award that provides for accelerated distribution on a Change of Control of amounts that constitute deferred compensation (as defined in Section 409A of the Code and the regulations thereunder), if the event that constitutes such Change of Control does not also constitute a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the Companys assets (in either case, as defined in Section 409A of the Code), such amount shall not be distributed on such Change of Control but instead shall vest as of the date of such Change of Control and shall be paid on the scheduled payment date specified in the applicable Award Agreement, except to the extent that earlier distribution would not result in the Participant who holds such Award incurring interest or additional tax under Section 409A of the Code.
Code means the Internal Revenue Code of 1986, as amended from time to time, and the rules, regulations and guidance thereunder. Any reference to a provision in the Code shall include any successor provision thereto.
Committee means the Compensation Committee of the Board unless another committee is designated by the Board. If there is no Compensation Committee of the Board and the Board does not designate another committee, references herein to the Committee shall refer to the Board.
Director means any member of the Companys Board and, for eligibility purposes, a director of any Subsidiary board of directors.
Employee means any individual employed by the Company or any Subsidiary or any prospective employee who has accepted an offer of employment from the Company or any Subsidiary.
Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, and the rules, regulations and guidance thereunder. Any reference to a provision in the Exchange Act shall include any successor provision thereto.
Fair Market Value on any date, means (i) if the Shares are listed or traded on an exchange, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Shares are not listed on a securities exchange, Fair Market Value shall mean a price determined by the Committee in good faith on the basis of objective criteria.
Incentive Stock Option means an option representing the right to purchase Shares from the Company, granted pursuant to the provisions of Section 6, that meets the requirements of Section 422 of the Code.
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Non-Statutory Stock Option means an option representing the right to purchase Shares from the Company, granted pursuant to Section 6, that is not an Incentive Stock Option.
Option means an Incentive Stock Option or a Non-Statutory Stock Option.
Participant means the recipient of an Award granted under the Plan.
Performance Award means an Award granted pursuant to Section 9.
Performance Period means the period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are measured.
Person has the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including group as defined in Section 13(d) thereof.
Restricted Stock means any Share granted pursuant to Section 8.
RSU means a contractual right granted pursuant to Section 8 that is denominated in Shares. Each RSU represents a right to receive the value of one Share (or a percentage of such value) in cash, Shares or a combination thereof. Awards of RSUs may include the right to receive dividend equivalents.
SAR means any right granted pursuant to Section 7 to receive upon exercise by the Participant or settlement, in cash, Shares or a combination thereof, the excess of (i) the Fair Market Value of one Share on the date of exercise or settlement over (ii) the exercise price of the right on the date of grant, or if granted in connection with an Option, on the date of grant of the Option.
SEC means the Securities and Exchange Commission.
Shares means shares of the Companys common stock, no par value per Share.
Subsidiary means (i) any entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which the Company, directly or indirectly, has a significant equity interest, in each case as determined by the Committee and (iii) any other company which the Committee determines should be treated as a Subsidiary.
Section 3. Eligibility. Any Employee, Director or any other individual who provides services to the Company or any Subsidiary shall be eligible to be selected to receive an Award under the Plan, to the extent an offer of an Award or a receipt of such Award is permitted by applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations.
Section 4. Administration.
(a) Administration of the Plan. The Plan shall be administered by the Committee. All decisions of the Committee shall be final, conclusive and binding upon all parties, including the Company, its shareholders, Participants and any Beneficiaries thereof. The Committee may issue rules and regulations for administration of the Plan. It shall meet at such times and places as it may determine.
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(b) Composition of Committee. To the extent necessary or desirable to comply with applicable regulatory regimes, any action by the Committee shall require the approval of Committee members who are (i) independent, within the meaning of and to the extent required by applicable rulings and interpretations of the applicable stock market or exchange on which the Shares are quoted or traded; and (ii) non-employee Directors within the meaning of Rule 16b-3 under the Exchange Act. The Board may designate one or more Directors as alternate members of the Committee who may replace any absent or disqualified member at any meeting of the Committee. To the extent permitted by applicable law, the Committee may delegate to one or more officers of the Company the authority to grant Options and SARs or other Awards in the form of Share rights, except that such delegation shall not be applicable to any Award for a Person then covered by Section 16 of the Exchange Act.
(c) Authority of Committee. Subject to the terms of the Plan and applicable law, the Committee (or its delegate) shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent and under what circumstances Awards may be settled or exercised in cash, Shares, other Awards, other property, net settlement, or any combination thereof, or canceled, forfeited or suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) correct any defect, supply any omission and reconcile any inconsistency in the Plan or any Award, in the manner and to the extent it shall deem desirable to carry the Plan into effect; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents, trustees, brokers, depositories and advisors and determine such terms of their engagement as it shall deem appropriate for the proper administration of the Plan and due compliance with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan and due compliance with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations; provided, however, that nothing in subsections (ix) or (x) of this paragraph is intended to provide the Committee with the authority to accelerate the vesting of any Awards except for instances of death, disability or a Change of Control. Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, grant Awards or administer the Plan. In any such case, the Board shall have all of the authority and responsibility granted to the Committee herein.
Section 5. Shares Available for Awards.
(a) The number of Shares that may be issued pursuant to Awards granted under the Plan shall not exceed in the aggregate two million five hundred thousand (2,500,000) Shares; provided that the aggregate number of Shares with respect to which Incentive Stock Options may be granted under the Plan shall be two million five hundred thousand (2,500,000) Shares. The aggregate number of shares of Stock available for grant under this Plan and the number of shares of Stock subject to outstanding awards shall be subject to adjustment as provided in Section 5(c). Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares purchased in the open market or by private purchase.
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(b) If any Award is forfeited, expires, terminates, otherwise lapses or is settled for cash, in whole or in part, without the delivery of Shares, then the Shares covered by such forfeited, expired, terminated or lapsed Award shall again be available for grant under the Plan. For clarification, the following will not again become available for issuance under the Plan: (i) any Shares withheld in respect of taxes, (ii) Shares added back that have been repurchased by the Company using Option exercise proceeds, (iii) stock-settled SARs where only actual Shares delivered with respect to the Award are counted against the Plan reserve; and (iv) any Shares tendered or withheld to pay the exercise price of Options.
(c) In the event that the Committee determines that, as a result of any dividend or other distribution (whether in the form of cash, Shares or other securities), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, separation, rights offering, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, issuance of Shares pursuant to the anti-dilution provisions of securities of the Company, or other similar corporate transaction or event affecting the Shares, or of changes in applicable laws, regulations or accounting principles, an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, subject to compliance with Section 409A of the Code, adjust equitably (including, without limitation, by payment of cash) any or all of:
(i) the number and type of Shares (or other securities) which thereafter may be made the subject of Awards, including the aggregate limit specified in Section 5(a);
(ii) the number and type of Shares (or other securities) subject to outstanding Awards; and
(iii) the grant, purchase or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award;
provided, however, that the number of Shares subject to any Award denominated in Shares shall always be a whole number.
Section 6. Options. The Committee is authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine:
(a) The exercise price per Share under an Option shall be determined by the Committee at the time of grant; provided, however, that, subject to Section 6(f), such exercise price shall not be less than the Fair Market Value of a Share on the date of grant of such Option.
(b) The term of each Option shall be fixed by the Committee but shall not exceed 10 years from the date of grant of such Option; provided that the Committee may (but shall not be required to) provide in an Award Agreement for an extension of such 10-year term in the event the exercise of the Option would be prohibited by law on the expiration date.
(c) The Committee shall determine the time or times at which an Option becomes vested and exercisable in whole or in part.
(d) The Committee shall determine the method or methods by which, and the form or forms, including, but not limited to, cash, Shares, net settlement, broker assisted cashless exercise or any combination thereof, having a Fair Market Value on the exercise date equal to the exercise price of the Shares as to which the Option shall be exercised, in which payment of the exercise price with respect thereto may be made or deemed to have been made.
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(e) No grant of Options may be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on such Options.
(f) The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code. Incentive Stock Options may be granted only to employees of the Company or of a parent or subsidiary corporation (as defined in Section 424(a) of the Code). Notwithstanding any designation as an Incentive Stock Option, to the extent that the aggregate Fair Market Value of Shares subject to a Participants Incentive Stock Options that become exercisable for the first time during any calendar year exceeds $100,000, such excess Options shall be treated as Non-Statutory Stock Options. For purposes of the foregoing, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant. No Incentive Stock Options may be issued more than ten years following the earlier of (i) the date of adoption of this Plan by the Board or (ii) the date of approval of this Plan by the Companys shareholders. In the case of a 10% shareholder, the exercise price per Share under an Incentive Stock Option shall not be less than 110% of the Fair Market Value on the date of grant of such Incentive Stock Option and the term of such Incentive Stock Option shall not exceed five years from the date of grant of such Incentive Stock Option.
(g) Each Participant awarded an Incentive Stock Option under the Plan shall notify the Committee in writing immediately after the date on which the Participant makes a disqualifying disposition of any Shares acquired pursuant to the exercise of an Incentive Stock Option. A disqualifying disposition is any disposition (including, without limitation, any sale) of such Shares before the later of (i) two years after the date of grant of an Incentive Stock Options and (ii) one year after the date of exercise of an Incentive Stock Option.
Section 7. Stock Appreciation Rights. The Committee is authorized to grant SARs to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine:
(a) SARs may be granted under the Plan to Participants either alone (freestanding) or in addition to other Awards granted under the Plan (tandem) and may, but need not, relate to a specific Option granted under Section 6.
(b) The exercise price per Share under a SAR shall be determined by the Committee; provided, however, that, such exercise price shall not be less than the Fair Market Value of a Share on the date of grant of such SAR.
(c) The term of each SAR shall be fixed by the Committee but shall not exceed 10 years from the date of grant of such SAR.
(d) The Committee shall determine the time or times at which a SAR may be exercised or settled in whole or in part.
(e) Upon the exercise of a SAR, the Company shall pay to the Participant an amount equal to the number of Shares subject to the SAR multiplied by the excess, if any, of the Fair Market Value of one Share on the exercise date over the exercise price of such SAR. The Company shall pay such excess in cash, in Shares valued at Fair Market Value, or any combination thereof, as determined by the Committee.
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(f) No grant of SARs may be accompanied by a tandem award of dividend equivalents or provide for dividends, dividend equivalents or other distributions to be paid on such SARs.
Section 8. Restricted Stock and RSUs. The Committee is authorized to grant Awards of Restricted Stock and RSUs to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine:
(a) The Award Agreement shall specify the vesting schedule and, with respect to RSUs, the delivery schedule (which may include deferred delivery later than the vesting date) and whether the Award of Restricted Stock or RSUs is entitled to voting rights, dividend rights or any other rights.
(b) Shares of Restricted Stock and RSUs shall be subject to such restrictions as the Committee may impose, which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate.
(c) The Committee may specify in the applicable Award Agreement that any or all dividends, dividend equivalents or other distributions, as applicable, paid on Awards of Restricted Stock or RSUs prior to vesting or settlement, as applicable, be paid either in cash or in additional Shares and either on a current or deferred basis and that such dividends, dividend equivalents or other distributions may be reinvested in additional Shares, which may be subject to the same restrictions as the underlying Awards; provided, however, that dividends, dividend equivalents or other distributions, as applicable, on Awards of Restricted Stock and RSUs with restrictions that lapse as a result of the achievement of performance conditions shall be deferred until and paid contingent upon the achievement of the applicable performance conditions.
(d) Any Share of Restricted Stock granted under the Plan may be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. No Shares shall be issued at the time an RSU award is made.
(e) If a Participant makes an election pursuant to Section 83(b) of the Code with respect to an Award of Restricted Stock, the Participant shall be required to file promptly a copy of such election with the Company and the applicable Internal Revenue Service office.
(f) The Committee may determine the form or forms (including cash or Shares or any combination thereof) in which payment of the amount owing upon settlement of any RSU Award may be made.
Section 9. Performance Awards. The Committee is authorized to grant Performance Awards to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine:
(a) Performance Awards may be denominated as a cash amount, number of Shares or a combination thereof and may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be
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specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. Subject to the terms of the Plan, the performance goals to be achieved during any Performance Period, the length of any Performance Period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. Performance criteria may be measured on an absolute or relative basis, may be established on a corporate-wide basis or with respect to one or more business units, may be based on a ratio or separate calculation of any performance criteria and may be made relative to an index or one or more of the performance goals themselves. Relative performance may be measured against a group of peer companies, a financial market index or other acceptable objective and quantifiable indices. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which the Company conducts its business, or other events or circumstances render the performance objectives unsuitable, the Committee may modify the performance objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable. Performance measures may vary from Performance Award to Performance Award and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative.
(b) Settlement of Performance Awards shall be in cash or Shares or any combination thereof, as determined in the discretion of the Committee. The Committee shall specify the circumstances in which, and the extent to which, Performance Awards shall be paid or forfeited in the event of a Participants termination of service.
(c) Unless otherwise provided in the applicable Award Agreement, the Committee may provide for the payment of dividend equivalents on Performance Awards either in cash or in additional Shares, subject in all cases to payment on a deferred and contingent basis based on the Participants earning of the Performance Shares upon achievement or satisfaction of performance conditions specified by the Committee with respect to which such dividend equivalents are paid.
(d) Performance Awards shall be settled only after the end of the relevant Performance Period. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with a Performance Award.
Section 10. Effect of a Change of Control on Awards.
(a) Notwithstanding any other provision of the Plan to the contrary, and unless otherwise provided in the Award Agreement, in the event of a Change of Control:
(i) Any options and Stock Appreciation Rights outstanding which are not then exercisable and vested, shall become fully exercisable and vested upon the termination of the participants employment, other than for Just Cause, during the Applicable Period.
(ii) The restrictions applicable to any Restricted Stock or Restricted Stock Unit Award which are not performance-based shall lapse and such Restricted Stock or Restricted Stock Unit shall become free of all restrictions and become fully vested and transferable upon the termination of the participants employment, other than for Just Cause, during the Applicable Period.
(iii) The conditions applicable to any Performance Award shall be deemed satisfied at the target level and shall become free of all restrictions and become fully vested and transferable upon the termination of the participants employment, other than for Just Cause, during the Applicable Period.
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(b) For purposes of this Section 10, and unless otherwise provided in the Award Agreement, (i) the term Applicable Period shall mean the twelve (12) month period ending on the first anniversary of a Change of Control and (ii) a termination for Just Cause shall mean termination on account of the occurrence of any of the following events: (i) personal dishonesty; (ii) willful misconduct; (iii) breach of fiduciary duty involving personal profit; (iv) intentional failure to perform duties; or (v) willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease-and-desist order. Notwithstanding the foregoing, it is expected that the Participant will perform all duties and responsibilities of his or her position, and the Participant shall have the right to cure non-performance, to the extent such performance is reasonably capable of being cured, and shall promptly comply upon receipt of written notice of non-performance that the Company alleges to be Just Cause, with the requirements of such notice, and further if the Participant shall not comply with such notice to the satisfaction of the Company within forty-eight (48) hours after delivery thereof (except if such compliance cannot be reasonably completed within forty-eight (48) hours, if the Participant shall not commence to comply within such period and thereafter proceed to completion with due diligence) the Company shall have the right to proceed with termination for Just Cause.
(c) In order to maintain the participants rights in the event of a Change of Control, the Committee, as constituted before such Change of Control, is hereby authorized, and has sole discretion, as to any Award, either at the time such Award is made hereunder or any time thereafter, to take any one or more of the following actions: (i) provide for the purchase of any such Award for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the participants rights, had such Award been currently exercisable or payable; or (ii) cause any such Award then outstanding to be assumed, or new rights substituted therefore, by the acquiring or surviving corporation after such Change of Control; provided, however, that nothing in this paragraph is intended to provide the Committee with the authority to accelerate the vesting of any Awards except for instances of death, disability or a Change of Control. The Committee may, in its discretion, include such further provisions and limitations in any Award Agreement, as it may deem equitable and in the best interests of the Company.
Section 11. General Provisions Applicable to Awards.
(a) Awards shall be granted for such cash or other consideration, if any, as the Committee determines; provided that in no event shall Awards be issued for less than such minimal consideration as may be required by applicable law.
(b) Awards may, in the discretion of the Committee, be granted either alone or in addition to or in tandem with any other Award or any award granted under any other plan of the Company. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Company, may be granted either at the same time as or at a different time from the grant of such other Awards or awards.
(c) Subject to the terms of the Plan, payments or transfers to be made by the Company upon the grant, exercise or settlement of an Award may be made in the form of cash, Shares, other Awards, other property, net settlement, or any combination thereof, as determined by the Committee in its discretion at the time of grant, and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of dividend equivalents in respect of installment or deferred payments.
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(d) No Award and no right under any Award shall be assignable, alienable, saleable or transferable by a Participant otherwise than by will or pursuant to Section 11(e). During a Participants lifetime, each Award, and each right under any Award, shall be exercisable only by such Participant or, if permissible under applicable law, by such Participants guardian or legal representative. The provisions of this Section 11(d) shall not apply to any Award that has been fully exercised or settled, as the case may be, and shall not preclude forfeiture of an Award in accordance with the terms thereof.
(e) A Participant may designate a Beneficiary or change a previous Beneficiary designation only at such times as prescribed by the Committee, in its sole discretion, and only by using forms and following procedures approved or accepted by the Committee for that purpose.
(f) All certificates for Shares and/or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the SEC, any stock market or exchange upon which such Shares or other securities are then quoted, traded or listed, and any applicable securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
(g) The Committee may impose restrictions on any Award with respect to non-competition, confidentiality and other restrictive covenants as it deems necessary or appropriate in its sole discretion.
Section 12. Amendment and Terminations.
(a) Amendment or Termination of the Plan. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan, the Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided, however, that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) shareholder approval if such approval is required by applicable law or the rules of the stock market or exchange, if any, on which the Shares are principally quoted or traded or (ii) subject to Section 5(c) and Section 10, the consent of the affected Participant, if such action would materially adversely affect the rights of such Participant under any outstanding Award, except (x) to the extent any such amendment, alteration, suspension, discontinuance or termination is made to cause the Plan to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations or (y) to impose any clawback or recoupment provisions on any Awards in accordance with Section 18.
(b) Dissolution or Liquidation. In the event of the dissolution or liquidation of the Company, each Award shall terminate immediately prior to the consummation of such action, unless otherwise determined by the Committee.
(c) Terms of Awards. The Committee may waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue or terminate any Award theretofore granted, prospectively or retroactively, without the consent of any relevant Participant or holder or Beneficiary of an Award; provided, however, that, subject to Section 5(c) and Section 10, no such action shall materially adversely affect the rights of any affected Participant or holder or Beneficiary under any Award theretofore granted under the Plan, except (x) to the extent any such action is made to cause the Plan to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations, or (y) to impose any clawback or recoupment provisions on any Awards in accordance with Section 16; provided further, that the Committees authority under this Section 12(c) is limited in the case of Awards subject to Section 9(b). Except as provided in Section 9, the Committee shall be authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of events
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(including the events described in Section 5(c)) affecting the Company, or the financial statements of the Company, or of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
(d) No Repricing. Notwithstanding the foregoing, except as provided in Section 5(c), the Committee shall not without the approval of the shareholders of the Company, (i) reduce the exercise price or base price of any previously granted Option or SAR, (ii) cancel any previously granted Option or SAR in exchange for another Option or SAR with a lower exercise price or base price, or (iii) cancel any previously granted Option or SAR in exchange for cash or another Award if the exercise price of such Option or the base price of such SAR exceeds the Fair Market Value of a Share on the date of such cancellation, in each case other than in connection with a corporate transaction including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of Shares.
Section 13. Miscellaneous.
(a) No Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of employees, Participants or holders or Beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each recipient. Any Award granted under the Plan shall be a one-time Award that does not constitute a promise of future grants. The Company, in its sole discretion, maintains the right to make available future grants under the Plan.
(b) The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or to continue to provide services to, the Company or any Subsidiary. The receipt of any Award under the Plan is not intended to confer any rights on the receiving Participant except as set forth in the applicable Award Agreement.
(c) Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.
(d) The Company shall be authorized to withhold from any Award granted or any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to the Participant the amount (in cash, Shares, other Awards, other property, net settlement, or any combination thereof) of applicable withholding taxes due in respect of an Award, its exercise or settlement or any payment or transfer under such Award or under the Plan and to take such other action (including providing for elective payment of such amounts in cash or Shares by such Participant) as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes; provided that if the Committee allows the withholding or surrender of Shares to satisfy the Participants tax withholding obligations, the Company shall not allow Shares to be withheld in an amount that exceeds the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. In the event ASC 718 is modified to allow higher amounts of Share withholding, the Company may satisfy tax withholding obligations using such levels of withholding permitted under ASC 718 that do not trigger liability accounting.
(e) If any provision of the Plan or any Award Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award Agreement, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan and any such Award Agreement shall remain in full force and effect.
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(f) Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company.
(g) No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash or other securities shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.
Section 14. Effective Date of the Plan. This Plan shall be submitted to the shareholders of the Company for approval at the Companys 2018 annual meeting of shareholders and, if so approved, the Plan shall become effective as of the date the Plan was approved by the shareholders (the Effective Date).
Section 15. Term of the Plan. No Award shall be granted under the Plan after the earliest to occur of (i) the tenth anniversary of the Effective Date; (ii) the maximum number of Shares available for issuance under the Plan have been issued; or (iii) the Board terminates the Plan in accordance with Section 12(a). However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award, or to waive any conditions or rights under any such Award, and the authority of the Board to amend the Plan, shall extend beyond such date.
Section 16. Cancellation or Clawback of Awards. The Committee shall have full authority to implement any policies and procedures necessary to comply with Section 10D of the Exchange Act and any rules promulgated thereunder and any other regulatory regimes relating to clawback or recoupment. Notwithstanding anything to the contrary contained herein, the Committee may, to the extent permitted by applicable law and stock exchange rules or by any applicable Company policy or arrangement, and shall, to the extent required, cancel or require reimbursement of any Awards granted to the Participant or any Shares issued or cash received upon vesting, exercise or settlement of any such Awards or sale of Shares underlying such Awards.
Section 17. Section 409A of the Code. With respect to Awards subject to Section 409A of the Code, the Plan is intended to comply with the requirements of Section 409A of the Code and the regulations thereunder, and the provisions of the Plan and any Award Agreement shall be interpreted in a manner that satisfies the requirements of Section 409A of the Code, and the Plan shall be operated accordingly. If any provision of the Plan or any term or condition of any Award would otherwise frustrate or conflict with this intent, the provision, term or condition shall be interpreted and deemed amended so as to avoid this conflict. Notwithstanding anything else in the Plan, if the Board considers a Participant to be a specified employee under Section 409A of the Code at the time of such Participants separation from service (as defined in Section 409A of the Code), and the amount hereunder is deferred compensation subject to Section 409A of the Code, any distribution that otherwise would be made to such Participant with respect to an Award as a result of such separation from service shall not be made until the date that is six months after such separation from service, except to the extent that earlier distribution would not result in such Participants incurring interest or additional tax under Section 409A of the Code. If the Award includes a series of installment payments (within the meaning of
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Section 1.409A-2(b)(2)(iii) of the Treasury Regulations), the Participants right to the series of installment payments shall be treated as a right to a series of separate payments and not as a right to a single payment. Notwithstanding the foregoing, the tax treatment of the benefits provided under the Plan or any Award Agreement is not warranted or guaranteed, and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A of the Code.
Section 18. Successors and Assigns. The terms of the Plan shall be binding upon and inure to the benefit of the Company and any successor entity.
Section 19. Governing Law. The Plan and each Award Agreement shall be governed by the laws of the State of Washington, without application of the conflicts of law principles thereof.
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Exhibit 10.4
COASTAL FINANCIAL CORPORATION
ANNUAL INCENTIVE PLAN
I. | Introduction and Objectives |
The Annual Incentive Plan (the Plan) is designed to recognize and reward participants for their collective and individual contributions to the success of Coastal Financial Corporation (the Company) and its affiliates, collectively referred to herein as the Employer. The Plan focuses on performance measures that are critical to the growth and profitability of the Company and its affiliates.
The objectives of the Plan are to:
| Reward results, not effort. |
| Align the Employers strategic plan, budget, and shareholder interests with participant performance. |
| Motivate and reward participants for achieving /exceeding performance goals. |
| Align incentive pay with organizational performance. |
| Enable the Employer to attract and retain talent needed to drive the success of the Company. |
| Encourage teamwork. |
II. | Performance Period/Plan Year |
The performance period and the Plan operate on a calendar year basis (January 1st to December 31st) (the Plan Year).
III. | Incentive Award Opportunity |
A. | The Compensation Committee of the Board of Directors (the Committee), determines each participants incentive award opportunity, calculated as a percentage of base salary for the Plan Year. Award opportunities vary based on participant roles and are approved by the Committee at the beginning of the Plan Year. For purposes of this Plan, base salary means the participants annual base salary at the beginning of the Plan Year, ignoring any cash deferred under the Employers 401(k) plan, health and welfare plans or nonqualified compensation plans. Base salary does not include any bonuses, commissions, reimbursed expenses, employer credits or contributions. |
B. | The Committee, in coordination with the President and Chief Executive Officer, determines the performance measures, goals, and weightings at the beginning of the Plan Year. Performance measures are the criteria for which awards may be paid. Performance measures may be financial or non-financial. Goals are the specific results required to achieve a certain level of performance. Goals may be quantitative or qualitative. For each performance measure, a threshold, target and maximum is established. Threshold is the minimum level of performance for which an award is paid. If performance is below threshold, the payout is zero. Performance at threshold results in a payment equal to a percentage of the targeted incentive opportunity, as determined by the Committee. Target is expected level of performance. Performance at target results in a payment equal to 100% of the targeted incentive opportunity. Maximum is exceptional performance. Performance at or above maximum results in a payment equal to a percentage of the participants targeted incentive opportunity, as determined by the Committee, which shall be the highest amount to be paid under the Plan. Intermediate performance levels between threshold and target and target and maximum shall be established. Payment shall be based on performance level achieved. Weightings are used to differentiate the relative importance/priority of the performance measures. Each performance measure is weighted a minimum of 5%, and the total of all performance measures for a Plan Year equals 100%. |
IV. | Performance Measures |
Incentive awards shall be based on achievement during a Plan Year of a level or levels of, or increases in, one or more of the following performance measures, or any other performance measure reasonably determined by the Committee, with respect to the Company: return measures; revenues; income/earnings measures; expense measures; balance sheet/risk management measures; share price measures; or other strategic objectives. Performance criteria may be measured on an absolute or relative basis, may be established on a corporate-wide basis or with respect to one or more business units, may be based on a ratio or separate calculation of any performance criteria and may be made relative to an index or one or more of the performance goals themselves. Relative performance may be measured against a group of peer companies, a financial market index or other acceptable objective and quantifiable indices.
The Committee may adjust any performance measure to the extent necessary to prevent dilution or enlargement of an award as a result of extraordinary events or circumstances, as determined by the Committee in its sole discretion, or to exclude the effects of extraordinary, unusual, or non-recurring items, such as (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) acquisitions, mergers, or divestitures (including non-recurring transaction-related expenses); (f) securities offerings; and (g) other special charges or extraordinary items as approved by the Committee, in its sole discretion.
In addition to evaluating Company performance, the Compensation Committee will consider each participants individual performance review when determining payouts under this Plan.
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V. | Determining Payouts and the Distribution of Incentive Awards |
A. | Each participant is given a performance scorecard for the Plan Year. The scorecard sets forth the performance measures applicable to the participant, a comparison of actual performance to the established goals, and the participants performance review rating for the applicable Plan Year. Upon review of the achievement of the performance measures, the Chief Financial Officer completes a scorecard for each of the Plan participants and provides the scorecard, in the case of the President and Chief Executive Officer, to the Committee, and, in the case of the other participants, to the President and Chief Executive Officer, who evaluates the achievement of the performance measures and reviews the results with the Committee. The President and Chief Executive Officer may recommend adjustment of any incentive award based on qualitative considerations of corporate and individual performance. However, the Committee shall retain discretion to increase or reduce the amount of any incentive payment otherwise payable to any participant under this Plan. |
B. | Cash-based incentive awards will be paid before the end of the first quarter following the applicable Plan Year. Participants recognize taxable income upon the distribution of cash-based awards and the payments are subject to tax withholding for required income and other applicable taxes. |
C. | Equity-based incentive awards will be made under the Companys 2018 Omnibus Incentive Plan, or any successor plan, and shall vest over the period fixed by the Compensation Committee. All other terms and conditions of such equity-based awards shall be governed by the terms and conditions of the 2018 Omnibus Incentive Plan and the applicable award agreement. |
VI. | Terms and Conditions |
A. | Eligibility |
The Companys President and Chief Executive Officer participates in the Plan unless the Board of Directors deems otherwise. The President and Chief Executive Officer recommends other executives/senior officers for participation in the Plan for approval by the Board of Directors. New hires must be employed prior to October 1st to be eligible to participate in the Plan for the performance period. New hires that meet the eligibility criteria and are hired prior to October 1st of the Plan Year will receive a pro-rated award based on the number of full months worked during the Plan Year. New hires employed on or after October 1st are not eligible to receive an award for the current Plan Year.
B. | Effective Date |
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This Plan is effective as of January 1, 2018.
C. | Program Administration |
The Plan is authorized by the Compensation Committee, implemented by the Chief Financial Officer and administered by the Human Resources Department.
D. | Program Changes or Discontinuance |
We have developed the Plan based on existing business, market and economic conditions; current services; and staff assignments. If changes occur that affect these conditions, services, assignments, or forecasts, we may add to, amend, modify or discontinue any of the terms or conditions of the Plan at any time.
The Committee may, in its sole discretion, waive, change or amend the Plan as it deems appropriate and at any time.
E. | Promotions and Transfers |
If a participant changes his/her role or is promoted during the Plan Year such that the incentive award opportunity changes, he/she will be eligible for the new positions incentive award opportunity on a pro rata basis (i.e. the award will be prorated based on the number of months employed in the respective positions.)
F. | Termination of Employment |
Unless otherwise noted in this Plan, a participant must be employed by the Employer through the last day of the Plan Year in order to be eligible to receive the award. (See exceptions for death and retirement below.)
G. | Death or Retirement |
In the event of a participants death, the Employer will pay to the participants estate the pro rata portion of the award earned for the Plan Year in which the participant dies. Said award will be determined based on the participants base salary as of his or her date of death.
If a participant retires upon the attainment of Normal Retirement Age (as defined in the Companys tax-qualified retirement plan), the participant will be eligible to receive an award earned for the Plan Year in which he or she retires if he or she is actively employed through October 1st. In addition, if the participant retires prior to the distribution of an award from a prior Plan Year, the participant will receive the award that the participant would have received had the participant been employed as of the date of distribution of the award payout.
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H. | Clawback |
By accepting any compensation paid or otherwise made available to a participant under this Plan, the participant agrees to the terms and conditions of this Plan (including, without limitation, this Section VI.H.). The participant agrees to repay any compensation previously paid or otherwise made available to the participant under this Plan that is subject to recovery under any applicable law (including any rule of any exchange or service through which the securities of the Company are then traded), or any compensation clawback or recoupment policy of the Employer applicable to similarly-situated employees of the Employer or required to comply with applicable law (as may be amended from time to time and as may hereafter be adopted). Any participant whose award payout becomes subject to forfeiture or clawback shall promptly return any payment received under this Plan that is identified by the Employer by written notice to the participant. If the participant fails to return such payment promptly, the Employer may deduct such amount from other compensation owed to the participant by the Employer as an advancement of wages, and the participants acceptance of the applicable award represents his or her acknowledgment and agreement to such deduction. The participant acknowledges the rights of the Employer to engage in any legal or equitable action or proceeding in order to enforce the provisions of this section.
VII. | Ethics and Interpretation |
If there is any ambiguity as to the meaning of any terms or provisions of this Plan or any questions as to the correct interpretation of any information contained therein, the Employers interpretation expressed by the Committee will be final and binding.
The altering, inflating, and/or inappropriate manipulation of performance/financial results or any other infraction of recognized ethical business standards, will subject the participant to disciplinary action up to and including termination of employment. In addition, any incentive compensation as provided by the Plan to which the participant would otherwise be entitled will be revoked.
Participants who have willfully engaged in any activity injurious to the Company will upon termination of service forfeit any incentive award earned during the award period in which the termination occurred.
VIII. | Miscellaneous |
The Plan will not be deemed to give any participant the right to be retained in the employ of the Employer, nor will the Plan interfere with the right of the Employer to discharge any participant at any time.
In the absence of an authorized, written employment contract, the relationship between participant and the Employer is one of at-will employment. The Plan does not alter the relationship.
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This Plan and the transactions and payments hereunder shall, in all respect, be governed by, and construed and enforced in accordance with the laws of the State of Washington.
No payments are intended to constitute deferred compensation subject to Section 409A of the Internal Revenue Code, unless a participant elects to defer a payment pursuant to a deferred compensation plan that is intended to comply with such Internal Revenue Code section.
Each provision in this Plan is severable, and if any provision is held to be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions shall not, in any way, be affected or impaired thereby.
This Plan was approved by the Board of Directors on June 15, 2018.
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Exhibit 10.5
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the Agreement) dated as of June 19, 2018, by and between Coastal Financial Corporation (the Holding Company), Everett, Washington, Coastal Community Bank (the Bank), Everett, Washington, and Eric Sprink (the Executive).
WHEREAS, the Executive is currently engaged as the President and Chief Executive Officer of the Holding Company and the Bank pursuant to that certain Employment Agreement dated April 9, 2013, between the Executive, the Holding Company and the Bank (the Prior Agreement); and
WHEREAS, the parties desire to amend and restate the Prior Agreement in connection with the Holding Companys offering of common stock on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and the Executives continued employment with the Holding Company and the Bank, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows.
1. | POSITION. |
During the period of his employment hereunder, the Executive agrees to serve as President and Chief Executive Officer of the Holding Company and the Bank. In addition, the Executive agrees to serve as a member of the boards of directors of the Holding Company and the Bank for so long as he is President and Chief Executive Officer of the Holding Company and Bank, but shall not be entitled to compensation for services as a board member in addition to the compensation provided herein.
2. | TERM AND DUTIES. |
(a) This Agreement shall be effective as of the date on which the registration statement on Form S-1 filed by the Holding Company on June 19, 2018, with the Securities and Exchange Commission (the Registration Statement) becomes effective (the Effective Date). If the Registration Statement for any reason does not become effective, this Agreement shall be null and void, and the Prior Agreement and the Executives employment thereunder will continue on the terms and conditions set forth in the Prior Agreement.
(b) The term of this Agreement shall be deemed to have commenced as of the Effective Date and shall continue for a period of sixty (60) full calendar months thereafter (Term). Commencing on the first anniversary date, which is defined as the last day of the 60 month term, the Agreement will renew automatically for an additional twelve (12) months unless the Agreement is otherwise terminated or amended by mutual agreement upon delivery of notice to the other party of intent not to renew within ninety (90) days of the renewal date (Renewal Term). Unless amended by the parties hereto in writing, the Renewal Term of this Agreement shall continue in this fashion in twelve (12) month intervals.
(c) During the period of his employment hereunder, except for periods of absence occasioned by illness, vacation periods, and approved leaves of absence, the Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including the operation and management of the Holding Company and the Bank; provided, however, that, from time to time, the Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not materially affect the performance of the Executives duties pursuant to this Agreement. The duties of the Executive shall be as directed by the Board of Directors of the Holding Company and the Bank including, but not limited to, the direction of activities of all other officers and employees of the Holding Company and the Bank as their interests should appear in the performance of their responsibilities and functions.
3. | COMPENSATION AND REIMBURSEMENT. |
(a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties as President and Chief Executive Officer described in Section 1 and 2. The Bank shall pay the Executive as compensation a base salary of three-hundred sixty thousand and no/100 dollars ($360,000.00) per year (Base Salary), less deductions and withholdings. Such Base Salary shall be payable in accordance with the customary payroll practices of the Bank. The Compensation Committee of the Board of Directors (the Compensation Committee) shall review the Executives Base Salary at least annually and may increase, but not decrease, the Executives Base Salary based on such review. Any increase in salary after the Effective Date shall constitute the Base Salary for purposes of this Agreement.
(b) During the Term and any Renewal Term, the Executive shall be eligible to participate in the Banks Annual Incentive Plan or any other annual bonus plan similar to that offered to other senior executives, with award opportunities based upon the achievement of performance goals in relationship to objective defined targets as established from year to year by the Compensation Committee (the Annual Bonus). Determinations regarding the Executives performance against annual objectives shall be in the sole discretion of the Compensation Committee and in accordance with the Banks Annual Incentive Plan.
(c) During the Term and any Renewal Term, the Executive shall be eligible to receive an annual equity incentive award under the Holding Companys 2018 Omnibus Incentive Plan, or any successor plan, with award opportunities based upon the achievement of performance goals in relationship to objective defined targets as established from year to year by the Compensation Committee (the Annual Equity Incentive). Determinations regarding the Executives performance against annual objectives shall be in the sole discretion of the Compensation Committee and in accordance with the Banks Annual Incentive Plan.
(d) In addition to the incentive compensation opportunities provided under paragraphs (b) and (c) above, Executive shall also be eligible to participate in or receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, life insurance, health insurance, or any other employee benefit plan or arrangement made available by the Bank currently or in the future to its senior executives and key management employees, subject to, and on a basis consistent with, the terms, conditions and overall administration of such plans and arrangements.
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(e) The Bank will reimburse the Executive for reasonable, business-related travel and entertainment expenses upon the presentation of appropriate receipts, in accordance with the Banks reimbursement policies and procedures. The Bank shall reimburse the Executive for reasonable expenses for him and his wife to attend up to four (4) industry-related meetings per calendar year, including registration fees and travel expenses, in accordance with any budgetary constraints.
(f) The Bank provide the Executive with a cellular telephone and laptop computer and mobile and home data connections in accordance with the Banks internal IT policy.
(g) The Executive will be entitled to five (5) weeks paid vacation annually plus an additional amount of vacation days as may be authorized by the Board of Directors.
(h) The Bank shall provide the Executive with, and the Executive shall have the primary use of, an automobile owned or leased by the Bank and the Bank shall pay (or reimburse the Executive) for all expenses of insurance, registration, operation and maintenance of such automobile; provided, however, that such reimbursement shall not exceed such amounts as the Compensation Committee shall from time to time determine. The Executive shall comply with reasonable reporting and expense limitations on the use of such automobile, as the Bank may establish from time to time, and the Bank shall annually include on the Executives Form W-2 any amount attributable to the Executives personal use of such automobile.
(i) The Bank shall reimburse the Executive up to $200.00 per month toward the premium for a life insurance policy on the life of the Executive payable to the Executives designated beneficiary.
(j) The Bank shall furnish payments for annual dues for industry certifications, associations, and memberships, including, but not limited to, Everett Golf and Country Club, and the Bank shall furnish payment for continuing education requirements associated with such certifications.
4. | TERMINATION OF EMPLOYMENT. |
(a) Death or Disability. The Executives employment shall terminate automatically upon the Executives death. If the Holding Company or the Bank determine in good faith that a Disability (as defined in Section 5(h) below) of the Executive has occurred during the Term or any Renewal Term, the Holding Company or the Bank, as applicable, may give to the Executive written notice of its intention to terminate the Executives employment. In such event, Executives employment with the Holding Company and the Bank shall terminate effective on the 30th day after receipt by Executive of such written notice, provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executives duties.
(b) Termination by Bank. The Holding Company or the Bank may terminate the Executives employment during the Term or any Renewal Term, with or without Cause, immediately on written notice to Executive if with Cause or after thirty (30) days written notice if without Cause.
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(c) Termination by the Executive. The Executives employment may be terminated by the Executive for any reason or no reason by delivering a Notice of Termination (as defined below) to the Holding Company and the Bank at least thirty (30) days prior to the desired termination date (with the thirty (30) day period to be referred to as the Notice Period). If an event constituting Good Reason (as defined below) occurs during the Term or any Renewal Term, the Executive may, at any time within the sixty (60) day period following the initial occurrence of such event, provide a Notice of Termination specifying the event of Good Reason and notifying the Holding Company and the Bank of his intention to terminate his employment with the Holding Company and the Bank upon the Holding Companys and the Banks failure to correct the event of Good Reason within thirty (30) days following receipt of the Executives Notice of Termination. If the Holding Company and the Bank fail to correct the event of Good Reason and provide the Executive with notice of such correction within such thirty (30) day period, the Executives employment with the Holding Company and the Bank and this Agreement shall terminate as of the end of such period. During the Notice Period, and at the sole discretion of the Holding Company and the Bank, the Executive may be relieved of all duties or prohibited from physically working at the Banks offices so long as the Executive continues to be paid his Base Salary and receive any other amounts owed under this Agreement during such Notice Period.
(d) Notice of Termination. Any purported termination by the Holding Company, the Bank or the Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executives employment under the provision so indicated.
5. | OBLIGATIONS OF THE HOLDING COMPANY AND THE BANK UPON TERMINATION |
(a) Termination for Cause; Resignation other than for Good Reason or Disability. If, prior to the expiration of the Term or Renewal Term, the Holding Company and the Bank terminate the Executives employment for Cause, or the Executive terminates his employment for any reason other than Good Reason or Disability, the Holding Company and Bank shall have no further obligations to the Executive or the Executives legal representatives, other than to pay the Executive or his legal representatives (1) the unpaid Base Salary earned by the Executive through the effective date of the Executives termination of employment with the Holding Company and the Bank (the Termination Date) and any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive that are payable pursuant to the Holding Company and Banks policies as of such date, which payment shall be made within ten (10) days of termination or earlier if required by law, and (2) any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Bank and its affiliated companies and in accordance with the terms thereof, including, but not limited to, any amounts payable under any deferred compensation arrangements or agreements between the Executive and the Holding Company or the Bank, or other benefit plans, in accordance with the terms of such plans, programs or policies.
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(b) Without Cause or for Good Reason. If, prior to the expiration of the Term or Renewal Term and prior to a Change in Control, the Holding Company and the Bank terminates the Executives employment without Cause or the Executive terminates his employment for Good Reason, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(b), which shall be paid to the Executive or, after Executives death, to the Executives estate or beneficiary, as applicable, as follows:
(i) The Bank shall pay the Executive the cash amounts described in Section 5(a) above.
(ii) The Bank shall pay the Executive an amount in cash equal to two (2) times the Executives Base Salary as then in effect in a lump sum on the sixtieth (60) day after Executives termination.
(iii) The Bank shall pay the Executive an amount equal to the product of (A) the Annual Bonus, if any, that Executive would have earned for the calendar year in which the Termination Date occurs based on achievement of the applicable performance goals for such year at target and (B) a fraction, the numerator of which is the number of days the Executive was employed by the Holding Company during the year of termination and the denominator of which is the number of days in such year, in a lump sum in cash on the sixtieth (60th) day following the Termination Date.
(iv) If the Executive timely and properly elects continued Bank-provided group health plan coverage pursuant to the Consolidated Omnibus Reconciliation Act of 1985, as amended (COBRA), the Bank shall reimburse the Executive in an amount equal to the monthly COBRA premium paid by the Executive for such coverage less the active employee premium for such coverage. The Executive shall be eligible to receive such reimbursement until the earliest of: (A) one (1) year following the Termination Date; (B) the date the Executive is no longer eligible to receive COBRA continuation coverage; or (C) the date on which the Executive either receives or becomes eligible to receive substantially similar coverage from another employer.
(v) The Executive will be vested in full with respect to all of the Executives unvested stock options and/or other equity incentive compensation awards previously granted to the Executive that would have vested based solely on the continued employment of the Executive, effective as of the time the Release Agreement set forth in Section 5(g) below becomes effective and irrevocable.
(c) Disability. If, prior to the expiration of the Term or Renewal Term and prior to a Change in Control, the Executives employment terminates due to his Disability, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(c), which shall be paid to the Executive or, after Executives death, to the Executives estate or beneficiary, as applicable, as follows:
(i) The Bank shall pay the Executive the cash amounts described in Section 5(a) above.
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(ii) The Bank shall pay the Executive an amount equal to two (2) times the Executives Base Salary in effect on the Termination Date less the amount expected to be paid under the Banks long-term disability plan for the two (2) year period following the Termination Date, with such net amount paid as salary continuation in substantially equal installments over the two (2) year period following the Termination Date in accordance with the Banks customary payroll practices regarding the payment of base salary to executives but no less frequently than monthly (i.e., as if the Executive were still employed and receiving Base Salary pursuant to Section 3(a) of this Agreement), except that the first payment shall be made within sixty (60) days following the Termination Date and shall include all installments that would have been paid earlier had the installment stream commenced immediately following the Termination Date.
(iii) If the Executive timely and properly elects continued Bank-provided group health plan coverage pursuant to COBRA, the Bank shall reimburse the Executive in an amount equal to the monthly COBRA premium paid by the Executive for such coverage less the active employee premium for such coverage. The Executive shall be eligible to receive such reimbursement until the earliest of: (A) two (2) years following the Termination Date; or (B) the date the Executive is no longer eligible to receive COBRA continuation coverage.
(iv) The Executive will be vested in full with respect to all of the Executives unvested stock options and/or other equity incentive compensation awards previously granted to the Executive that would have vested based solely on the continued employment of the Executive.
(d) Death. If prior to the expiration of the Term or the Renewal Term, the Executives employment terminates due to his death, the Executives estate or beneficiary shall be entitled to receive the payments and benefits set forth in this Section 5(d) as follows:
(i) The Bank shall pay the Executives estate or beneficiary the cash amounts described in Section 5(a) above.
(ii) If the Executives surviving spouse timely and properly elects continued Bank-provided group health plan coverage pursuant to COBRA, the Bank shall reimburse the Executives surviving spouse and covered dependents in an amount equal to the monthly COBRA premium paid by her for such coverage less the active employee premium for such coverage. The Executives surviving spouse shall be eligible to receive such reimbursement until the earliest of: (A) twelve (12) months following the Executives death; or (B) the date she is no longer eligible to receive COBRA continuation coverage.
(iii) The Executive will be vested in full with respect to all of the Executives unvested stock options and/or other equity incentive compensation awards previously granted to the Executive that would have vested based solely on the continued employment of the Executive.
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(e) Without Cause or for Good Reason following a Change in Control. If, prior to the expiration of the Term or Renewal Term and within two (2) years following a Change in Control, the Holding Company and Bank terminate the Executives employment without Cause or the Executive terminates his employment for Good Reason, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(e) in lieu of the payments and benefits set forth in Section 5(b), which shall be paid to the Executive or, after Executives death, to the Executives estate or beneficiary, as applicable, as follows:
(i) The Bank shall pay the Executive the cash amounts described in Section 5(a) above.
(ii) The Bank shall pay the Executive an amount in cash equal to three (3) times the sum of (A) the Executives Base Salary as then in effect, (B) the Annual Bonus earned by the Executive for the year prior to the year in which the Change in Control occurs, and (C) the grant date fair value of the Annual Equity Incentive received by the Executive in the year prior to the year in which the Change in Control occurs, in a lump sum within ten (10) days following the Termination Date.
(iii) Within ten (10) days following the Termination Date, the Bank shall pay to the Executive a single lump sum payment in an amount equal to thirty-six (36) times the Banks monthly COBRA charge in effect on the Termination Date for the type of Bank-provided group health plan coverage in effect for the Executive (e.g., family coverage) on the Termination Date less the active employee charge for such coverage in effect on the Termination Date.
(iv) The Executive will be vested in full with respect to all of the Executives unvested stock options and/or other equity incentive compensation awards previously granted to the Executive that would have vested based solely on the continued employment of the Executive, effective as of the time the Release Agreement set forth in Section 5(g) below becomes effective and irrevocable.
(f) Entitlement to Benefits. Except as otherwise provided in this Agreement, upon termination of the Executives employment, the Executive shall be entitled to all vested benefits, vested stock-based awards, accrued and unused vacation, return of personal effects, COBRA rights and other rights that may not be waived or released as a matter of law, in addition to any other sums, benefits, or rights which are provided for in this Agreement.
(g) Release of Claims. Notwithstanding anything herein to the contrary, the Bank shall be obligated to provide the payments and benefits described in Section 5(b)(ii) through 5(b)(v) and Section 5(e)(ii) through 5(e)(iv) only if within forty-five (45) days after the Termination Date the Executive shall have executed a full release of claims covering all claims relating to the Executives employment and termination of employment (the Release Agreement) and such Release Agreement shall not have been revoked within the revocation period specified in the Release Agreement (provided the Bank provides a copy of such Release Agreement for the Executives consideration no later than the Termination Date) provided, however, that if the maximum period in which the Executive has to execute and revoke the Release Agreement would extend into the calendar year following the year of termination (the
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Following Year), then any termination payment which is subject to Section 409A of the Internal Revenue Code of 1986, as amended (the Code), will be paid beginning no later than fourteen (14) days after the later of (i) the first day of the Following Year or (ii) the date on which Executive has executed and not revoked the Release Agreement. The Release Agreement shall contain exceptions to the release for (a) any existing right to indemnification, contribution and a defense, (b) any directors and officers and general liability insurance coverage of the Executive, (c) the Executives rights as a shareholder, (d) all vested rights of the Executive, (e) the Executives right to enforce this Agreement and (f) any rights which cannot be waived or released as a matter of law.
(h) Definitions of Terms.
(i) Cause. Cause shall exist if there is (a) a material neglect by the Executive of his assigned duties, which includes any failure to follow the written direction of the Board of Directors or to comply with the Holding Company and Banks code of ethics or written policies, or repeated refusal by the Executive to perform his assigned duties, in each case other than by reason of Disability, which continues for 30 days following receipt of written notice from the Board of Directors; (b) the commission by the Executive of any act of fraud or embezzlement against the Holding Company, the Bank or any of their affiliates or the commission of any felony or act involving dishonesty; (c) the commission by the Executive of any breach of fiduciary duty or act of moral turpitude which causes harm to the Holding Company, the Bank or any of their affiliates; (d) a material breach by the Executive of the terms of this Agreement or any other confidentiality or non-disclosure agreement of the Executive with the Holding Company and the Bank; (e) the Executives commencement of employment with another company while he is an employee of the Holding Company and the Bank without the prior consent of the Board of Directors; or, (f) a final cease and desist order issued against the Executive, directly or indirectly.
(ii) Change in Control. Change in Control means a change in control as defined in Section 409A of the Code and the rules, regulations and guidance promulgated thereunder and issued by the Department of the Treasury, including the occurrence of any one or more of the following events:
(A) Merger. The Holding Company merges into or consolidates with another entity, or merges another entity into the Holding Company and, as a result, less than a majority of the combined voting power of the resulting entity or, if applicable, the ultimate parent thereof, immediately after the merger or consolidation is held by persons who were stockholders of the Holding Company immediately before the merger or consolidation;
(B) Acquisition of Significant Share Ownership. The acquisition by any person (within the meaning of Section 13(d) of the Securities Exchange Act, as amended), other any employee benefit plan or trust maintained by the Holding Company, of fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors of the Holding Companys then outstanding voting securities;
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(C) Change in Board Composition. During any period of two consecutive years, individuals who constitute the Holding Companys Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Holding Companys Board of Directors; provided, however, that for purposes of this clause (c), each director who is first elected by the Board of Directors (or first nominated by the Board of Directors for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or
(D) Sale of Assets. A sale, transfer, or other disposition of all or substantially all of the assets of the Holding Company which is consummated and immediately following which the persons who were the owners of the Holding Company immediately prior to such sale, transfer, or disposition, do not own, directly or indirectly and in substantially the same proportions as their ownership immediately prior to the sale, transfer, or disposition, more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of (i) the entity or entities to which such assets or ownership interest are sold or transferred or (ii) an entity that, directly or indirectly, owns more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the entities described in clause (i).
(iii) Disability. Disability means a determination by the Social Security Administration of the Executives inability to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
(iv) Good Reason. Good Reason shall mean the occurrence of any of the following during the Term or any Renewal Term without the express prior written consent of the Executive: (a) there is a material change in the geographic location at which the Executive must perform his services hereunder; e.g., relocation of the principal executive offices to a location outside Snohomish and Skagit Counties, (b) there is a material reduction by the Holding Company and Bank in the Executives responsibilities, duties, authority, title or reporting relationship; or (c) the Holding Company and Bank acts in any way that would materially reduce the Executives Base Salary (as defined or subsequently increased pursuant to Section 3(a)) or if the Holding Company and Bank adversely affect in any material way the Executives participation in or materially reduces the Executives benefit under any benefit plan of the Holding Company and Bank in which the Executive is participating.
(v) To the extent any definition herein differs in a material way from the definitions of the same term in other agreements relating to Executives employment or benefits, the definitions herein shall control.
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6. | CONFIDENTIALITY AND NON-COMPETITION. |
(a) Upon cessation of his employment, or as otherwise reasonably requested by Bank or the Holding Company, Executive shall return to the Bank or the Holding Company all documents, information and other property of the Bank or of any Affiliate that is in his possession or control, including but not limited to documents and files (whether paper or electronic); keys, passes and key cards; and computers, portable hard drives, and other office equipment.
(b) Executive agrees that he will not disclose, nor will he use for the benefit of himself or any other person, any of the non-public information regarding the business of the Holding Company, Bank or any Affiliate to which he was entrusted with access during his employment, including but not limited to: (a) customer information, including customer lists and other non-public information regarding customers, such as customer contact information; contract terms; customer files; information regarding customer history, needs and preferences; and information designated by customers to be kept confidential; (b) financial information, such as financial plans and earnings and other performance figures; cost and profitability information; and pricing; (c) strategies, marketing and other strategic plans; and (d) personnel files and information (collectively, the Confidential Information). Confidential Information does not include any information that is, or becomes, in the public domain through no disclosure or other action (whether direct or indirect) by the Executive. The obligations in this Section with respect to a particular piece of Confidential Information shall remain in effect until that piece of information enters the public domain through no breach of contract or duty.
(c) Upon (1) termination of the Executives employment by the Holding Company and the Bank during the Term or any Renewal Term without Cause or by the Executive for Good Reason and payment of the amounts due to the Executive under Section 5(b), or (2) termination of the Executives employment upon expiration of this Agreement and payment to the Executive of a lump-sum cash amount equal to two (2) times his taxable income for the prior calendar year, the Executive agrees not to directly or indirectly engage in any of the following activities for a period of twelve (12) months following the Termination Date:
(i) compete with the Holding Company, the Bank or any Affiliate within the Restricted Area;
(ii) work for or advise, consult or otherwise provide services to, any entity whose business materially competes, or who is planning or preparing to compete, with the depository, lending or other business activities of the Holding Company, the Bank or any Affiliate within the Restricted Area.
(iii) provide services, in either a paid or unpaid capacity, to any individual, entity or group proposing, planning or preparing to establish a new bank or other financial institution in the Restricted Area; or
(iv) provide, or assist in the provision of, Restricted Services to any Restricted Customer.
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Restricted Area means Snohomish County, Washington and all geographic territory within. Affiliate as used in this Section 6 means any subsidiary or parent company for or as to which Executive performs services, or as to which Executive is provided access to Confidential Information, during his employment hereunder. Restricted Services means banking and financial services of the type provided by the Holding Company, the Bank and their Affiliates during Executives employment. Restricted Customer means any and all persons or entities who customers of the Bank at any time during the last six (6) months of the Executives employment. The parties hereto, recognizing that irreparable injury will result to the Holding Company and the Bank, their business and property in the event of the Executives breach of this Section 6 agree that in the event of any such breach by the Executive, the Holding Company and the Bank will be entitled, in addition to any other remedies and damages available, to temporary, preliminary and post-trial injunctive relief to restrain the violation hereof by the Executive, the Executives partners, agents, servants, employers, employees and all persons acting for or with the Executive. The Executive represents and admits that the Executives experience and capabilities are such that the Executive can obtain employment in a business, engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent the Executive from earning a sufficient livelihood. Nothing herein will be construed as prohibiting the Holding Company and the Bank from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from the Executive.
(d) Additionally, during the twelve months following the Termination Date, Executive will not, directly or indirectly do the following, nor will Executive assist, encourage or advise any other person or entity to do the following: (a) recruit, hire, or employ any Restricted Person; or (b) recommend, suggest or interview for employment any Restricted Person; or (c) solicit, advise, encourage or induce any Restricted Person to terminate his or her engagement with the Bank or an Affiliate. Restricted Person means any person who provided services to the Bank or an Affiliate (whether as an employee, agent, independent contractor, or otherwise) within the last six (6) months of Executives employment.
(e) The Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company, the Bank and their Affiliates, as they may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company and the Bank. The Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company, the Bank or Affiliates to any person, firm, corporation or other entity for any reason or purpose whatsoever, Notwithstanding the foregoing, the Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company and the Bank. In the event of a breach or threatened breach by the Executive of the provisions of this Section 6(e), the Holding Company and the Bank will be entitled to an injunction restraining the Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company, the Bank or Affiliates, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company and the Bank from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from the Executive.
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(f) In the event that the Executive is found to have breached any covenant in this agreement, the time period provided for in that covenant shall be tolled (i.e., it will not run) for so long as the Executive is in violation of that covenant.
7. | SOURCE OF PAYMENTS. |
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank or by the Holding Company as provided in Section 11.
8. | EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. |
This Agreement contains the entire understanding between the parties hereto and supersedes the Prior Agreement and the Change in Control Severance Agreement dated as of April 21, 2009, as amended, between the Holding Company, the Bank and the Executive. No provision of this Agreement shall be interpreted to mean that the Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.
9. | MANDATORY REDUCTION OF PAYMENTS IN CERTAIN EVENTS. |
(a) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by the Holding Company or the Bank to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (such benefits, payments or distributions are hereinafter referred to as Payments) would, if paid, be subject to the excise tax imposed by Section 4999 of the Code , (the Excise Tax), then, prior to the making of any Payments to the Executive, a calculation shall be made comparing (i) the net after-tax benefit to the Executive of the Payments after payment by the Executive of the Excise Tax, to (ii) the net after-tax benefit to Executive if the Payments had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments shall be limited to the extent necessary to avoid being subject to the Excise Tax (the Reduced Amount). The reduction of the Payments due hereunder, if applicable, shall be made by first reducing cash Payments against the latest amounts to be paid and then, to the extent necessary, reducing those Payments having the next highest ratio of Parachute Value to actual present value of such Payments as of the date of the Change in Control, reducing the latest amounts to be paid first, as determined by a nationally recognized accounting firm or compensation consulting firm mutually acceptable to the Holding Company, the Bank and Executive (the Determination Firm). For purposes of this Section 9, present value shall be determined in good faith in accordance with Section 280G(d)(4) of the Code. For purposes of this Section 9, the Parachute Value of a Payment means the present value as of the date of the Change in Control of the portion of such Payment that constitutes a parachute payment under Section 280G(b)(2) of the Code, as determined by the Determination Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
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(b) All determinations required to be made under this Section 9, including whether an Excise Tax would otherwise be imposed, whether the Payments shall be reduced, the amount of the Reduced Amount, and the assumptions to be utilized in arriving at such determinations, shall be made in writing in good faith by the Determination Firm which shall provide detailed supporting calculations to the Holding Company, the Bank and the Executive within fifteen (15) business days after the receipt of notice from the Executive that a Payment is due to be made, or such earlier time as is requested by the Holding Company or the Bank. All fees and expenses of the Determination Firm shall be borne solely by the Holding Company or the Bank. Any determination by the Determination Firm shall be binding upon the Holding Company, the Bank and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Determination Firm hereunder, it is possible that Payments which the Executive was entitled to, but did not receive pursuant to Section 9(a), could have been made without the imposition of the Excise Tax (Underpayment), consistent with the calculations required to be made hereunder. In such event, the Determination Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Holding Company or the Bank to or for the benefit of the Executive but no later than March 15 of the year after the year in which the Underpayment is determined to exist, which is when the legally binding right to such Underpayment arises.
10. | COMPLIANCE WITH SECTION 409A OF THE INTERNAL REVENUE CODE. |
(a) It is the intent of the Holding Company and the Bank that the payments and benefits provided under this Agreement shall be exempt from the application of, or otherwise comply with, the requirements of Section 409A of the Code (Section 409A). Specifically, any taxable benefits or payments provided under this Agreement are intended to be separate payments that qualify for the short-term deferral exception to Section 409A to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the involuntary separation pay exceptions to maximum extent possible. This Agreement shall be construed, administered, and governed in a manner that effects such intent, and the Holding Company and the Bank shall not take any action that would be inconsistent with such intent; provided that in no event shall the Holding Company or the Bank be responsible for any 409A penalties that arise in connection with any amounts payable under this Agreement. Without limiting the foregoing, the payments and benefits provided under this Agreement may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A upon the Executive.
(b) If neither the short-term deferral nor the involuntary separation pay exceptions to Section 409A described above applies to a benefit, payment, or reimbursement under this Agreement, and such benefit, payment or reimbursement is not otherwise exempt from Section 409A, then notwithstanding any provision in this Agreement to the contrary, the remaining provisions of this Section 10 shall apply.
(i) If the Executive is a specified employee, within the meaning of Section 409A as determined under the Banks or Holding Companys policy for identifying specified employees on the Termination Date, then to the extent required in order to comply with Section 409A of the Code, all payments, benefits or reimbursements paid or provided under this Agreement that constitute a deferral of compensation within the
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meaning of Section 409A of the Code, that are provided as a result of a separation from service within the meaning of Section 409A and that would otherwise be paid or provided during the first six months following such Termination Date shall be accumulated through and paid or provided (together with interest on the delayed amount at the applicable federal rate under Section 7872(f)(2)(A) of the Code in effect on the Termination Date) within 30 days after the first business day following the six (6) month anniversary of such Termination Date (or, if the Executive dies during such six month period, within thirty (30) days after the Executives death).
(ii) To the extent required to comply with Section 409A Code, any reimbursement of expenses pursuant to this Agreement, that will not be excluded from the Executives income when received is subject to the following requirements: (1) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other calendar year; (2) the reimbursement of the eligible expense must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; and (3) the right to reimbursement is not subject to liquidation or exchange for another benefit.
11. | JOINDER. |
The Holding Company joins in this Agreement, not as the primary employer of the Executive, but as secondary obligor of the Banks obligations hereunder. In the event the Bank is unable to fulfill its obligations hereunder, the Holding Company shall be obligated to fulfill those obligations.
12. | NO ATTACHMENT; SUCCESSORS AND ASSIGNS, |
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Holding Company and the Bank and their respective successors and assigns. Holding Company and the Bank, or either of them, may assign this Agreement to any purchaser of all or substantially all of its assets without notice to or consent from Executive. Executive may not assign this Agreement.
13. | MODIFICATION AND WAIVER. |
(a) Except for the judicial modification allowed by Section 14, this Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been waived, nor there any estoppel against the enforcement of any provision of this Agreement, except by written
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instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.
14. | SEVERABILITY. |
If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part shall to the full extent consistent with law continue in full force and effect. If any one or more of the provisions contained in this Agreement shall for any reason be held by a court of competent jurisdiction to be excessively broad (for example as to temporal or geographic scope), that court may construe, modify, limit, and enforce such provision to the extent allowed by applicable law as it then shall appear in such jurisdiction, without affecting the enforceability of any part of this Agreement in any jurisdiction or proceeding.
15. | HEADINGS FOR REFERENCE ONLY. |
The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
16. | GOVERNING LAW; VENUE AND JURISDICTION. |
(a) This Agreement shall be governed by the substantive laws and procedural provisions of the State of Washington, including, without limitation, its statutory and case law of privilege, unless otherwise specified herein; provided, however, that in the event of a conflict between the terms of this Agreement and any applicable federal or state law or regulation, the provisions of such law or regulation shall prevail.
(b) If requested by the Holding Company and Bank or the Executive, any unresolved controversy or claim arising from or related to this Agreement or breach hereof shall be resolved by use of mediation initially, and if that fails to resolve the matter, by arbitration. Mediation shall be in Everett, Washington, before a mediator qualified in mediation of employment matters agreed upon by the parties. If the parties cannot agree on a single mediator, each party must select one mediator and those two mediators will select a third mediator. This third mediator will hear the dispute. There shall be only one mediator. The parties will use best efforts to obtain a mediator and complete the mediation within 30 days from the date of request for mediation. If the mediation has not been completed within 45 days from the date of request for mediation, any party may, by notice to all other parties and the AAA, forego mediation and move directly to arbitration under the AAA National Rules for the Resolution of Employment Disputes (or under any other form of arbitration mutually acceptable to the parties); provided, however, that such arbitration shall be before one arbitrator, and shall be in Everett, Washington. Also, by written agreement signed by the Holding Company and Bank and the Executive, the parties hereto may agree to forego mediation, may make any agreement regarding scheduling of the mediation or the arbitration process, discovery or hearing, which agreement shall be binding on the mediator
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or arbitrator, despite any AAA rule to the contrary. In any arbitration, if the Executive is the prevailing party, the Holding Company and Bank shall pay all reasonable attorneys fees of the Executive, as well as the expenses and administrative fees related to the arbitration. If the Holding Company and Bank is the prevailing party at the arbitration, each party shall pay its own attorneys fees and expenses and its share of the administrative fees and expenses related to the arbitration. Notwithstanding the foregoing provisions of this Section 16(a), (a) the parties are not required to arbitrate any issue for which injunctive relief is sought by any party hereto, (b) all parties may seek injunctive relief in any federal or state court having jurisdiction located in Everett, Washington, and (c) claims of workers compensation and unemployment compensation shall not be subject to arbitration under this Agreement. In rendering any decision as to any state law claims, Washington State law shall apply.
(c) The parties irrevocably and unconditionally waive, to the fullest extent permitted by law, all rights to trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, including without limitation, any counteraction or counterclaim, whether in contract, statute, tort (including, without limitation, negligence) or otherwise. This provision is a material inducement for the parties to enter into this Agreement.
17. | INDEMNIFICATION. |
The Bank shall provide the Executive with coverage under a standard directors and officers liability insurance policy as is provided for the other directors and officers of the Holding Company and the Bank, at its expense, and hereby indemnifies the Executive to the fullest extent permitted under applicable Washington and federal law and the Articles of Incorporation and Bylaws of the Holding Company and the Bank against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Holding Company or the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgment, court costs and attorneys fees and the cost of reasonable settlements.
18. | SUCCESSOR TO THE HOLDING COMPANY AND THE BANK. |
The Holding Company and the Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Holding Company and the Bank, expressly and unconditionally, to assume and agree to perform the Holding Companys and the Banks obligations under this Agreement, in the same manner and to the same extent that the Holding Company and the Bank would be required to perform if no such succession or assignment had taken place,
19. | LIMITATIONS ON EXECUTIVE COMPENSATION. |
Notwithstanding any other provisions of this Agreement, it is intended that, in the event that the Holding Company and/or the Bank elect to participate in any program of the United States government which, by its terms, limits the total amount of executive compensation that the Executive may receive, this Agreement shall be amended by operation of law to comply with the limitations set out in such program.
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20. | REGULATORY REQUIREMENTS. |
The parties agree that any payments contemplated pursuant to this Agreement are subject to and conditioned upon their compliance (if required) with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359 (golden parachute and indemnification payments), as such laws and regulations may hereafter be amended from time to time.
21. | CLAW BACK. |
(a) The Bank or its successors retain the legal right to demand the return of any golden parachute payments from the Executive in the event that it shall be determined, by legal process or by order of the Banks or the Holding Companys federal regulator(s) that the Executive:
(i) has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Bank or the Holding Company that has had or is likely to have a material adverse effect on the Bank or the Holding Company; or
(ii) is substantially responsible for the insolvency of, the appointment of a conservator or receiver for, or the troubled condition, as defined by applicable regulations of the appropriate federal banking agency, of the Bank, the Holding Company, or any FDIC insured depository institution subsidiary of the Holding Company; or
(iii) has materially violated any applicable federal or state banking law or regulation that has had or is likely to have a material effect on the Bank or the Holding Company; or
(iv) has violated or conspired to violate section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a federally insured financial institution as defined in title 18 of the United States Code.
(b) The Bank and its successors-in-interest further retain the legal right to demand the return by the Executive of any or all incentive compensation paid to the Executive pursuant to the terms of any compensation clawback or recoupment policy of the Holding Company and/or the Bank applicable to similarly-situated employees of the Holding Company or the Bank or required to comply with applicable law (as may be amended from time to time and as may hereafter be adopted).
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22. | BOARD MEMBERSHIP. |
Termination of the Executives employment with the Holding Company and the Bank for any reason whatsoever shall constitute the Executives resignation from the Board of Directors of the Holding Company, the Bank and of any subsidiary for which he serves as a director, and resignation as an officer of the Bank, the Holding Company and of any of the subsidiaries for which he serves as an officer.
Signatures on following page
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer or director, and the Executive has signed this Agreement, effective on the date first written above. This Agreement may be executed in multiple counterparts, each of which, when assembled to include an original signature for each party, will constitute a complete and fully executed original. All such fully executed original counterparts will collectively constitute a single agreement between the parties.
Coastal Financial Corporation | ||
By | /s/ Chris Adams | |
Title | Vice Chairman | |
Coastal Community Bank | ||
By | /s/ Chris Adams | |
Title | Vice Chairman | |
Executive | ||
/s/ Eric Sprink | ||
Eric Sprink |
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Exhibit 10.6
COASTAL FINANCIAL CORPORATION
COASTAL COMMUNITY BANK
AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT (Agreement) is entered into by and between COASTAL FINANCIAL CORPORATION, a Washington corporation (Company), its wholly-owned subsidiary, COASTAL COMMUNITY BANK, a Washington state-chartered bank (Bank), and JOEL EDWARDS (Executive), as of June 19, 2018.
The Company, the Bank, and the Executive agree as follows:
1. | Commitment of Executive. In the event that any person extends any proposal or offer that is intended to or may result in a Change in Control (defined below), Executive shall, at the Companys or the Banks request, assist the Company and/or the Bank in evaluating such proposal or offer. Further, subject to the additional terms and conditions of this Agreement, in order to receive the Change in Control Payment (defined below), Executive cannot resign from the Company or the Bank during any period from the receipt of a specific Change in Control proposal up to the consummation of the transaction contemplated by such proposal. |
2. | Change in Control. For purposes of this Agreement, Change in Control means a change in control as defined in Section 409A of the Internal Revenue Code and the rules, regulations and guidance promulgated thereunder and issued by the Department of the Treasury, including the occurrence of any one or more of the following events: |
a. | Merger. The Company merges into or consolidates with another entity, or merges another entity into the Company and, as a result, less than a majority of the combined voting power of the resulting entity or, if applicable, the ultimate parent thereof, immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation; |
b. | Acquisition of Significant Share Ownership. The acquisition by any person (within the meaning of Section 13(d) of the Securities Exchange Act, as amended), other any employee benefit plan or trust maintained by the Company, of fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors of the Companys then outstanding voting securities; |
c. | Change in Board Composition. During any period of two consecutive years, individuals who constitute the Companys Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Companys Board of Directors; provided, however, that for purposes of this clause (c), each director who is first elected by the Board of Directors (or first nominated by the Board of Directors for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or |
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d. | Sale of Assets. A sale, transfer, or other disposition of all or substantially all of the assets of the Company which is consummated and immediately following which the persons who were the owners of the Company immediately prior to such sale, transfer, or disposition, do not own, directly or indirectly and in substantially the same proportions as their ownership immediately prior to the sale, transfer, or disposition, more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of (i) the entity or entities to which such assets or ownership interest are sold or transferred or (ii) an entity that, directly or indirectly, owns more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the entities described in clause (i). |
3. | Payment Obligations. |
3.1 | Termination Following Change in Control. If, consistent with Section 1, Executive remains employed with the Company and the Bank through the closing of a Change in Control and concurrent with or within twenty-four (24) months after a Change in Control either the Company and the Bank terminate the Executives employment for reasons other than for Cause, or the Executive terminates his employment with the Company and the Bank for Good Reason, then: |
a. | within ten (10) days following the effective date of the Executives termination of employment, the Bank shall pay to the Executive a single lump sum cash payment (Change in Control Payment) in an amount equal to two (2) times the sum of: (i) the Executives base salary as then in effect, (ii) the cash bonus earned by the Executive for the year prior to the year in which the Change in Control occurs, and (iii) the grant date fair value of any equity incentive award received by the Executive in the year prior to the year in which the Change in Control occurs; and |
b. | the Executive will fully vest in all unvested stock options and/or other equity incentive compensation awards previously granted to the Executive that would have vested based solely on the continued employment of the Executive. |
3.2 | Termination Prior to Change in Control. If (i) the Company or the Bank terminates Executives employment without Cause before a Change in Control, and (ii) within ninety (90) days thereafter the Company and/or the Bank enters into an agreement for a Change in Control or any party announces or is required by law to announce a prospective Change in Control, which Change in Control is consummated, then within ten (10) days following the consummation of such Change in Control the Bank shall pay to the Executive the Change in Control Payment in a single lump sum. |
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4. | MANDATORY REDUCTION OF PAYMENTS IN CERTAIN EVENTS. |
4.1 | Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by the Company or the Bank to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (such benefits, payments or distributions are hereinafter referred to as Payments) would, if paid, be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code), (the Excise Tax), then, prior to the making of any Payments to the Executive, a calculation shall be made comparing (i) the net after-tax benefit to Executive of the Payments after payment by Executive of the Excise Tax, to (ii) the net after-tax benefit to Executive if the Payments had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments shall be limited to the extent necessary to avoid being subject to the Excise Tax (the Reduced Amount). The reduction of the Payments due hereunder, if applicable, shall be made by first reducing cash Payments against the latest amounts to be paid and then, to the extent necessary, reducing those Payments having the next highest ratio of Parachute Value to actual present value of such Payments as of the date of the Change in Control, reducing the latest amounts to be paid first, as determined by a nationally recognized accounting firm or compensation consulting firm mutually acceptable to the Company, the Bank and Executive (the Determination Firm). For purposes of this Section 4.1, present value shall be determined in good faith in accordance with Section 280G(d)(4) of the Code. For purposes of this Section 4, the Parachute Value of a Payment means the present value as of the date of the Change in Control of the portion of such Payment that constitutes a parachute payment under Section 280G(b)(2) of the Code, as determined by the Determination Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. |
4.2 | All determinations required to be made under this Section 4, including whether an Excise Tax would otherwise be imposed, whether the Payments shall be reduced, the amount of the Reduced Amount, and the assumptions to be utilized in arriving at such determinations, shall be made in writing in good faith by the Determination Firm which shall provide detailed supporting calculations to the Company, the Bank and the Executive within fifteen (15) business days after the receipt of notice from the Executive that a Payment is due to be made, or such earlier time as is requested by the Company or the Bank. All fees and expenses of the Determination Firm shall be borne solely by the Company or the Bank. Any determination by the Determination Firm shall be binding upon the Company, the Bank and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Determination Firm hereunder, it is possible that Payments which the Executive |
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was entitled to, but did not receive pursuant to Section 4.1, could have been made without the imposition of the Excise Tax (Underpayment), consistent with the calculations required to be made hereunder. In such event, the Determination Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company or the Bank to or for the benefit of the Executive but no later than March 15 of the year after the year in which the Underpayment is determined to exist, which is when the legally binding right to such Underpayment arises. |
5. | Termination of Agreement. This Agreement terminates immediately if, at any time before the Change in Control transaction closes, (i) the Company or the Bank terminates Executives employment for Cause, (ii) Executive resigns from the Company or the Bank without Good Reason, (iii) Executive dies, or (iv) Executive is unable to perform his duties and obligations to the Company or the Bank for a period of ninety (90) consecutive days as a result of a physical or mental disability, unless with reasonable accommodation Executive could continue to perform such duties and making these accommodations would not pose an undue hardship on the Company or the Bank. If no Change in Control has occurred, this Agreement will terminate ninety (90) days after Executives employment is terminated by the Company or the Bank without Cause or by Executive for Good Reason, unless during such ninety-day period, the Company or the Bank enters into an agreement for a Change in Control, or a Change in Control is announced or required by law to be announced, in which case this Agreement will terminate upon payment of the Change in Control Payment pursuant to Section 3.2 or the abandonment of such Change in Control. |
6. | Definitions. |
6.1 | Cause. Cause means any one of the following: |
a. | Removal or discharge of Executive pursuant to order of any federal banking authority; |
b. | Willful misfeasance or gross negligence in the performance of Executives duties, including without limitation the concealment from or knowing failure to disclose to, any federal banking regulatory authority or the Board of Directors any material matters affecting the viability of the Company or the Bank; |
c. | Indictment (or equivalent under applicable law) with respect to, the conviction of, or a plea of guilty or no contest to, a felony, or any other crime involving moral turpitude, fraud, theft, embezzlement, or dishonesty, including Executives incarceration, with the exclusion of traffic violations; or |
d. | Misconduct, dishonesty or illegal conduct, including, without limitation, a violation of any employment policy or code of conduct of the Company as may be in effect from time to time, if it causes material reputational or financial harm or is otherwise injurious to the Company or to any entity in control of, controlled by or under common control with the Company. |
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6.2 | Good Reason. Good Reason means only any one or more of the following: |
a. | Material reduction of Executives base salary or elimination of any significant compensation or benefit plan benefiting Executive, unless the reduction or elimination is generally applicable to substantially all similarly situated employees (or similarly situated employees of a successor or controlling entity of the Company or the Bank) formerly benefited; |
b. | The assignment to Executive without his consent of any authority or duties materially inconsistent with Executives position as of the date of this Agreement; or |
c. | A relocation or transfer of Executives principal place of employment that would require Executive to commute on a regular basis more than thirty (30) miles each way from his present place of employment. |
The Company, the Bank and Executive agree that Good Reason shall not exist unless and until Executive provides the Company and the Bank with written notice of the acts alleged to constitute Good Reason within ninety (90) days of Executives knowledge of the occurrence of such event, and the Bank and the Company fail to cure such acts within thirty (30) days of receipt of such notice, if curable. Executive must terminate his/her employment within sixty (60) days following the expiration of such cure period for the termination to be on account of Good Reason.
7. | Arbitration. At either the Companys, the Banks, or Executives request, the parties must submit any dispute, controversy, or claim arising out of or in connection with, or relating to, this Agreement or any breach or alleged breach of this Agreement, to arbitration under the American Arbitration Associations rules then in effect (or under any other form of arbitration mutually acceptable to the parties). A single arbitrator agreed on by the parties will conduct the arbitration. If the parties cannot agree on a single arbitrator, each party must select one arbitrator and those two arbitrators will select a third arbitrator. This third arbitrator will hear the dispute. The arbitrators decision is final (except as otherwise specifically provided by law) and binds the parties, and any party may request any court having jurisdiction to enter a judgment and to enforce the arbitrators decision. The arbitrator will provide the parties with a written decision naming the substantially prevailing party in the action. In any arbitration, if the Executive is the prevailing party, the Company and Bank shall pay all reasonable attorneys fees of the Executive, as well as the expenses and administrative fees related to the arbitration. If the Company and Bank are the prevailing party at the arbitration, each party shall pay its own attorneys fees and expenses and its share of the administrative fees and expenses related to the arbitration. All proceedings will be held at a place designated by the arbitrator in Snohomish County, Washington. The arbitrator, in rendering a decision as to any state law claims, will apply Washington law. |
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8. | Withholding. All payments required to be made by the Company or the Bank hereunder to Executive shall be subject to the withholding of such amounts, if any, relating to tax or other payroll deductions as the Company or the Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. |
9. | Other Compensation and Terms of Employment. This Agreement is not an employment agreement. Accordingly, except with respect to the Change in Control Payment, this Agreement shall have no effect on the determination of any compensation payable by the Company or the Bank to Executive, or upon any of the other terms of Executives employment with the Company or the Bank. The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to Executive upon a termination of employment with the Company or the Bank pursuant to employee benefit plans of the Company or the Bank or otherwise. |
10. | Miscellaneous Provisions. |
10.1 | Entire Agreement. This Agreement constitutes the entire understanding and agreement between the parties concerning its subject matter and supersedes all prior agreements, correspondence, representations, or understandings between the parties relating to its subject matter, including the Change in Control Severance Agreement dated as of January 1, 2016 (the Prior Agreement), by and between the Company, the Bank and the Executive. |
10.2 | Effective Date. This Agreement shall be effective as of the date on which the registration statement on Form S-1 filed by the Company on June 19, 2018, with the Securities and Exchange Commission (the Registration Statement) becomes effective. If the Registration Statement for any reason does not become effective, this Agreement shall be null and void and the Prior Agreement will continue on the terms and conditions set forth in the Prior Agreement. |
10.3 | Binding Effect. This Agreement will bind and inure to the benefit of the Companys, the Banks, and Executives heirs, legal representatives, successors, and assigns. |
10.4 | Waiver. Any waiver by a party of its rights under this Agreement must be written and signed by the party waiving its rights. A partys waiver of the other partys breach of any provision of this Agreement will not operate as a waiver of any other breach by the breaching party. |
10.5 | Amendment. This Agreement may be modified only through a written instrument signed by all parties. |
10.6 | Severability. The provisions of this Agreement are severable. The invalidity of any provision will not affect the validity of other provisions of this Agreement. |
10.7 | Counsel Review. Executive acknowledges that he has had the opportunity to consult with independent counsel with respect to the negotiation, preparation, and execution of this Agreement. |
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10.8 | Governing Law and Venue. This Agreement will be governed by and construed in accordance with Washington law, except to the extent that federal law may govern certain matters. The parties must bring any legal proceeding arising out of this Agreement in Snohomish County, Washington. |
10.9 | Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which taken together will constitute one and the same document. |
10.10 | Compliance with Section 409A of the Internal Revenue Code. |
(a) | General. It is the Companys and the Banks intent that the payments and benefits provided under this Agreement shall be exempt from the application of, or otherwise comply with, the requirements of Section 409A of the Internal Revenue Code (Section 409A). |
Specifically, any taxable benefits or payments provided under this Agreement are intended to be separate payments that qualify for the short-term deferral exception to Section 409A to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the involuntary separation pay exceptions to the maximum extent possible. This Agreement shall be construed, administered, and governed in a manner that effects such intent, and the Bank shall not take any action that would be inconsistent with such intent. Without limiting the foregoing, the payments and benefits provided under this Agreement may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A upon the Executive.
If neither the short-term deferral nor the involuntary separation pay exceptions to Section 409A described above applies to a benefit, payment, or reimbursement under this Agreement, then notwithstanding any provision in this Agreement to the contrary, it is intended that any payment or benefit which is provided pursuant to, or in connection with, this Agreement shall be provided and paid in a manner, and at such time and in such form as complies with the applicable requirements of Section 409A of the Code to avoid the unfavorable tax consequences provided therein for non-compliance. Any reference in this Agreement to involuntary termination, involuntarily terminate, termination of employment or similar terms or phrases shall be interpreted as a separation from service within the meaning of Section 409A. For purposes of Section 409A, any installment payment provided under this Agreement shall be treated as a separate payment. Any provision in this Agreement that is determined to violate the requirements of Section 409A shall be void and without effect. To the extent permitted under Section 409A, the parties shall reform the provision, provided such reformation shall not subject the Executive to additional tax or interest and the
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Executive shall not be required to incur any additional compensation as a result of the reformation. In addition, any provision that is required to appear in this Agreement that is not expressly set forth shall be deemed to be set forth herein, and this Agreement shall be administered in all respects as if such provision were expressly set forth. References in this Agreement to Section 409A of the Internal Revenue Code include rules, regulations, and guidance of general application issued by the Department of the Treasury under Internal Revenue Code Section 409A.
(b) | Delay of Payments. If the Executive is deemed to be a specified employee within the meaning of Section 409A, then payment of his benefits under this Agreement that is payable because the Executives employment terminates as set forth in the preceding provisions shall be delayed until six (6) months and one day after the date the benefit under such provisions is payable, unless the Executive dies between such date and the payment date, at which time all such benefits shall then commence. |
11. | Regulatory Provisions. In no event shall the Bank or the Company be obligated to make any payment pursuant to this Agreement that is prohibited by Section 18(k) of the Federal Deposit Insurance Act (codified at 12 U.S.C. § 1828(k)), 12 C.F.R. Part 359, or any other applicable law. |
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Effective as of the date first set forth above.
COMPANY: | ||
COASTAL FINANCIAL CORPORATION | ||
By: | /s/ Eric Sprink | |
Printed Name: Eric Sprink | ||
Title: | President & CEO | |
BANK: | ||
COASTAL COMMUNITY BANK | ||
By: | /s/ Eric Sprink | |
Printed Name: Eric Sprink | ||
Title: | President & CEO | |
EXECUTIVE: | ||
/s/ Joel Edwards | ||
Joel Edwards |
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Exhibit 10.7
COMMERCIAL REAL ESTATE LEASE
ARTICLE 1
BASIC TERMS
This Article I contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article I explain and define the Basic Terms and are to be read in conjunction with the Basic Terms.
1.1 Date of Lease. June 4, 2008.
1.2 Landlord. JMHLS, LLC, a Washington Limited Liability Company, whose address is 9910 Vernon Rd., Lake Stevens, Washington 98258.
1.3 Tenant. Coastal Community Bank, the address of which is 2817 Colby Avenue, Everett, Washington 98201.
1.4 Property. The Property is Landlords real property located at 10520-19th Ave. SE, Everett, Washington. The Property includes the land, buildings and all other improvements located on a portion .of the property legally described as attached hereto as Exhibit A.
1.5 Lease Term. Ten (10) years beginning on July 1, 2008 (Commencement Date), and ending on June 30, 2018, unless sooner terminated as set forth in this agreement.
1.6 Permitted Uses. Banking.
1.7 Initial Security Deposit. None.
1.8 Rent and Other Charges Payable by Tenant.
(a) Base Rent. The basic rent shall be Sixteen Thousand Nine Hundred Thirty-Eight and 21/100 Dollars ($16,938.21) per month for the first ten (10) years of this Lease.
(b) Other Periodic Payments. (i) Real Property Taxes on the entire area described in Exhibit A; (ii) Utilities/Electrical Charges; (iii) Insurance Premiums; and (iv) Maintenance, Repairs and Alterations.
ARTICLE 2
LEASE TERM
2.1 Lease of Property For Lease Term. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.5 above and shall begin and end on the dates specified in Section 1.5 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The Commencement Date shall be the date specified in Section 1.5 above for the beginning of the Lease Term unless advanced or delayed under any provision of this Lease.
2.2 Renewal Provisions. Provided that all of the terms and conditions of this Lease have been complied with by the Tenant, the Tenant shall have the option to renew this Lease for four (4) additional Terms of five (5) years of each Term. The renewal Terms shall begin upon the expiration of the primary or prior renewal Tenn. Tenants right to extend the Term of this Lease may be exercised only in the event that Tenant is not in default at the time of the exercise of the renewal option and at the time such renewal option commences. The options to renew the Lease provided for herein shall not be severable from the Lease. Tenant shall exercise a renewal option by delivering to the Landlord a written notice of its election to renew no later than 90 days prior to the expiration date of the primary term or prior renewal term, as the case may be. All terms, provisions and covenants of this Lease Agreement shall apply to each of the renewal terms, except for the term of the Lease and the minimum rent. The minimum rent commencing with the first renewal year and each anniversary date for the first two extension (years 15-20 and 20-25) thereafter (hereinafter referred to as the Adjustment Date), the monthly rent shall be increased by the percentage of increase, if any, in the Consumer Price Index--All Urban Consumers, All Items (hereinafter referred to as the CPI) as published by the United States Department of Labor, Bureau of Labor Statistics. The percentage of increase in the CPI will be determined by using the percentage change, as published for the month prior to the month in which the commencement date occurs as compared to that same month each year thereafter. The monthly rent as adjusted on the Adjustment Date shall be the monthly rent until the next Adjustment Date. Any increase in subsequent years shall be added to the monthly rent as adjusted by the CPI increase on the previous Adjustment Date. In no event shall the monthly rent be less than the monthly rent for the previous year. If the aforementioned CPI is discontinued, Landlord shall select another similar index which reflects consumer prices (by way of illustration only, if the Commencement Date occurs in the month of June, then May shall be the base month for the purpose of determining the percentage increase in the CPI as compared with each subsequent May thereafter during the Lease Term).
Provided, further, the last two (years 20-25 and 25-30) renewal terms shall have the minimum monthly rent increased, if any, by the parties agreeing to the monthly rent to be charged for the next additional five-year extended term within seventy-five (75) days prior to the expiration date of a prior renewal term. In the event Landlord and Tenant do not agree in writing within said 15 days after Tenants election to exercise the further renewal term, Landlord shall give written notice to Tenant of its appointment of an MAI Real Estate Appraiser with at least 5 years full-time commercial real estate rental value appraisal experience to appraise and set the fair market monthly rental value. Tenant, within 10 days of the receipt of Landlords notice, may elect, by written notice to Landlord, to appoint an MAI Real Estate Appraiser with the aforesaid qualifications. If Tenant does not, within said 10 day period, provide Landlord with the name of its appraiser, the single appraiser appointed by Landlord shall be the sole appraiser. If each party shall have so appointed an appraiser, the two appraisers shall meet promptly in an attempt to set a fair market monthly rental for the next extended five year term. If the two appraisers are unable to agree within 30
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days after the second appraiser has been appointed, they shall attempt to select a third appraiser meeting the qualifications herein stated. If the two appraisers are unable to agree on a third appraiser within a 10 day period, either of the parties to the Lease, by giving 10 days notice to the other party, may apply to the then presiding Judge of the Superior Court of Snohomish County for the selection of a third appraiser meeting the qualifications stated in this paragraph. Each party shall bear 1⁄2 of the cost of the appraisers appointed pursuant to this paragraph. Within 30 days after the selection of a third appraiser, a majority of the appraisers shall set the fair market monthly rental value for the extended term. If a majority of the appraisers are unable to set the fair market monthly rental value within the stipulated period of time, the three appraisals shall be added together and their total divided by 3. The resulting quotient shall be the fair market value for the fair market monthly rental value. However, if the low appraisal and the high appraisal is/are 5% lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by 2. The resulting quotient shall be the fair market rental value for the extended term. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the fair market value.
2.3 Holding Over. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenants delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenants occupancy of the Property shall he a month-to-month tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy.
ARTICLE 3
BASE RENT
3.1 Time and Manner of Payment. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.8 (a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance. The Base Rent shall be payable at Landlords address or at such other place as Landlord may designate in writing. PROVIDED, HOWEVER, if the first month of the Lease is less than a one month period, rent shall be a prorated portion of the monthly installment herein, based on a 30-day month.
ARTICLE 4
OTHER CHARGES PAYABLE BY TENANT
4.1 Additional Rent. All charges payable by Tenant other than Base Rent are called Additional Rent. Unless otherwise agreed to, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term rent shall mean Base Rent and Additional Rent.
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4.2 Property Taxes.
(a) Real Property Taxes. Tenant shall pay when due directly to Snohomish County all real property taxes the leased property during the Lease Term. Tenant shall provide Landlord with a copy evidencing timely payment.
(b) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall have personal property taxed separately from the Property.
(ii) If any of Tenants personal property is taxed with the Property, Tenant shall pay the taxes for the personal property within fifteen (15) days after Tenant receives a written statement for such personal property taxes.
(c) Tenants Right to Contest Taxes. Tenant may attempt to have the assessed valuation of the Property reduced or may initiate proceedings to contest the real property taxes. If required by law, Landlord shall join in the proceedings brought by Tenant. However, Tenant shall pay all costs of the proceedings, including any costs or fees incurred by Landlord. Upon the final determination of any proceeding or contest, Tenant shall immediately pay the real property taxes due, together with all costs, charges, interest and penalties incidental to the proceedings. If Tenant does not pay the real property taxes when due and contests such taxes, Tenant shall not be in default under this lease for nonpayment of such taxes if Tenant deposits funds with Landlord or opens an interest-bearing account reasonably acceptable to Landlord in the joint names of Landlord and Tenant. The amount of such deposit shall be sufficient to pay the real property taxes plus a reasonable estimate of the interest, costs, charges and penalties which may accrue if Tenants action is unsuccessful, less any applicable tax impounds previously paid by Tenant to Landlord. The deposit shall be applied to the real property taxes due, as determined at such proceedings. The real property taxes shall be paid under protest from such deposit if such payment under protest is necessary to prevent the Property from being sold under a tax sale or similar enforcement proceeding.
4.3 Utilities. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, electricity, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property.
4.4 Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall pay for and maintain commercial general liability insurance with broad form property damage and contractual liability endorsements. This policy shall name Landlord, its property manager (if any), and other parties designated by Landlord as additional insureds using an endorsement form acceptable to Landlord, and shall insure Tenants activities and those of Tenants employees, officers, contractors, licensees, agents, servants, employees, guests, invitees or visitors with respect to the Premises against loss, damage or liability for personal
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injury or bodily injury (including death) or loss or damage to property with a combined single limit of not less than $1,000,000, and a deductible of not more than $10,000. Tenants insurance will be primary and noncontributory with any liability insurance carried by Landlord.
(b) Property and Rental Income Insurance. During the Lease Term, Tenant shall maintain and pay for policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), and any other perils which Landlord deems reasonably necessary. Landlord shall not obtain insurance for Tenants fixtures or equipment installed by Tenant on the Property, or business income coverage, but Tenant may.
ARTICLE 5
USE OF PROPERTY
5.1 Permitted Uses. Tenant may use the Property only for the Permitted Uses set forth in Section 1.6 above. Tenant shall be responsible for confirming that the building is adequate for its use in its present condition. Any improvement required for Tenant shall be at Tenants sole expense.
5.2 Manner of Use. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of other tenants of Landlord, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenants occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act.
5.3 Hazardous Materials. As used in this Lease, the term Hazardous Material means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of hazardous substances, hazardous wastes, hazardous materials or toxic substances now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenants proposed activity with respect to Hazardous Material.
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5.4 Signs and Auctions. Tenant may place any signs on the Property without Landlords prior written consent.
5.5 Indemnity. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenants use of the Property; (b) the conduct of Tenants business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenants obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenants expense with counsel reasonably acceptable to Landlord or, at Landlords election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlords negligence or willful misconduct. As used in this Section, the term Tenant shall include Tenants employees, agents, contractors and invitees, if applicable. Landlord shall be responsible for and shall hold harmless and indemnify Tenant as to any and all costs, fees, fines, etc. related to any hazardous waste located on the property prior to Tenants occupancy.
5.6 Quiet Possession. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease.
ARTICLE 6
CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
6.1 Existing Conditions. Tenant accepts the Property in its condition as of the execution of the Lease. Tenant shall be responsible for any and all of Tenants improvements to the property.
6.2 Tenants Obligations.
(a) Tenant shall keep all portions of the Property in good order, condition and repair (including landscaping, roof, exterior walls, parking lot and foundation). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Tenn. If any part of the Property is damaged by any act or omission of Tenant and Tenant fails to timely repair, then Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive and fully operative condition in the same general condition as when delivered to Tenant, unless Tenant further improves the condition in which case it shall be maintained in such higher condition.
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(b) Tenant shall fulfill all of Tenants obligations under this Section at Tenants sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section, Landlord may, upon twenty (20) days prior notice to Tenant (except that no notice shall be required in the case of an emergency) enter the Property and perform such maintenance or repair including replacement, as needed on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand.
6.3 Alterations, Additions, and Improvements.
(a) Tenant may make any alterations, additions, or improvements to the Property without Landlords prior written consent. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations. Upon completion of any such work, Tenant shall provide Landlord with as built plans, copies of all construction contracts, and proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material furnished to the Property.
6.4 Condition Upon Termination. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received less and except reasonable and normal wear and tear. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair (Damage or Destruction). All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlords property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenants property which can be removed without material damage to the Property.
ARTICLE 7
DAMAGE OR DESTRUCTION
7.1 Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the occurrence of any significant damage to the Property. If the Property is only partially damaged (i.e., less than twenty-five percent (25%) of the Property is untenantable as a result of such damage and less than twenty-five percent (25%) of Tenants operations are materially impaired) this Lease shall remain in effect and Tenant shall repair the damage as soon as reasonably possible; provided, however, if repair is not possible within thirty (30) days, Tenant, at its option, may terminate this Lease.
7.2 Substantial or Total Destruction. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage, and regardless of whether Landlord receives any Insurance proceeds, this Lease shall terminate as of the date the destruction occurred.
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7.3 Temporary Reduction of Rent. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property, any rent payable during the period of such damage, repair and/or restoration shall be abated or reduced from the date of the damage in the same ratio that the portion of the Property rendered for the time being unfit for occupancy shall bear to the entire Property.
ARTICLE 8
CONDEMNATION
If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called Condemnation), this Lease shall terminate at the option of Tenant.
ARTICLE 9
ASSIGNMENT AND SUBLETTING
9.1 Landlords Consent Required. No portion of the Property or of Tenants interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlords prior written consent except as provided below.
9.2 Tenant Affiliate. Tenant may assign this Lease or sublease the Property, without Landlords consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant (Tenants Affiliate). In such case, any Tenants Affiliate shall assume in writing all of Tenants obligations under this Lease.
ARTICLE 10
OPTION TO PURCHASE
Provided that Tenant is not in default under the Lease, Tenant shall have the option to purchase the leased property, provided that Tenant provides written notice to Landlord of its election to purchase the leased property at least two (2) months prior to the tenth (10th) anniversary of the Commencement Date of this Lease. The purchase price shall be Three Million One Hundred Thousand Dollars ($3,100,000) and shall be paid in cash on closing. The sale shall be closed in escrow with Pacific Northwest Title Insurance Company (the Title Company) within 60 days after Tenant provides Landlord with the written notice of its exercise of this option. Title to the Premises shall be conveyed to Tenant by statutory warranty deed subject only to the matters arising through Tenant and matters accepted by Tenant in the preliminary commitment for title insurance issued by the Title Company and any supplement thereto, provided further that Landlord shall remove and satisfy as of the closing any mortgages, deeds of trust or liens arising through Landlord. Landlord shall pay the premium for an owners title insurance policy in favor of Tenant and the real estate excise tax. Escrow fees shall be shared equally between Landlord and Tenant. Real estate taxes shall be prorated as of closing. Tenants option under this Article shall terminate in the event Landlord offers Tenant a right of first opportunity to purchase pursuant to Article 11 below and Tenant does not elect to purchase the Offered Space pursuant to such right.
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ARTICLE 11
RIGHT OF FIRST OPPORTUNITY
Provided that Tenant is not in default under this Lease, Landlord shall, during the original ten (10) year term of this Lease, provide written notice to Tenant at such time as Landlord desires to sell the leased Property, and shall provide Tenant the right to purchase the leased property for a purchase price of Two Million Six Hundred Fifty Thousand Dollars ($2,650,000), plus any loan prepayment penalties which may be due Coastal Community Bank. Landlord shall provide Tenant written notice of its intent to sell the Property at least ninety (90) days prior to putting the leased property on the market for sale, or soliciting or accepting any offers of purchase and sale. Tenant shall have thirty (30) days thereafter to provide Landlord of its intent to purchase after receipt of Landlord notice, and if Tenant gives notice of its intent to purchased within said thirty (30) days, closing shall be within sixty (60) days of Tenants notice of intent to purchase. Costs shall be apportioned and the other terms as to status of title shall be as set forth in Article 10. If Tenant does not given Landlord such timely notice, Landlord may sell to a third party on terms acceptable to Landlord.
ARTICLE 12
DEFAULTS; REMEDIES
12.1 Covenants and Conditions. Tenants performance of each of Tenants obligations under this Lease is a condition as well as a covenant. Tenants right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions.
12.2 Defaults. Tenant shall be in material default under this Lease:
(a) If Tenant abandons the Property or if Tenants vacation of the Property results in the cancellation of any Insurance.
(b) If Tenant fails to pay rent or any other charge within 10 days of when due.
(c) If Tenant fails to perform any of Tenants non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion.
12.3 Remedies. On the occurrence and continuance beyond any applicable cure period of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have:
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(a) Terminate Tenants right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord.
(b) Subject to Landlords legal obligation to mitigate its damages, maintain Tenants right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlords rights and remedies under this Lease, including the right to recover the rent as it becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under the laws of the State of Washington.
12.4 Automatic Termination. Subject to the provisions of Chapter 59.12 of the Revised Code of Washington, and notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlords intention to terminate the Lease, including the filing of an unlawful detainer action against Tenant. On such termination, Landlords damages for default shall include costs and reasonable attorneys fees.
ARTICLE 13
PROTECTION OF LENDERS
13.1 Subordination. Landlord shall have the right to subordinate this Lease to any deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded provided that Tenants obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenants obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenants right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenants obligations under this Lease and is not otherwise in default. If any beneficiary or mortgagee elects to have this Lease prior to the lien of its deed of trust or mortgage and gives written notice thereof to Tenant. this Lease shall be deemed prior to such deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof.
13.2 Attornment. If Landlords interest in the Property is acquired by any sale, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attom to the transferee of or successor to Landlords interest in the Property and recognize such transferee or successor as Landlord under this Lease.
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13.3 Signing of Documents. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so.
13.4 Estoppel Certificates. Upon Landlords written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying to the extent true: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require.
ARTICLE 14
LEGAL COSTS
14.1 Legal Proceedings. If Tenant or Landlord shall be in breach or default under this Lease, such party (the Defaulting Party) shall reimburse the other party (the Nondefaulting Party) upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys fees and costs. The losing party in such action shall pay such attorneys fees and costs.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Landlords Liability. Landlord shall be responsible for and pay any costs, expenses, etc. not specifically required to be paid by Tenant in this lease.
15.2 Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect.
15.3 Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term Tenant shall include Tenants agents, employees, contractors, invitees, successors or others using the Property with Tenants expressed or implied permission.
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15.4 Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void.
15.5 Notices. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.3 above, except that upon Tenants taking possession of the Property, the Property shall be Tenants address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.2 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party.
15.6 Waivers. All waivers must be in writing and signed by the waiving party. Landlords failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement.
15.7 Recordation. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may record a Short Form memorandum of this Lease. The party performing such recording shall pay all transfer taxes and recording fees.
15.8 Binding Effect; Choice of Law. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. The laws of the State of Washington shall govern this Lease, and venue shall be in Snohomish County, Washington.
15.9 Force Majeure. If a Party cannot perform any of its obligations due to events beyond Landlords control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond a Partys control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. The Tenants obligation to pay rent (after the commencement of the term of this Leases) shall not be excused by this Section.
15.10 Execution of Lease. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument, Landlords delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties.
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Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Exhibits which are attached to or incorporated by reference in this Lease.
DATED this 4th day of June, 2008. |
||||||
LANDLORD: | JMHLS, LLC, a Washington Limited Liability Company | |||||
BY: | /s/ John Haugen | |||||
ITS: | Managing Member | |||||
TENANT: | COASTAL COMMUNITY BANK | |||||
BY: | /s/ Eric Sprink | |||||
ITS: | President |
STATE OF WASHINGTON | ) | |
) ss. | ||
COUNTY OF SNOHOMISH | ) |
On this 4th day of June, 2008, before me, the undersigned, a Notary Public in .and for the State of Washington, duly commissioned and sworn, personally appeared John Haugen, to me known to be the Managing Member of JMHLS, LLC, a Washington Limited Liability Company, the individual that executed the foregoing instrument, and acknowledged the said instrument to be his free and voluntary act and deed for the uses and purposes therein mentioned.
Witness my hand and official seal hereto affixed the day and year first above written.
[Illegible] |
Signature of Notary Public |
Residing at Camano Island |
My apt. expires: July 21, 2008 |
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STATE OF WASHINGTON | ) | |
) ss. | ||
COUNTY OF SNOHOMISH | ) |
On this 4th day of June, 2008, before me, the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared Eric Sprink, to me known to be the President of COASTAL COMMUNITY BANK, the entity that executed the foregoing instrument, and acknowledged the said instrument to be his free and voluntary act and deed of said entity, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument on behalf of said entity.
Witness my hand and official seal hereto affixed the day and year first above written.
[Illegible] |
Signature of Notary Public |
Residing at Camano Island |
My apt. expires: July 21, 2008 |
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Exhibit 10.8
FIRST AMENDMENT OF COMMERCIAL REAL ESTATE LEASE
THIS FIRST AMENDMENT TO COMMERCIAL REAL ESTATE LEASE (First Amendment) is made to be effective the 26th day of March, 2018 (the Effective Date), by and between JMHLS, LLC, a Washington Limited Liability Company (Landlord), and Coastal Community Bank (Tenant).
RECITALS
WHEREAS, Landlord and Tenant entered into a Commercial Real Estate Lease, dated June 4, 2008 (the Lease), whereby Landlord agreed to lease certain commercial real property (the Premises) to Tenant;
WHEREAS, the Premises is commonly known as the Silver Lake Office located at 10520 19th Ave SE, Everett, Washington; and
WHEREAS, the Lease had an initial term of ten (10) years. The initial term is set to expire on June 30, 2018. Section 2.2 of the Lease granted Tenant four (4) five-year extension options. Tenant hereby exercises the first and second of the four extension options, which will extend the term of the Lease to June 30, 2028.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is expressly acknowledged, the parties hereby agree as follows:
AGREEMENT
1. Lease Term. The original term of the lease expires on June 30, 2018. Tenant desires to exercise the first and second of four extension options, extending the term of the Lease for ten (10) additional years. The extended term of the Lease shall expire on June 30, 2028. The Tenant shall have the option to exercise the third and fourth extensions for an additional five (5) years each.
2. Rent. For the purpose of complying with applicable regulations, the parties examined the current market conditions to determine whether setting the extension periods minimum rent as directed by Section 2.2 of the Lease would be consistent with current fair market value. As a result of this examination, the parties determined that setting the minimum rent according to Section 2.2 would likely result in a rate higher than fair market value. The parties analysis determined that a rate of monthly minimum rent reflecting fair market value would equal Fifteen Thousand One Hundred Fifty & No/100 Dollars ($15,150.00). Accordingly, for the period of July 1, 2018 through June 30, 2019, the monthly minimum rent shall be $15,150. Beginning with the July 2019 monthly minimum rent payment and annually thereafter for the term of this extension the monthly minimum rent shall be adjusted by an amount equivalent to the change in the All Urban Consumers (CPI-U) US city average as measured on a year-over-year basis for the month of April. Based on the parties examination of the Premises and the current market conditions, the parties believe that a monthly minimum rent rate of $15,150.00 is that same rate that would be produced by an arms-length negotiation, without either party receiving preferential terms.
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3. Renewal Provisions. The Tenants extension options set forth in Section 2.2 of the Lease shall remain in effect for this extension. The parties acknowledge that Tenant has two (2) five-year extension options remaining.
4. Estoppel. Landlord hereby represents and warrants that no event of default by Tenant under the Lease exists as of the date hereof, nor has any event occurred which, with the passage of time or the giving of notice, or both, would constitute an event of default by Tenant.
5. Remaining Lease Provisions. To the extent that this First Amendment modifies or is inconsistent with the Lease as modified, the terms of this First Amendment shall control. All other provisions of the Lease as modified are to remain in full force and effect.
6. Counterparts. This First Amendment may be executed in two or more counterparts, each of which when executed and delivered to the other parties will be deemed to be an original and all of which, taken together, will be deemed the same instrument.
7. Modifications. Any alteration, change or modification of or to the Lease as amended hereby, in order to become effective, shall be made by written instrument or endorsement thereon and in each such instance executed on behalf of each party hereto.
[signature page to follow]
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IN WITNESS WHEREOF, this First Amendment of Commercial Real Estate Lease has been signed to be effective on the Effective Date.
LANDLORD |
JMHLS, LLC |
/s/ John M. Haugen, Jr. |
By: John M. Haugen, Jr. |
Its: Managing Member |
TENANT |
COASTAL COMMUNITY BANK |
/s/ Eric Sprink |
By: Eric Sprink |
Its: President/CEO |
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LANDLORD
STATE OF WASHINGTON | ) | |
) ss. | ||
COUNTY OF SNOHOMISH | ) |
I certify that I know or have satisfactory evidence that John M. Haugen, Jr. is the person who appeared before me, and said person acknowledged that they signed this instrument as the Managing Member of JMHLS, LLC, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.
DATED March 26, 2018 |
/s/ John D. Weber |
[print name] John D. Weber NOTARY PUBLIC in and for the State of Washington My Commission Expires: 10/05/2021 |
TENANT
STATE OF WASHINGTON | ) | |
) ss. | ||
COUNTY OF SNOHOMISH | ) |
I certify that I know or have satisfactory evidence that Eric Sprink is the person who appeared before me, and said person acknowledged that they signed this instrument as the President/CEO of Coastal Community Bank, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.
DATED March 26, 2018 |
/s/ Tyler Ferguson |
[print name] Tyler Ferguson NOTARY PUBLIC in and for the State of Washington My Commission Expires: 8/19/2021 |
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Exhibit 10.9
Lease
THIS LEASE, made in Everett this 21st day of October, 1996, between Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and the marital community composed thereof; Andrew P. Skotdal, a single man; and Craig G. Skotdal, a single man, hereinafter collectively referred to as Lessor, and Coastal Community Bank (In Organization) hereinafter referred to as Lessee.
WITNESSETH:
1. | PREMISES: |
The Lessor does hereby lease to the Lessee, and the Lessee does hereby lease from the Lessor, those certain premises situated in the City of Everett. County of Snohomish, State of Washington, described as follows;
Lots 7 & 8, block 667, Plat of Everett, according to the plat recorded in volume 3 of plats, page 32, in Snohomish County, Washington. Together with lots A, B & C (Lot 18A), as block 667, Tunnel. Addition to Everett, according to the plat thereof recorded in volume 4 of plats, page 34, in Snohomish County, Washington,
hereinafter called the premises. The 2817 Colby Avenue Building in which the premises are located is hereinafter called the Building.
2. | BUSINESS PURPOSES: |
The premises are to be used for the purpose of conducting therein retail banking and any other business for lawful purpose and for no other business or purpose, without the written consent of the Lessor.
3. | TERM: |
The term of this lease shall be for ten (10) years and -0- months, and shall commence on the 1st day of January, 1997, and end on the 31st day of December, 2006, inclusive. The Lessors acceptance of rent for a period after the end of the term hereof shall not extend the term, but shall simply evidence a month to month tenancy. The term of this lease may be extended for two (2) five (5) year periods at market rate by Lessee giving Lessor a ninety (90) day written notice.
4. | RENT: |
Lessee covenants and agrees to pay the Lessor, as rental for said premises, the minimum monthly rental set forth in the attached Rent Schedule in lawful money of the United States in advance on the first day of each calendar month to the Lessor at P.O. Box 5267 Everett, Washington 98206-5267 or to such other party or at such other place as the Lessor may hereafter designate. There is no percentage rent payable by Lessee.
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5. | RENT ADJUSTMENTS: |
(a) Notwithstanding anything contained in this Paragraph 5, the rent payable by Lessee shall in no event be less than the minimum monthly rent specified in paragraph 4 above.
(b) The failure of Lessor during the term of this lease to prepare and submit to Lessee notices advising Lessee of the rent adjustments made in accordance with Paragraphs 5(a) and 5(b) of this lease shall not in any way cause Lessor to waive, surrender or forfeit any additional rent which may become due during the term of this lease.
(c) Notwithstanding any dispute which may arise between Lessor and Lessee regarding rent adjustments under this Paragraph 5, Lessee shall continue to pay all minimum monthly rent as provided in Paragraph 4 above and the full amount of any rent adjustments as determined by Lessor under this Paragraph 5, such payments being subject to adjustment, if necessary, upon final resolution of the dispute.
6. | CONSIDERATION: |
[Intentionally Deleted]
7. | ASSIGNMENT: |
(a) | By Lessee. |
Lessee will not assign this lease or sublet the premises or any part thereof without the written approval of Lessor. If approval is once given by the Lessor to the assignment of this lease or subletting the premises or any part thereof, Lessor shall not be barred from afterwards refusing to consent to any further assignment. Notwithstanding any assignment or subletting, Lessee shall remain fully obligated to perform all the covenants, agreements, terms and conditions of this lease. Notwithstanding the foregoing, Lessor will allow the assignment or subletting by Lessee of space located in the basement and on the 2nd, 3rd and 4th floors of the Building to other tenants.
(b) | By Lessor. |
Lessor may sell, assign, convey or otherwise transfer all or any part of the Lessors estate, right, title and interest under this lease and/or in the premises, the Building and real estate upon which the Building is situated, or any portion thereof, without the consent of Lease. From and after the date of any such sale, assignment, conveyance or transfer, Lessor Shall be automatically freed and relieved of any and all liability and obligation under the terms of this lease.
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8. | SERVICES AND UTILITIES: |
Lessor shall not be responsible for furnishing any services or utilities to the Building. Lessor shall not be liable for any loss, injury or damage which may arise or accrue should the furnishing of any of these services and utilities be interrupted or prevented by fire, accident, strike, riot, act of God, the making of necessary repairs or improvements, or any other cause beyond the reasonable control of Lessor.
9. | CARE OF PREMISES: |
Lessee has examined the premises and subject to such alterations as may be set forth on any Rider to this lease, accepts them in their present condition, and will at all times keep the premises neat, clean and in a sanitary condition. Lessee shall, at the expiration or earlier termination of this Lease, surrender possession thereof to the Lessor in their condition as accepted hereunder, or, in the event any alterations, additions or improvements are made hereafter, then in the condition in which they shall be after the making of such alterations, additions, or improvements, except for ordinary wear and tear and damage by act of God, earthquake, the elements, Lessor or other occupants of the Building, water damage, or by any of the risks covered by the normal fire and extended coverage policy of insurance, whether caused by the negligence of the Lessee, its agents, employees or invitees, or otherwise. Lessee will replace any glass or all windows and doors as may become cracked or broken in the leased premises due to the negligence of the Lessee, its agents, employees or invitees. If cracked or broken due to any other cause, Lessor shall replace such glass. Lessor agrees to keep the premises free from defects or disrepair due to ordinary wear and tear on roof, walls and foundations.
10. | ALTERATIONS OR IMPROVEMENTS: |
Lessee shall not make any alterations, additions or improvements in or to the premises without first obtaining the written consent of the Lessor. Prior to the commencement of work upon any alterations, additions or improvements, Lessee shall, at its cost and expense, prepare and submit to Lessor architectural drawings, plans and specifications for such alterations, additions and improvements for written approval by Lessor. Lessee shall perform no work on any such alterations, additions or improvements until the Lessor, in writing, has approved the architectural drawings, plans and specifications therefor. All alterations, additions and additions or improvements which shall be made, shall be at the sole cost and expense of Lessee, and shall become the property of Lessor and shall remain in and be surrendered with the premises as a part thereof at the termination of this lease. Lessee agrees to indemnify and save Lessor free and harmless from damages, loss or expense, including reasonable attorneys fees arising out of any work performed in making any alterations, additions or improvements to the premises, consent for alterations and additions shall not be unreasonably withheld.
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11. | DAMAGE OR DESTRUCTION: |
In the event the premises are destroyed by fire, earthquake, or other casualty to such an extent as to render the same untenantable in whole or in substantial part thereof, it shall be optional with the Lessor to repair or rebuild the same, and in the meantime the rent shall be abated in the same proportion as the untenantable portion of the premises bears to the whole thereof. Unless the Lessor, within 90 days after the happening of any such damage or casualty, shall notify the Lessee of its election to restore said premises, this lease shall thereupon terminate and end.
12. | CONDEMNATION: |
(a) | Entire or Substantial Taking. |
If the entire premises, or so much thereof as to make the balance not reasonably adequate for the conduct of Lessees business, shall be taken under the power of eminent domain, this lease shall automatically terminate as of the date on which the condemning authority takes possession.
(b) | Partial Taking. |
In the event of any taking under the power of eminent domain which does not so result in a termination of this lease, the minimum monthly rental and additional rent payable under this lease shall be reduced, effective as of the date on which the condemning authority takes possession, in the same proportion which the floor area of the portion of the premises taken bears to the floor area of the entire premises prior to the taking. Lessor shall restore the portion of the premises not so taken to as near its former condition as is reasonably possible, and this lease shall continue in full force and effect.
(c) | Awards. |
Any award for any taking of all or any part of the premises under the power of eminent domain shall be the property of the Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for taking of the fee or otherwise and Lessee shall have no claim thereto. Lessee agrees to execute any and all documents necessary to permit Lessor to recover any such award. Lessee may make a separate claim for the value of any leasehold improvements and its moving expenses.
13. | ACCIDENTS: |
Lessee will save and hold Lessor harmless from all loss, damage, liability or expense resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act or omission of Lessee or any officer, agent, employee, guest, invitee or visitor of Lessee in or about the premises or the Building. Lessor shall not be liable for any loss or damage to person or property sustained by Lessee, or other persons, which may be caused by the Building or the premises or any appurtenances thereto, being out of repair, or by the bursting or leakage of any water, gas, sewer, or steam pipes, or by theft or by any act or neglect of any tenant or occupant of the Building, or of any other person, or by any other cause of whatsoever nature, unless caused by the negligence of the Lessor.
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14. | ACCESS: |
The Lessor shall have the right to inspect the premises at all reasonable times and the right to enter the same for the purpose of cleaning, repairing, altering or improving the same, or the Building, but nothing contained in this lease shall be construed so as to impose any obligation on the Lessor to make any repairs, alterations or improvements other than those that are expressly the obligation of the Lessor to make.
15. | SIGNS OR ADVERTISING: |
The Lessee will not inscribe any inscription or post, place, or in any manner display any sign, notice, picture or poster, or any advertising matter whatsoever, anywhere on the exterior of the Building, without first obtaining the Lessors written consent thereto, which shall not he unreasonably withheld. Any consent so obtained from Lessor shall be with the understanding and agreement that Lessee will remove same at the termination of the tenancy herein created and repair any damage or injury to the premises or the Building caused thereby. Lessor will install and maintain a building directory of tenants in the principal lobby entrances of the Building, and Lessor may, as it may determine, from time to time publish or advertise a list of tenants in the Building.
16. | UNLAWFUL USE: |
The Lessee will not disturb other occupants of the Building by making any undue or unseemly noise, or otherwise, and will not do or permit to be done in or about the premises anything which is illegal or unlawful, or which will be dangerous to life or limb, or will increase any insurance rate upon the premises or the Building.
17. | SUCCESSORS: |
All the covenants, agreements, terms and conditions contained in this lease, shall apply to and be binding upon the Lessor and the Lessee and their respective heirs, executors, administrators, successors and assigns.
18. | POSSESSION: |
In the event of the inability of the Lessor or to deliver possession of the premises or any portion thereof, at the time of the commencement of the term of this lease the Lessor shall not be liable for any damage caused thereby, nor shall this lease thereby become void or voidable, nor shall the term herein specified be in any way extended, but in such event, Lessee shall not be liable for any rent until such time as Lessor can deliver possession. If the Lessor shall deliver possession of the premises to the Lessee prior to the commencement date of this lease and the Lessee agrees to accept same at such time, both Lessor and Lessee agree to be bound by all provisions and obligations of this lease during the prior period, including the payment of rent and all rental adjustments and additional rent at the same monthly rate prorated for the prior period.
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19. | TAX ON RENTALS: |
If any governmental authority shall in any manner levy a tax on rentals payable under this lease or rentals accruing from use of property, or a tax in any form against Lessor measured by income derived from the leasing or rental of all or any portion of the Building, such tax shall be paid by Lessee, as additional rent, either directly or through Lessor, as Lessor may determine.
20. | LIENS AND INSOLVENCY: |
The Lessee shell keep the premises and the property in which the premises are situated, free from any liens arising out of any work performed, materials furnished or obligations incurred by the Lessee. In the event Lessee becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, assignee or other liquidating officer is appointed for the business of the Lessee, then the Lessor may cancel this lease at Lessors option.
21. | COSTS AND ATTORNEYS FEES: |
It by reason of any default or breach hereunder by Lessor or by Lessee, it becomes necessary to institute suit, the prevailing party in such suit shall be entitled to recover, as part of any judgment, such amount as the court shall determine reasonable as attorneys fees, together with taxable costs.
22. | NON-WAIVER OF BREACH: |
The failure of Lessor to insist upon strict performance of any of the covenants and agreements of this lease or to exercise any option herein conferred in any one or more instances, shall not be construed to be a waiver or relinquishment of any right, or option of Lessor, or any other covenants or agreements, but the same shall be and remain if full force and effect.
23. | REMOVAL OF PROPERTY: |
In the event of any entry in, or taking possession of, the premises pursuant to Paragraph 26 below, Lessor shall have the right, but not the obligation, to remove from the premises all personal property located therein, and may store the same in any place selected by Lessor, including but not limited to a public warehouse, at the expense and risk of the owners thereof, with the right to sell such stored property, without notice to Lessee, after it has been stored for a period of thirty days or more. The proceeds of such sale shall be applied first to the cost of such sale, second to the payment of the charges for storage, if any, and third to the payment of any other sums of money which may then be due from Lessee to Lessor under any of the terms hereof, the balance if any to be paid to Lessee.
24. | HOLDOVER: |
If Lessee shall, without written consent of the Lessor, hold over after the expiration of the term of this lease, such tenancy shall be for an indefinite period of time on a month-to-month tenancy, which tenancy may be terminated as provided by the laws of the State of
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Washington. During such tenancy the Lessee agrees to pay to Lessor the same rent as set forth herein, including all rent adjustments and additional rent, unless a different rate is established by the Lessor, and to be bound by all of the terms, covenants and condition as herein specified, so far as applicable.
25. | ELECTRICITY: |
Electricity shall be provided and the cost of monthly services shall be paid by the Lessee.
26. | DEFAULTS: |
Time is the essence hereof, and in the event Lessee shall violate or breach or fail to keep or perform any covenant, agreement, term or condition of this lease, and if such default or violation shall continue or shall not be remedied within three (3) days (or, if no default in the payment of rental or additional rent is involved, within ten (10) days) after notice in writing thereof is given by Lessor to Lessee specifying the matter claimed to be in default, Lessor at its option, may immediately declare Lessees rights under this lease terminated, and re-enter the premises, and repossess itself thereof, as of its former estate, and remove all persons and property from the premises. Notwithstanding any such re-entry, the liability of Lessee for all rent provided for herein shall not be extinguished for the balance of the term of this lease, and Lessee shall make good to Lessor any deficiency arising from a reletting of the premises at a lesser rental, plus the costs and expenses of renovating or altering the premises. Lessee shall pay any such deficiency each month as the amount thereof is ascertained by Lessor.
27. | SUBORDINATION: |
Lessee agrees that this lease shall be subordinate to any mortgages or deeds of trust that may hereafter be placed upon the premises or the Building containing the same, or the real estate upon which the Building is situated, and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof; provided the mortgagee or beneficiary named in said mortgages or deeds of trust shall agree to recognize this lease in the event of foreclosure if Lessee is not in default. Within fifteen (15) days after written request from Lessor, Lessee shall execute any documents that may be necessary or desirable to effectuate the subordination of this lease to any such mortgages or deeds of trust.
28. | ESTOPPEL CERTIFICATES: |
At any time and from time to time, Lessee agrees, upon request in writing from Lessor, to execute, acknowledge and deliver to Lessor a statement, in writing and in form and manner satisfactory to Lessor, certifying that this lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and the dates to which the rental, additional rent and other charges have been paid.
7
29. | WAIVER OF SUBROGATION: |
Whether the loss or damage is due to the negligence of either Lessor or Lessee, their agents or employees, or any other cause, Lessor and Lessee do each herewith and hereby release and relieve the other from responsibility for, and waive their entire claim of recovery for (a) any loss or damage to the real or personal property of either located anywhere in the Building, including the Building itself, arising out of or incident to the occurrence of any of the perils which may be covered by their respective fire and lightning insurance policies, with extended coverage endorsements, or (b) loss resulting from business interruption at the premises or loss of rental income from the Building, arising out of or incident to the occurrence of any of the perils which may be covered by the business interruption insurance policy and by the loss of rental income insurance policy held by Lessor or Lessee. Each party shall cause its insurance carriers to consent to such waiver and to waive all rights of subrogation against the other party.
30. | DRAPERIES: |
NONE
31. | CAPTIONS AND CONSTRUCTION: |
The captions or titles to paragraphs of this lease are not a part of this lease and shall have no effect upon the construction or interpretation of any part thereof. This lease shall be construed and governed by the laws of the State of Washington.
32. | PAYMENT: |
Tenant understands that the total rent is due and payable the first of each month. A fifteen dollar ($15.00) fee, in addition to the full amount of rent owed, will be charged for a check returned from tenants bank for any reason. A fifty dollar ($50.00) late fee will be charged for rent paid after the fifth day of the month, plus, ten dollars ($10.00) for each day thereafter until rent is paid in full.
33. | RIDERS: |
The Riders attached hereto are made a part of and incorporated into this lease by this reference.
8
IN WITNESS WHEREOF the Lessor and Lessee have signed their names and affixed their seals the day and year first above written.
Lessor | Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and the marital community composed thereof; Andrew P. Skotdal a single man; and Craig G. Skotdal, a single man, Managing Partners. | |||||||
By: | /s/ Arthur W. Skotdal |
|||||||
Arthur W. Skotdal | ||||||||
By: | /s/ Marianne P. Skotdal |
|||||||
Marianne P. Skotdal | ||||||||
By: | /s/ Edwin McRory by Arthur W. Skotdal, Attorney in fact |
|||||||
Edwin McRory by Arthur W. Skotdal, Attorney in fact | ||||||||
By: | /s/ Irene McRory by Arthur W. Skotdal, Attorney in fact |
|||||||
Irene McRory by Arthur W. Skotdal, Attorney in fact | ||||||||
By: | /s/ Thomas Goyette by Arthur W. Skotdal, Attorney in fact |
|||||||
Thomas Goyette by Arthur W. Skotdal, Attorney in fact | ||||||||
By: | /s/ Louise Goyette by Arthur W. Skotdal, Attorney in fact |
|||||||
Louise Goyette by Arthur W. Skotdal, Attorney in fact | ||||||||
By: | /s/ Craig G. Skotdal by Arthur W. Skotdal, Attorney in fact |
|||||||
Craig G. Skotdal by Arthur W. Skotdal, Attorney in fact | ||||||||
By: | /s/ Andrew P. Skotdal |
|||||||
Andrew P. Skotdal | ||||||||
Lessee | COASTAL COMMUNITY BANK (in organization) | |||||||
By: | /s/ Lee A. Pintar |
|||||||
Lee A. Pintar (proposed President & CEO) |
9
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 22nd day of November, 1996.
/s/ Robert C. Wilson (Signature) |
Robert C. Wilson (Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Everett My Commission Expires: 6-1-1997 |
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me and , to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this day of , 1996.
(Signature) | ||
(Please print name legibly) | ||
NOTARY PUBLIC in and for the State of | ||
Washington, residing at |
| |
My Commission Expires: |
|
10
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Edwin McRory and Irene McRory and the marital community composed thereof; to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 22nd day of November, 1996.
/s/ Robert C. Wilson (Signature) |
Robert C. Wilson (Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Everett My Commission Expires: 6-1-1997 |
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Thomas Goyette and Louise Goyette and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 22nd day of November, 1996.
/s/ Robert C. Wilson (Signature) |
Robert C. Wilson (Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Everett My Commission Expires: 6-1-1997 |
11
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Andrew P. Skotdal a single man, to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 22nd day of November, 1996.
/s/ Robert C. Wilson |
(Signature) |
Robert C. Wilson |
(Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Everett My Commission Expires: 6-1-1997 |
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Craig G. Skotdal, a single man to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 22nd day of November, 1996.
/s/ Robert C. Wilson (Signature) |
Robert C. Wilson (Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Everett My Commission Expires: 6-1-1997 |
12
STATE OF WASHINGTON | ) | |||||
) | ss | |||||
County of Snohomish | ) |
On this day personally appeared before me Lee A. Pintar, proposed President and CEO of Coastal Community Bank (in organization) to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 21st day of November, 1996.
/s/ Jeanne A. Sparks (Signature) |
Jeanne A. Sparks (Please print name legibly) |
NOTARY PUBLIC in and for the State of Washington, residing at Snohomish My Commission Expires: 9/18/97 |
RENT SCHEDULE
The length of the lease will be ten (10) years starting approximately February 1, 1997, or sooner.
Minimum monthly rent payable by Lessee during the term of the lease is as follows:
Year |
1 | : | $8,000 | |||||
Year |
2 | : | $14,080 | |||||
Year |
3 | : | $20,080 | |||||
Year |
4-5 | : | $14,080 | |||||
Year |
6-10 | : | $14,080 plus the lesser of (a) ten percent (10%) or (b) the increase in the Consumer Price Index for the Puget Sound area for the period from 1996 to 2001. |
RIDER TO LEASE
A. | Tenant Improvement Allowance: |
Lessor shall provide a tenant improvement allowance equal to $65,000.00. Prior to any work commencing on the tenant improvements, Lessor and Lessee shall both have approved the plans and specifications therefor, and the budget for the improvements. If, during the course of construction, there are any change orders either necessitated or requested that result in an increase to the cost of constructing the tenant improvements, such change orders shall be approved by both Lessor and Lessee. Lessee expressly assumes responsibility for the cost and payment of any portion of the tenant improvements that puts the cost of constructing the tenant improvements in excess of the tenant improvement allowance. Lessee agrees to complete the tenant improvements in a good and workmanlike manner, and in accordance with all applicable laws, ordinances and regulations: Lessee expressly agrees that no liens of mechanics, materialmen, labors or contractors shall be created or imposed against the Premises, and that in the event any claims or liens are asserted or filed by any persons, Lessee shall cause the same to be discharged of record within thirty (30) days of notification thereof.
B. | Limitation on Lessors Damages: |
Notwithstanding any other provisions contained in this lease, in the event (a) Lessee or its successors or assigns shall become insolvent or bankrupt, or if it or their interests under this Lease shall be levied upon or sold under execution or other legal process, or (b) the depository institution then operating on the Premises is closed, or is taken over by any depository institution supervisory authority (Authority), Lessor may, in either such event, terminate this Lease only with the concurrence of any Receiver or Liquidator appointed by such Authority; provided, that in the event this Lease is terminated by the Receiver or Liquidator, the maximum claim of Lessor for rent, damages, or indemnity for injury resulting from the termination, rejection, or abandonment of the unexpired Lease shall by law in no event be in excess of the amount equal to all accrued and unpaid rent to the date of termination, plus the unamortized portion of the tenant improvement allowance of $65,000.
C. | Taxes And Assessments: |
(1) | Payment Of Taxes And Assessments: Lessee shall pay before delinquency all real estate and personal property taxes, assessments, water rates, electricity charges, and any other governmental charges of any kind or nature whatsoever, including but not limited to assessments for public improvements or benefits which shall during the term be assessed, levied or imposed upon or become due and payable or a lien upon the Premises or any part thereof, or any buildings, appurtenances, or equipment or personal property thereon (all of which taxes, assessments, water rates, or charges are hereinafter referred to as Impositions); except that if any Imposition is due and payable in installments, Lessee may pay the Imposition in installments so long as each installment, together with any interest on the unpaid balance of the Imposition, is paid prior to delinquency. Any Impositions relating |
Rider 1
to a period, only a part of which is included within the Lease term, shall be prorated between Lessor and Lessee so that Lessee shall pay only that portion relating to the Lease term. With respect to any Imposition for public improvements or benefit which is payable in installments, Lessor shall pay the installments thereof which become due and payable prior to the commencement and subsequent to the termination of the Lease term, and Lessee shall pay those installments which become due and payable during the Lease term. |
(2) | Taxes Not Payable By Tenant: Nothing in this Lease shall be Construed to require Lessee to pay any inheritance, estate, succession, gift, franchise, income, or profit tax, that is or may be imposed upon Lessor, its successors and assigns. Lessee will pay as additional. rent, any tax that may be Imposed on rents by government. |
(3) | Evidence of Payment: Lessee shall furnish to Lessor, within thirty (30) days after the date upon which any Imposition is due, proof of payment satisfactory to Lessor. |
(4) | Tax Contests: Lessee shall have the right to contest the amount or validity of any Imposition by appropriate legal proceedings, but this shall not be deemed to relieve Lessee of its obligation to pay such Imposition when due, unless such proceedings shall operate to prevent the sale of the Property or any part thereof or the placing of any lien thereon, and Lessee shall have provided security for the payment of such Imposition, together with all interest and penalties in connection therewith, in form and amount reasonably satisfactory to Lessor. Lessee shall not be entitled to interest on any money deposited with Lessor pursuant to this subparagraph (d), but shall be entitled to all interest actually earned on monies deposited with others. |
(5) | Cooperation By Lessor: Lessor shall join any such proceedings, but only if necessary to prosecute such proceedings properly. Lessee shall indemnify Lessor against all costs or expenses, including attorneys fees, in connection with any such proceedings. |
D. | Condition of Building at Beginning of Lease: |
Lessor shall, prior to the commencement of the Lease term and at its sole cost and expense, make the following improvements to the Premises:
(1) | Replace the boiler; |
(2) | Install new front doors at the existing front lobby entrance at the south end of the building; |
(3) | Frame in a new front lobby and install doors thereto at the north end of the building; and |
(4) | install new back doors and construct a back lobby adjacent to the existing elevator. |
Rider 2
The cost of making the improvements listed in items 1 through 4 above shall not be included in the $65,000.00 tenant improvement allowance set forth in this Rider to Lease, but shall be in addition thereto.
E. | Additional Building Improvements To Be Made By Lessor: |
During the first two (2) years of the lease term, Lessor shall make improvements to the north front lobby entrance, which improvements shall consist of the installation of a new elevator and the construction of stairs from the north front lobby to the second and third floors of the building (collectively, the Lobby Improvements). The Lobby Improvements shall be made at the sole cost and expense of Lessor and in accordance with plans, specifications and a budget approved by Lessee. Lessee shall, beginning on the first day of the month following completion of the Lobby Improvements, reimburse Lessor for the cost of making the Lobby Improvements on the following terms. The actual cost of the Lobby Improvements (as substantiated by actual invoices) shall be amortized over the remaining portion of the initial ten-year term of this lease by adding to the amount otherwise due as minimum monthly rent pursuant to the Rent Schedule attached to this Lease an amount equal to the actual costs incurred plus interest at the rate of 12% per annum, divided by the number of months remaining in the initial ten-year term of this lease. Lessee shall have the option of paying in part or whole the cost of these improvements during the term of this lease.
F. | Responsibilities of Lessor and Lessee. |
Lessor shall only be responsible for maintaining the roof, foundation and exterior walls of. the Building, and for maintenance of the landscaped and parking lot areas adjacent to the Building. Lessee shall be responsible for all other maintenance, the payment of real estate taxes, building insurance and all utilities.
G. | Both the lessee and lessor agree that this lease is subject to approval by certain regulators for the lessee to begin business as Coastal Community Bank. In the event such approval is withheld, this lease would be null and void. |
Rider 3
Exhibit 10.10
LEASE AMENDMENT 1.0
THIS AMENDMENT (Amendment) is entered into as of August 15, 2006 between Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company, hereinafter collectively referred to as Lessor, and Coastal Community Bank hereinafter referred to as Lessee, and provides for the amendment of that certain lease dated October 21, 1996 (Lease) previously entered into by the parties hereto.
Recitals:
A. | The leased premises are located on Lots 7 and 8, Block 667, Plat of Everett, according to the plat recorded in volume 3 of Plats, page 32, in Snohomish County, Washington. Together with Lots A, B, C, and 18A, Block 667, tunnel addition to Everett, according to the plat thereof recorded in Volume 4 of Plats, page 34, in Snohomish County, Washington. |
B. | The Term of the Lease is ten (10) years and zero (0) months, commencing on January l, 1997 and terminating December 31, 2006, inclusive. |
C. | Lessee has provided Lessor with written notice exercising the first option to extend for a five (5) year period. Lessee has one (l) option remaining to extend the Lease by giving Lessor a ninety day written notice prior to expiration. |
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
Agreement:
1. | The Lease shall be extended five (5) years, commencing January l, 2007 and ending December 31, 2011 (Paragraph 3). |
2. | The base rent for the leased premises shall be increased to $41,583 per month (Paragraph 4). |
3. | Lessor will complete mechanical and electrical upgrades per the attached proposal from McKinstry and will authorize commencement of the work upon the signing of this Amendment. |
IN WITNESS WHEREOF, the parties have executed this Amendment 1.0 to Lease effective August 15, 2006.
Lessor: |
Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company.
By: | /s/ Arthur W. Skotdal | |||
Arthur W. Skotdal | ||||
By: | /s/ Marianne P. Skotdal by Arthur W. Skotdal Attorney in Fact | |||
Marianne P. Skotdal by Arthur W. Skotdal Attorney in Fact | ||||
By: | /s/ Edwin McRory by Arthur W. Skotdal Attorney in Fact | |||
Edwin McRory by Arthur W. Skotdal Attorney in Fact | ||||
By: | /s/ Irene McRory by Arthur W. Skotdal Attorney in Fact | |||
Irene McRory by Arthur W. Skotdal Attorney in Fact | ||||
By: | /s/ Thomas Goyette by Arthur W. Skotdal Attorney in Fact | |||
Thomas Goyette by Arthur W. Skotdal Attorney in Fact | ||||
By: | /s/ Louise Goyette by Arthur W. Skotdal Attorney in Fact | |||
Louise Goyette by Arthur W. Skotdal Attorney in Fact | ||||
By: | /s/ Criag G. Skotdal | |||
Skotdal Brothers, LLC | ||||
Craig G. Skotdal, Member | ||||
Lessee: Coastal Community Bank | ||||
By: | /s/ Lee A. Pintar Lee A. Pintar, Chairman & CEO |
2
Lessors Acknowledgement
STATE OF WASHINGTON | ) | |||||
) SS | ||||||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 12th day of September, 2006.
/s/ Connie L. Fisher (Signature) | ||||||
Connie L. Fisher (Printed Name) | ||||||
Notary Public in and for the State of Washington, residing in Everett. | ||||||
My commission expires 1-29-10 |
STATE OF WASHINGTON | ) | |||||
) SS | ||||||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Edwin McRory and Louise McRory and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 12th day of September, 2006.
/s/ Connie L. Fisher | ||||||
(Signature) | ||||||
Connie L. Fisher | ||||||
(Printed Name) | ||||||
Notary Public in and for the State of Washington, residing in Everett. | ||||||
My commission expires 1-29-10 |
3
Lessors Acknowledgement
STATE OF WASHINGTON |
) | |||||
) SS | ||||||
COUNTY OF SNOHOMISH |
) |
On this day personally appeared before me Thomas Goyette and Louise Goyette and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 12th day of September, 2006.
/s/ Connie L. Fisher | ||||||
(Signature) | ||||||
Connie L. Fisher | ||||||
(Printed Name) | ||||||
Notary Public in and for the State of Washington, residing in Everett. | ||||||
My commission expires 1-29-10 |
STATE OF WASHINGTON |
) | |||||
) SS | ||||||
COUNTY OF SNOHOMISH |
) |
On this day personally appeared before me Craig Skotdal, Member of Skotdal Brothers, LLC a Washington limited liability company, to me known to be the companys representative described in and who executed the within and foregoing instrument, and acknowledged that he signed the same as his free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 12th day of September, 2006.
/s/ Connie L. Fisher | ||||||
(Signature) | ||||||
Connie L. Fisher | ||||||
(Printed Name) | ||||||
Notary Public in and for the State of Washington, residing in Everett. | ||||||
My commission expires 1-29-10 |
4
Lessors Acknowledgement
STATE OF WASHINGTON |
) | |||||
) SS | ||||||
COUNTY OF SNOHOMISH |
) |
On this day of September 7, 2006, before me personally appeared Lee A. Pintar, to me known to be Chairman & CEO of Coastal Community Bank, the Corporation that executed the within and foregoing instrument and acknowledged the said instrument to be the free and voluntary act and deed of said Corporation, for the uses and purposes therein mentioned and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the Corporate Seal of said Corporation.
Given under my hand and official seal this 7th day of September, 2006.
/s/ Joan Hynek | ||||||
(Signature) | ||||||
Joan Hynek | ||||||
(Printed Name) | ||||||
Notary Public in and for the State of Washington, residing in Everett. | ||||||
My commission expires 3/24/10 |
5
Exhibit 10.11
LEASE AMENDMENT 2.0
THIS AMENDMENT (Amendment) is entered into as of March 31, 2008 between Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company, hereinafter collectively referred to as Lessor, and Coastal Community Bank hereinafter referred to as Lessee, and provides for the amendment of that certain lease dated October 21, 1996 (Lease) previously entered into by the parties hereto, plus Amendment 1.0 entered into on August 15, 2006.
Recitals:
A. | The leased premises are located on Lots 7 and 8, Block 667, Plat of Everett, according to the plat recorded in volume 3 of Plats, page 32, in Snohomish County, Washington. Together with Lots A, B, C, and 18A, Block 667, tunnel addition to Everett, according to the plat thereof recorded in Volume 4 of Plats, page 34, in Snohomish County, Washington. |
B. | The Term of the Lease is ten (10) years and zero (0) months, commencing on January 1, 1997 and terminating December 31, 2006, inclusive. |
C. | Lessee has provided Lessor with written notice exercising the first option to extend for a five (5) year period, and added time to the lease. Lessee has zero (-0-) options remaining to extend the Lease. |
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
Agreement:
1. | The Lease shall be extended ten (10) years, commencing April 1, 2008 and ending March 31, 2018 (Paragraph 3). |
2. | The base rent for the leased premises shall be decreased as follows: |
Extend the lease through 3-31-2018:
4-1-2008 through 3-31-2013 at $37,583 per month
4-1-2013 through 3-31-2018 at $39,583 per month
Based on a nine-month notice, the existing parking lot would be removed and the bank would then have the fifteen (15) spaces behind the Shops on Colby. When and if this takes place, your monthly rent of $37,583 would reduce to $34,583 per month for part of the first 5 years, or your monthly rent of $39,583 would reduce to $36,583 per month for part of the second 5 years. This $3,000 per month reduction would continue until we finish our new building on your existing
1
parking lot, as well as the adjoining property. Our new building would provide you with eighteen (18) customer parking spaces, which will have convenient access to your rear door. This $3,000 per month reduction will be for thirty-six (36) months, even if the new building is completed earlier.
Regarding the drive-thru area, it would be one of our goals to gain access to Wetmore Avenue. This would depend on the design of a new building, as well as City approval. We would try to provide this, but cannot guarantee this. In a worst case scenario, the Banks customers would exit the drive-thru via the alleyway in much the same way as vehicles now exit the garage at the Frontier Bank Building.
We would identify the parking behind the Shops on Colby and in the new buildings parking garage with signage labeled Coastal Bank Use Only.
We would work to keep the alley open at all times by signing the alley with No Parking and have our people help by overseeing the alley.
IN WITNESS WHEREOF, the parties have executed this Amendment 2.0 to Lease effective March 31, 2008.
Lessor:
Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company.
By: | /s/ Arthur W. Skotdal | |
Arthur W. Skotdal | ||
By: | /s/ Marianne P. Skotdal by Arthur W. Skotdal Attorney in Fact | |
Marianne P. Skotdal by Arthur W. SkotdalAttorney in Fact | ||
By: | /s/ Edwin McRory by Arthur W. Skotdal Attorney in Fact | |
Edwin McRory by Arthur W. SkotdalAttorney in Fact | ||
By: | /s/ Irene McRory by Arthur W. Skotdal Attorney in Fact | |
Irene McRory by Arthur W. SkotdalAttorney in Fact |
2
By: | /s/ Thomas Goyette by Arthur W. Skotdal Attorney in Fact | |
Thomas Goyette by Arthur W. SkotdalAttorney in Fact | ||
By: | /s/ Louise Goyette by Arthur W. Skotdal Attorney in Fact | |
Louise Goyette by Arthur W. SkotdalAttorney in Fact | ||
By: | /s/ Craig G. Skotdal | |
Skotdal Brothers, LLC Craig G. Skotdal, Member | ||
Lessee: Coastal Community Bank | ||
By: | /s/ Lee A. Pintar | |
Lee A. Pintar, Chairman & CEO |
3
Lessors Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 31st day of March, 2008.
/s/ Connie L. Fisher |
(Signature) |
Connie L Fisher |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Everett My commission expires 1-29-10 |
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Edwin McRory and Louise McRory and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 31st day of March, 2008.
/s/ Connie L. Fisher |
(Signature) |
Connie L Fisher |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Everett My commission expires 1-29-10 |
4
Lessors Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Thomas Goyette and Louise Goyette and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 31st day of March, 2008.
/s/ Connie L. Fisher |
(Signature) |
Connie L Fisher |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Everett My commission expires 1-29-10 |
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Craig Skotdal, Member of Skotdal Brothers, LLC a Washington limited liability company, to me known to be the companys representative described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as his free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 31st day of March, 2008.
/s/ Connie L. Fisher |
(Signature) |
Connie L Fisher |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Everett My commission expires 1-29-10 |
5
Lessees Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day of March 31, 2008, before me personally appeared Lee A. Pintar, to me known to be Chairman & CEO of Coastal Community Bank, the Corporation that executed the within and foregoing instrument and acknowledge the said instrument to be the free and voluntary act and deed of said Corporation, for the uses and purposes therein mentioned and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the Corporate Seal of said Corporation.
Given under my hand and official seal this 31st day of March, 2008.
/s/ Cynthia L. Heltne |
(Signature) |
Cynthia L. Heltne |
(Printed Name) |
Notary Public in and for the State of Washington, residing at [Illegible] My commission expires 6/14/08 |
6
Exhibit 10.12
LEASE AMENDMENT 3.0
THIS AMENDMENT (Amendment) is entered into as of June 29, 2009 between Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company, hereinafter collectively referred to as Lessor, and Coastal Community Bank hereinafter referred to as Lessee, and provides for the amendment of that certain Lease dated October 21, 1996 previously entered into by the parties hereto, as amended by Amendment 1.0 dated August 15, 2006 and Amendment 2.0 dated March 31, 2008, (collectively the Lease).
Recitals:
A. | The leased premises are located on Lots 7 and 8, Block 667, Plat of Everett, according to the plat recorded in volume 3 of Plats, page 32, in Snohomish County, Washington. Together with Lots A, B, C, and 18A, Block 667, tunnel addition to Everett, according to the plat thereof recorded in Volume 4 of Plats, page 34, in Snohomish County, Washington. |
B. | The Term of the Lease expires March 31, 2018. |
C. | Lessor and Lessee hereby express their mutual desire to further amend, by this writing, those terms, covenants and conditions contained herein. All terms and conditions of the Lease not expressly amended by this writing shall continue in full force and effect throughout the term. |
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
Agreement:
1. | Term: The Term in Article 3 of the Lease shall be extended six (6) years, commencing April 1, 2018 and ending March 31, 2024. |
2. | Rent: The minimum monthly rental in Article 4 of the Lease for this extended term shall be as follows: |
April 1, 2018 through March 31, 2024 Forty Five Thousand Five Hundred Twenty and 45/100 Dollars($45,520.45) per month.
3. | Parking and Drive-Thru from April 1, 2018 to March 31, 2024: During this extended period and based on a nine-month notice, the existing parking lot would be removed and the bank would then have the fifteen (15) spaces behind the Shops on Colby (see Exhibit A attached). When and if this takes place, your |
1
monthly rent of $45,520.45 would reduce to $42,520.45 per month. This $3,000 per month reduction would continue until we finish our new building on your existing parking lot, as well as the adjoining property. Our new building would provide you with eighteen (18) customer parking spaces, which will have convenient access to your rear door. This $3,000 per month reduction will be for thirty-six (36) months, even if the new building is completed earlier.
Regarding the drive-thru area, it would be one of our goals to gain access to Wetmore Avenue. This would depend on the design of a new building, as well as City approval. We would try to provide this, but cannot guarantee this. In a worst case scenario, the Banks customers would exit the drive-thru via the alleyway in much the same way as vehicles now exit the garage at the Frontier Bank Building.
We would identify the parking behind the Shops on Colby and in the new buildings parking garage with signage labeled Coastal Bank Use Only.
We would work to keep the alley open at all times by signing the alley with No Parking and have our people help by overseeing the alley.
IN WITNESS WHEREOF, the parties have executed this Amendment 3.0 to Lease effective June 29, 2009.
Lessor:
Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof; and Edwin McRory and Irene McRory and the marital community composed thereof; and Thomas Goyette and Louise Goyette and the marital community composed thereof; and Skotdal Brothers, LLC a Washington limited liability company.
By: | /s/ Arthur W. Skotdal | |
Arthur W. Skotdal | ||
By: | /s/ Marianne P. Skotdal by Arthur W. Skotdal Attorney in Fact | |
Marianne P. Skotdal by Arthur W. Skotdal Attorney in Fact | ||
By: | /s/ Edwin McRory by Arthur W. Skotdal Attorney in Fact | |
Edwin McRory by Arthur W. Skotdal Attorney in Fact | ||
By: | /s/ Irene McRory by Arthur W. Skotdal Attorney in Fact | |
Irene McRory by Arthur W. Skotdal Attorney in Fact |
2
By: | /s/ Thomas Goyette by Arthur W. Skotdal Attorney in Fact | |
Thomas Goyette by Arthur W. Skotdal Attorney in Fact | ||
By: | /s/ Louise Goyette by Arthur W. Skotdal Attorney in Fact | |
Louise Goyette by Arthur W. Skotdal Attorney in Fact | ||
By: | /s/ Craig G. Skotdal | |
Skotdal Brothers, LLC Craig G. Skotdal, Member | ||
Lessee: Coastal Community Bank | ||
By: | /s/ Lee A. Pintar | |
Lee A. Pintar, Chairman & CEO |
3
Lessors Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Arthur W. Skotdal and Marianne P. Skotdal and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 29th day of June, 2009.
/s/ Candy Thoreson |
(Signature) |
Candy Thoreson |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Arlington, WA My commission expires 5-9-12 |
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Edwin McRory and Louise McRory and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 29th day of June, 2009.
/s/ Candy Thoreson |
(Signature) |
Candy Thoreson |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Arlington, WA My commission expires 5-9-12 |
4
Lessors Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Thomas Goyette and Louise Goyette and the marital community composed thereof, to me known to be the individuals described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as their free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 29th day of June, 2009.
/s/ Candy Thoreson |
(Signature) |
Candy Thoreson |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Arlington, WA My commission expires 5-9-12 |
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day personally appeared before me Craig Skotdal, Member of Skotdal Brothers, LLC a Washington limited liability company, to me known to be the companys representative described in and who executed the within and foregoing instrument, and acknowledged that they signed the same as his free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 29th day of June, 2009.
/s/ Candy Thoreson |
(Signature) |
Candy Thoreson |
(Printed Name) |
Notary Public in and for the State of Washington, residing in Arlington, WA My commission expires 5-9-12 |
5
Lessees Acknowledgement
STATE OF WASHINGTON | ) | |||
) | SS | |||
COUNTY OF SNOHOMISH | ) |
On this day of June 29, 2009, before me personally appeared Lee A. Pintar, to me known to be Chairman & CEO of Coastal Community Bank, the Corporation that executed the within and foregoing instrument and acknowledge the said instrument to be the free and voluntary act and deed of said Corporation, for the uses and purposes therein mentioned and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the Corporate Seal of said Corporation.
Given under my hand and official seal this 29th day of June, 2009.
/s/ Cynthia L. Heltne |
(Signature) |
Cynthia Heltne |
(Printed Name) |
Notary Public in and for the State of Washington, residing at [Illegible] My commission expires 6/14/2012 |
6
Exhibit 10.13
EXECUTION COPY
MARCH 30, 2011
INVESTMENT AGREEMENT
dated as of March 30, 2011
between
COASTAL FINANCIAL CORPORATION
and
STEVEN D. HOVDE,
an Individual and Resident of the State of Illinois
TABLE OF CONTENTS
PAGE | ||||
ARTICLE I Purchase; Closing |
2 | |||
1.1 Purchase |
2 | |||
1.2 Reserved |
2 | |||
1.3 Closing |
2 | |||
1.4 Treatment of Stock Plans |
4 | |||
1.5 Termination |
4 | |||
ARTICLE II Representations and Warranties |
5 | |||
2.1 Disclosure |
5 | |||
2.2 Representations and Warranties of the Company |
6 | |||
2.3 Representations and Warranties of the Investor |
23 | |||
ARTICLE III Covenants |
26 | |||
3.1 Filings; Other Actions |
26 | |||
3.2 Expenses |
27 | |||
3.3 Access, Information and Confidentiality |
27 | |||
3.4 Conduct of the Business |
28 | |||
ARTICLE IV Additional Agreements |
29 | |||
4.1 Agreement |
29 | |||
4.2 No Rights Agreement |
30 | |||
4.3 Gross-Up Rights |
31 | |||
4.4 Governance Matters |
32 | |||
4.5 Legend |
34 | |||
4.6 Adjustment to Number of Shares Issued |
34 | |||
4.7 Indemnity |
35 | |||
4.8 Reserved |
37 | |||
4.9 Reserved |
37 | |||
4.10 Reserved |
37 | |||
4.11 Voting and Equity |
37 | |||
4.12 Additional Regulatory Matters |
37 | |||
4.13 Most Favored Nation |
38 | |||
4.14 No Change in Control |
38 | |||
4.15 Reserved |
38 |
i
4.16 Reserved |
38 | |||
4.17 Reserved |
38 | |||
4.18 Certain Other Transactions |
38 | |||
4.19 Option |
39 | |||
4.20 Non-Voting Shares |
39 | |||
4.21 Cooperation |
40 | |||
ARTICLE V Termination |
40 | |||
5.1 Termination |
40 | |||
5.2 Effects of Termination |
41 | |||
ARTICLE VI Miscellaneous |
41 | |||
6.1 Survival |
41 | |||
6.2 Amendment |
41 | |||
6.3 Waivers |
41 | |||
6.4 Counterparts and Facsimile |
41 | |||
6.5 Governing Law |
41 | |||
6.6 Waiver of Jury Trial |
42 | |||
6.7 Notices |
42 | |||
6.8 Entire Agreement, Etc |
43 | |||
6.9 Other Definitions |
43 | |||
6.10 Captions |
45 | |||
6.11 Severability |
45 | |||
6.12 No Third Party Beneficiaries |
46 | |||
6.13 Time of Essence |
46 | |||
6.14 Certain Adjustments |
46 | |||
6.15 Public Announcements |
46 | |||
6.16 Specific Performance |
46 | |||
6.17 No Recourse |
46 |
Exhibit A to Investment Agreement |
Form of Opinion |
Exhibit B to Investment Agreement |
Expense Agreement |
ii
INDEX OF DEFINED TERMS
Location of | ||||
Definition | ||||
Affiliate |
6.9(2) | |||
Agency |
2.2(x)(2)(A) | |||
Agreement |
Preamble | |||
Articles of Incorporation |
2.2(a) | |||
Beneficially Own/Beneficial Owner/Beneficial Ownership |
6.9(9) | |||
Benefit Plans |
2.2(p)(1) | |||
BHC Act |
1.3(c)(1)(iii) | |||
Board Representative |
4.4(e) | |||
Business Combination |
6.9(11)(C) | |||
Business Day |
6.9(7) | |||
Capitalization Date |
2.2(c) | |||
Change in Control |
6.9(11) | |||
CIBC Act |
1.3(c)(1)(i) | |||
Closing |
1.3(a) | |||
Closing Date |
1.3(a) | |||
Common Stock/Common Shares |
Recitals | |||
Company |
Preamble | |||
Company Financial Statements |
2.2(f) | |||
Company Indemnified Parties |
4.7(b) | |||
Company Preferred Stock |
2.2(c) | |||
Company Option |
2.2(c) | |||
Company Reports |
2.2(g)(1) | |||
Company Restricted Stock |
2.2(c) | |||
Company Significant Agreement |
2.2(k) | |||
Control/Controlling/Controlled by/under Common Control with |
6.9(3) | |||
De Minimis Claim |
4.7(d) | |||
Disclosed Agreements |
2.2(r)(2) | |||
Disclosure Schedule |
2.1(a) | |||
Employees |
2.2(p)(1) | |||
Environmental Law |
2.2(t) | |||
ERISA |
2.2(p)(1) | |||
ERISA Affiliate |
2.2(p)(3) | |||
ERISA Plans |
2.2(p)(2) | |||
Exchange Act |
4.1(2)(b) | |||
FDIC |
2.2(b) | |||
Federal Reserve |
1.3(c)(i) | |||
GAAP |
2.1(b) | |||
Governmental Entity |
1.3(c)(1)(i) | |||
Hazardous Substance 2.2(t) herein/hereof/hereunder |
6.9(6) | |||
including/includes/included/include |
6.9(5) | |||
Incumbent Directors |
6.9(11)(A) | |||
Indemnified Party |
4.7(c) |
iii
Indemnifying Party |
4.7(c) | |||
Information |
3.3(b) | |||
Interim Financials |
2.2(f) | |||
Internal Revenue Code |
2.2(c) | |||
Insurer |
2.2(x)(2)(C) | |||
Intellectual Property |
2.2(v) | |||
Investment |
Recitals | |||
Investor |
Preamble | |||
Investor Indemnified Parties |
4.7(a) | |||
IRS |
2.2(i)(2)(i) | |||
IT Assets |
2.2(v) | |||
Liens |
2.2(b) | |||
Loan Investor |
2.2(x)(2)(B) | |||
Losses |
4.7(a) | |||
Material Adverse Effect |
2.1(b) | |||
New Security |
4.3(a) | |||
Nominating Committee |
4.4(a) | |||
Non-Qualifying Transaction |
6.9(11)(C) | |||
or |
6.9(4) | |||
Option |
4.19 | |||
Parent Corporation |
6.9(11)(C) | |||
Pension Plan |
2.2(p)(2) | |||
Previously Disclosed |
2.1(c) | |||
Purchase Price |
1.3(b) | |||
Qualifying Ownership Interest |
4.4(a) | |||
Registered |
2.2(v) | |||
Regulatory Agreement |
2.2(y) | |||
Required Approvals |
2.2(e) | |||
Scheduled Intellectual Property |
2.2(v)(1) | |||
Stock Plans |
2.2(c) | |||
Subsidiary |
6.9(1) | |||
Surviving Corporation |
6.9(11)(C) | |||
Tax/Taxes |
2.2(i) | |||
Tax Return/Tax Returns 2.2(i) to the knowledge of the Company/Companys knowledge |
6.9(10) | |||
Transaction Deadline |
5.1(b) | |||
Transaction Expenses |
3.2 | |||
Unlawful Gains |
2.2(n)(5) | |||
Voting Debt |
2.2(c) | |||
Voting Securities | 4.1(a)(1) | |||
Written Agreement | 2.2(n)(4) |
iv
INVESTMENT AGREEMENT, dated as of March 30, 2011 (this Agreement), between Coastal Financial Corporation,
a Washington corporation (the Company), Steven D. Hovde, an individual and resident of the
state of (herein the Investor).
RECITALS:
A. The Investment. The Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), up to 8,000,000 shares of its common stock, no par value (the Common Stock), at a purchase price of $1.00 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 1,750,000 shares of Common Stock for a purchase price of $1.00 per share.
B. Placement Agent. The Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering. (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and
agreements set forth herein, the parties agree as follows:
ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor 1,750,000 shares of Company Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation , or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $1,750,000 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 1,750,000 shares of Company Common Stock to be registered to Steven M. Hovde as he shall direct in writing.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Authority shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
2
(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall have received gross proceeds from investors participating in the Offering, including the Investor and other investors including Montlake Capital II, L.P., Montlake Capital II-B, L.P. and CJA Private Equity Financial Restructuring Master Fund I LP, in an amount not less than $5,000,000, on the same terms and conditions as set forth herein, provided that the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date hereof and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1 (b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
3
(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of Transaction, including without limitation the Offering and the Purchase contemplated hereby; and
(xi) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date, except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date hereof.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3 (c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this agreement is irrevocable.
4
ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
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(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision.
2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
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(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on March 30, 2011 (the Capitalization Date), there were 13,206,868 shares of Common Stock outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including the any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly
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or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Common Stock, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Common Stock by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement. The Common Stock to be issued has been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Common Stock, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Common Stock, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a
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default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2010, and the unaudited consolidated balance sheets of the Company and the Bank as of February 28, 2011 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 28, 2011, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2008, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports
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complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). The Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are
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delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) The Company does not have any 5-Percent Shareholders (as defined by Section 382(k)(7) of the Code). (14) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2009. (15) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
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For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2010, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of the date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
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(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the Common Shares (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
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(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Common Stock or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Common Stock to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2010 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
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(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2007 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending
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or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
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(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
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(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty, securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
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(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Common Stock (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor any of the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented
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reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
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(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2008, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2010 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
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(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
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2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
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(c) Purchase for Investment. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
(f) Ownership. As of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of shares of Common Stock, securities convertible into or exchangeable for Common Stock or any other equity or equity linked security of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Company Common Stock, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Common Stock to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents and no independent counsel has been retained to represent Investor or any other Investor.
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(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Common Stock, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Common Stock involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Common Stock will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
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(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Common Stock or made any finding or determination as to the fairness of this investment and (iii) the Common Stock is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Common Stock as the Investor has deemed necessary to make an investment decision.
(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions
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contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the shares of Common Stock owned by the Investor represent less than 4.9% of the outstanding Common Shares, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
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(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director,
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officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, without the prior approval of the Board of Directors, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; (ii) owning in the aggregate 25% or more of the total equity of the Company, provided, however, if the aggregate Beneficial Ownership by the Investor and its Affiliates constitutes less than 15% of any class of voting securities of the Company, the Investor may make any acquisition that would result in the Investor and its Affiliates owning, in the aggregate, less than 33% of the total equity of the Company; or (iii) having Beneficial Ownership or control of 25% or more in aggregate of the outstanding shares of a class of voting securities (in each case in (ii) and (iii), within the meaning of the BHC Act and Regulation Y). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such voting securities or Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying voting securities or Common Stock and (y) any security convertible into, or exercisable for, the Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are then entitled to vote generally in the election of directors.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
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(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
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4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
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(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of, such New Securities.
(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor. Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of Common Stock outstanding (the Qualifying
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Ownership Interest). Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees. At all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve as Chairman of the Board or as Chairman of any Board committee, so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
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(e) For purposes of this Agreement, Board Representative means Steven D. Hovde or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF MARCH 30, 2011, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Adjustment to Number of Shares Issued. In the event the Company shall, at any time during the two year period following the Closing Date and for so long as the Investor has a Qualifying Ownership Interest, issue, sell or exchange any New Security other than in an Excluded New Issuance, for a consideration per share less than $1.00 per share (the consideration for any such issuance the Dilutive Price and any such issuance, sale or exchange a Dilutive Transaction), then and thereafter successively upon the consummation of any Dilutive Transaction, the Investor shall issue and deliver to the Investor certificates representing such number of additional shares of Company Common Stock in an amount such that, when added to the number of shares
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delivered to the Investor at Closing (or previously pursuant to this Section 4.6), the Investor has received an aggregate number of shares equal to the amount Investor would have received if Investor had purchased shares at a per share purchase price equal to the Dilutive Price for an aggregate purchase price equal to the Purchase Price. The Investor may elect to receive such securities in nonvoting form. Such shares shall be registered in the name of the Investor.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any
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Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof.
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(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to exercise any voting rights of any Securities in excess of 9.9% of the total outstanding Voting Securities of the Company unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company (or, if the Investor and its Affiliates in the aggregate own less than 15% of any class of voting securities of the Company, 33% of the total outstanding equity of the Company) unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of Common Stock, of securities or rights, options, or warrants to purchase Common Stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for Common Stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
37
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of Common Stock or securities convertible or exchangeable into or exercisable for shares of Common Stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of Common Stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing
38
Date for the payment of any non-stock dividend or distribution on the Common Stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Common Stock to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Common Stock to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Common Stock by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Common Stock to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Option. The Company hereby grants to the Investor an Option, exercisable on one or more occasions, to purchase for $1.00 per share up to 3,250,000 additional shares of Common Stock or other similar non-voting shares of the Company (Option); provided the exercise of said Option shall not cause the Investor to be deemed to control more than 9.9% of any class of voting securities of the Company within the meaning of 12 C.F.R. Part 225 without the receipt of any necessary regulatory approvals. The Option shall expire on the first anniversary of the Agreement and shall be of no further force or effect. Any such Common Stock shall be voting or non-voting at the direction of the Investor.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock, with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Common Stock, as are required by the Company and the Investor in order to comply with
39
the terms of this Agreement and the implicit rights of the Investor under this Agreement to acquire additional shares or to convert or exchange any portion of the Common Stock held by it to or for non-voting shares, by the issuance of non-voting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares. Such non-voting shares shall be subject to such transfer restrictions as are necessary to cause such non-voting shares not to be treated as voting securities for purposes of the BHCA and 12 C.F.R. Part 225.
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, 4.6, 4.19, and 4.20, including, but not limited to, securing any required approvals or consents or issuing non-voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2011 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
40
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
41
6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) | If to the Investor: | |||||
Steven D. Hovde | ||||||
Hovde Securities, LLC | ||||||
8370 Wilshire Boulevard, Suite 340 | ||||||
Beverly Hills, CA 90211 | ||||||
with a copy to (which copy alone shall not constitute notice): | ||||||
|
||||||
|
||||||
Attn: | ||||||
|
||||||
Facsimile: | ||||||
Email: | ||||||
(2) | If to the Company: | |||||
Coastal Financial Corporation | ||||||
2817 Colby Avenue | ||||||
Everett, WA 98201 | ||||||
Attn: Eric Sprink | ||||||
Facsimile: (425) 338-0504 | ||||||
Email: esprink@coastalbank.com |
42
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC 700 Colonial Road, Suite 200 Memphis, TN 38117 Attn: Jeffrey C. Gerrish Facsimile: (901) 684-2339 Email: jgerrish@gerrish.com |
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each of any confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
43
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any
44
employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
45
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Common Stock shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
* * *
46
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first herein above written.
COASTAL FINANCIAL CORPORATION
By: |
/s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer |
47
STEVEN D. HOVDE
By: |
/s/ Steven Hovde | |
Name: Steven D. Hovde | ||
Tax ID: |
[Investor Signature Page to Investment Agreement]
48
Exhibit 10.14
EXECUTION COPY
MARCH 30, 2011
INVESTMENT AGREEMENT
dated as of March 30, 2011
between
COASTAL FINANCIAL CORPORATION
and
MONTLAKE CAPITAL II, L.P.
MONTLAKE CAPITAL IIB, L.P.
a Delaware State Limited Partnership
TABLE OF CONTENTS
PAGE | ||||
Recitals |
1 | |||
Article I Purchase; Closing |
2 | |||
1.1 Purchase |
2 | |||
1.2 Reserved |
2 | |||
1.3 Closing |
2 | |||
1.4 Treatment of Stock Plans |
4 | |||
1.5 Termination |
4 | |||
Article II Representations and Warranties |
5 | |||
2.1 Disclosure |
5 | |||
2.2 Representations and Warranties of the Company |
6 | |||
2.3 Representations and Warranties of the Investor |
22 | |||
Article III Covenants |
26 | |||
3.1 Filings; Other Actions |
26 | |||
3.2 Expenses |
27 | |||
3.3 Access, Information and Confidentiality |
27 | |||
3.4 Conduct of the Business |
28 | |||
Article IV Additional Agreements |
29 | |||
4.1 Agreement |
29 | |||
4.2 No Rights Agreement |
30 | |||
4.3 Gross-Up Rights |
30 | |||
4.4 Governance Matters |
32 | |||
4.5 Legend |
34 | |||
4.6 Adjustment to Number of Shares Issued |
34 | |||
4.7 Indemnity |
34 | |||
4.8 Reserved |
36 | |||
4.9 Reserved |
36 | |||
4.10 Reserved |
36 | |||
4.11 Voting and Equity |
37 | |||
4.12 Additional Regulatory Matters |
37 | |||
4.13 Most Favored Nation |
38 | |||
4.14 No Change in Control |
38 | |||
4.15 Reserved |
38 | |||
4.16 Reserved |
38 | |||
4.17 Reserved |
38 |
i
PAGE | ||||
4.18 Certain Other Transactions |
38 | |||
4.19 Option |
39 | |||
4.20 Non-Voting Shares |
39 | |||
4.21 Cooperation |
40 | |||
Article V Termination |
40 | |||
5.1 Termination |
40 | |||
5.2 Effects of Termination |
40 | |||
Article VI Miscellaneous |
41 | |||
6.1 Survival |
41 | |||
6.2 Amendment |
41 | |||
6.3 Waivers |
41 | |||
6.4 Counterparts and Facsimile |
41 | |||
6.5 Governing Law |
41 | |||
6.6 Waiver of Jury Trial |
41 | |||
6.7 Notices |
42 | |||
6.8 Entire Agreement, Etc. |
43 | |||
6.9 Other Definitions |
43 | |||
6.10 Captions |
45 | |||
6.11 Severability |
45 | |||
6.12 No Third Party Beneficiaries |
46 | |||
6.13 Time of Essence |
46 | |||
6.14 Certain Adjustments |
46 | |||
6.15 Public Announcements |
46 | |||
6.16 Specific Performance |
46 | |||
6.17 No Recourse |
46 |
Exhibit A to Investment Agreement
From of Opinion
Exhibit B to Investment Agreement
Expense Agreement
ii
INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate | 6.9(2) | |
Agency | 2.2(x)(2)(A) | |
Agreement | Preamble | |
Articles of Incorporation | 2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership | 6.9(9) | |
Benefit Plans | 2.2(p)(1) | |
BHC Act | 1.3(c)(1)(iii) | |
Board Representative | 4.4(e) | |
Business Combination | 6.9(11)(C) | |
Business Day | 6.9(7) | |
Capitalization Date | 2.2(c) | |
Change in Control | 6.9(11) | |
CIBC Act | 1.3(c)(1)(i) | |
Closing | 1.3(a) | |
Closing Date | 1.3(a) | |
Common Stock/Common Shares | Recitals | |
Company | Preamble | |
Company Financial Statements | 2.2(f) | |
Company Indemnified Parties | 4.7(b) | |
Company Preferred Stock | 2.2(c) | |
Company Option | 2.2(c) | |
Company Reports | 2.2(g)(1) | |
Company Restricted Stock | 2.2(c) | |
Company Significant Agreement | 2.2(k) | |
Control/Controlling/Controlled by/under Common Control with | 6.9(3) | |
De Minimis Claim | 4.7(d) | |
Disclosed Agreements | 2.2(r)(2) | |
Disclosure Schedule | 2.1(a) | |
Employees | 2.2(p)(1) | |
Environmental Law | 2.2(t) | |
ERISA | 2.2(p)(1) | |
ERISA Affiliate | 2.2(p)(3) | |
ERISA Plans | 2.2(p)(2) | |
Exchange Act | 4.1(2)(b) | |
FDIC | 2.2(b) | |
Federal Reserve | 1.3(c)(i) | |
GAAP | 2.1(b) | |
Governmental Entity | 1.3(c)(1)(i) | |
Hazardous Substance | 2.2(t) | |
herein/hereof/hereunder | 6.9(6) |
iii
Location of Definition | ||
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) | |
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3(b) | |
Interim Financials | 2.2(f) | |
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1(b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Option | 4.19 | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Previously Disclosed | 2.1(c) | |
Purchase Price | 1.3(b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(11)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1(b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
iv
INVESTMENT AGREEMENT, dated as of March 30, 2011 (this Agreement), between Coastal Financial Corporation,
a Washington corporation (the Company), Montlake Capital II, L.P. and Montlake Capital II-B, L.P., each a
limited partnership (each herein individually and collectively the Investor).
RECITALS:
A. The Investment. The Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), up to 8,000,000 shares of its common stock, no par value (the Common Stock), at a purchase price of $1.00 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 1,750,000 shares of Common Stock for a purchase price of $1.00 per share.
B. Placement Agent. The Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering. (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and
agreements set forth herein, the parties agree as follows:
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ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor 1,750,000 shares of Company Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation , or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $1,750,000 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 1,750,000 shares of Company Common Stock to be registered to Montlake Capital II, L.P. and Montlake Capital II-B, L.P. as they shall direct in writing.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Authority shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
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(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall have received gross proceeds from investors participating in the Offering, including the Investor and other investors including Steven D. Hovde and CJA Private Equity Financial Restructuring Master Fund I LP, in an amount not less than $5,000,000, on the same terms and conditions as set forth herein, provided that the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date hereof and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1 (b)) shall have occurred and be continuing;
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(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of Transaction, including without limitation the Offering and the Purchase contemplated hereby; and
(ix) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date, except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date hereof.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3 (c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this agreement is irrevocable.
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ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision.
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2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
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(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on March 30, 2011 (the Capitalization Date), there were 13,206,868 shares of Common Stock outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including the any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the
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Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Common Stock, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Common Stock by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement. The Common Stock to be issued has been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Common Stock, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Common Stock, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of
8
incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2010, and the unaudited consolidated balance sheets of the Company and the Bank as of February 28, 2011 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 28, 2011, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2008, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
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(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). The Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or
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may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) The Company does not have any 5-Percent Shareholders (as defined by Section 382(k)(7) of the Code). (14) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2009. (15) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth,
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and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2010, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of the date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
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(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the Common Shares (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Common Stock or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might
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subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Common Stock to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2010 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
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(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2007 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
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(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
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(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty,
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securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Common Stock (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
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(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor any of the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and
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confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment,
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origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2008, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2010 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
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(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
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(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
(c) Purchase for Investment. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
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(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
(f) Ownership. As of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of shares of Common Stock, securities convertible into or exchangeable for Common Stock or any other equity or equity linked security of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Company Common Stock, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Common Stock to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents and no independent counsel has been retained to represent Investor or any other Investor.
(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Common Stock, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all
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publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Common Stock involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Common Stock will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Common Stock or made any finding or determination as to the fairness of this investment and (iii) the Common Stock is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Common Stock as the Investor has deemed necessary to make an investment decision.
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(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC
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pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the shares of Common Stock owned by the Investor represent less than 4.9% of the outstanding Common Shares, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can
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be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
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ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, without the prior approval of the Board of Directors, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; (ii) owning in the aggregate 25% or more of the total equity of the Company, provided, however, if the aggregate Beneficial Ownership by the Investor and its Affiliates constitutes less than 15% of any class of voting securities of the Company, the Investor may make any acquisition that would result in the Investor and its Affiliates owning, in the aggregate, less than 33% of the total equity of the Company; (iii) or having Beneficial Ownership or control of 25% or more in aggregate of the outstanding shares of a class of voting securities (in each case in (ii) and (iii), within the meaning of the BHC Act and Regulation Y). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such voting securities or Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying voting securities or Common Stock and (y) any security convertible into, or exercisable for, the Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are then entitled to vote generally in the election of directors.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or
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any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock
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pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of, such New Securities.
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(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor. Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of Common Stock outstanding (the Qualifying Ownership Interest). Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from
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the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees. At all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve as Chairman of the Board or as Chairman of any Board committee, so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Andrew R. Dale or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
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4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF MARCH 30, 2011, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Adjustment to Number of Shares Issued. In the event the Company shall, at any time during the two year period following the Closing Date and for so long as the Investor has a Qualifying Ownership Interest, issue, sell or exchange any New Security other than in an Excluded New Issuance, for a consideration per share less than $1.00 per share (the consideration for any such issuance the Dilutive Price and any such issuance, sale or exchange a Dilutive Transaction), then and thereafter successively upon the consummation of any Dilutive Transaction, the Investor shall issue and deliver to the Investor certificates representing such number of additional shares of Company Common Stock in an amount such that, when added to the number of shares delivered to the Investor at Closing (or previously pursuant to this Section 4.6), the Investor has received an aggregate number of shares equal to the amount Investor would have received if Investor had purchased shares at a per share purchase price equal to the Dilutive Price for an aggregate purchase price equal to the Purchase Price. The Investor may elect to receive such securities in nonvoting form. Such shares shall be registered in the name of the Investor.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the
34
fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any
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pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof.
(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
4.10 Reserved.
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4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to exercise any voting rights of any Securities in excess of 9.9% of the total outstanding Voting Securities of the Company unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company (or, if the Investor and its Affiliates in the aggregate own less than 15% of any class of voting securities of the Company, 33% of the total outstanding equity of the Company) unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of Common Stock, of securities or rights, options, or warrants to purchase Common Stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for Common Stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
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4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of Common Stock or securities convertible or exchangeable into or exercisable for shares of Common Stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of Common Stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing Date for the payment of any non-stock dividend or distribution on the Common Stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Common Stock to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Common Stock to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
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(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Common Stock by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Common Stock to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Option. The Company hereby grants to the Investor an Option, exercisable on one or more occasions, to purchase for $1.00 per share up to 3,250,000 additional shares of Common Stock or other similar non-voting shares of the Company (Option); provided the exercise of said Option shall not cause the Investor to be deemed to control more than 9.9% of any class of voting securities of the Company within the meaning of 12 C.F.R. Part 225 without the receipt of any necessary regulatory approvals. The Option shall expire on the first anniversary of the Agreement and shall be of no further force or effect. Any such Common Stock shall be voting or non-voting at the direction of the Investor.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock, with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to acquire additional shares or to convert or exchange any portion of the Common Stock held by it to or for non-voting shares, by the issuance of non-voting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares. Such non-voting shares shall be subject to such transfer restrictions as are necessary to cause such non-voting shares not to be treated as voting securities for purposes of the BHCA and 12 C.F.R. Part 225.
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4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, 4.6, 4.19, and 4.20, including, but not limited to, securing any required approvals or consents or issuing non-voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2011 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
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ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(i) | If to the Investor: |
Montlake Capital II, L.P.
1200 Fifth Avenue, Suite 1800
Seattle, WA 98101
Attn:
Facsimile:
Email:
Montlake Capital II-B, L.P.
1200 Fifth Avenue, Suite 1800
Seattle, WA 98101
Attn:
Facsimile:
Email:
with a copy to (which copy alone shall not constitute notice):
Foster Pepper, LLC
Attn: Robert Diercks, Esq.
1111 Third Avenue, Suite 3400
Seattle, WA 98101-3299
Facsimile: (206) 749-1926
Email: dierr@foster.com
(ii) | If to the Company: |
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
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with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each of any confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
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(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any
44
employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
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6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Common Stock shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
* * *
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first herein above written.
COASTAL FINANCIAL CORPORATION
By: | /s/ Eric Sprink | |||
Name: | Eric Sprink | |||
Title: | President and Chief Executive Officer |
[Company Signature Page to Investment Agreement]
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MONTLAKE CAPITAL II, L.P. | MONTLAKE CAPITAL II-B, L.P. | |||||||
By: | /s/ Andrew R. Dale |
By: | /s/ Andrew R. Dale | |||||
Name: | Andrew R. Dale | Name: | Andrew R. Dale | |||||
Title: | Managing Director | Title: | Managing Director | |||||
Tax ID: | [Intentionally Omitted] | Tax ID: | [Intentionally Omitted] |
[Investor Signature Page to Investment Agreement]
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Exhibit 10.15
EXECUTION COPY
MARCH 20, 2012
INVESTMENT AGREEMENT
dated as of March 20, 2012
between
COASTAL FINANCIAL CORPORATION
and
MONTLAKE CAPITAL II, L.P.
MONTLAKE CAPITAL IIB, L.P.
a Delaware State Limited Partnership
TABLE OF CONTENTS
PAGE | ||||
Recitals |
1 | |||
Article I Purchase; Closing |
2 | |||
1.1 Purchase |
2 | |||
1.2 Reserved |
2 | |||
1.3 Closing |
2 | |||
1.4 Treatment of Stock Plans |
4 | |||
1.5 Termination |
4 | |||
Article II Representations and Warranties |
4 | |||
2.1 Disclosure |
4 | |||
2.2 Representations and Warranties of the Company |
5 | |||
2.3 Representations and Warranties of the Investor |
23 | |||
Article III Covenants |
26 | |||
3.1 Filings; Other Actions |
26 | |||
3.2 Expenses |
27 | |||
3.3 Access, Information and Confidentiality |
28 | |||
3.4 Conduct of the Business |
28 | |||
Article IV Additional Agreements |
29 | |||
4.1 Agreement |
29 | |||
4.2 No Rights Agreement |
31 | |||
4.3 Gross-Up Rights |
31 | |||
4.4 Governance Matters |
33 | |||
4.5 Legend |
34 | |||
4.6 Reserved |
35 | |||
4.7 Indemnity |
35 | |||
4.8 Reserved |
37 | |||
4.9 Reserved |
37 | |||
4.10 Reserved |
37 | |||
4.11 Voting and Equity |
37 | |||
4.12 Additional Regulatory Matters |
37 | |||
4.13 Most Favored Nation |
38 | |||
4.14 No Change in Control |
38 | |||
4.15 Reserved |
38 | |||
4.16 Reserved |
38 | |||
4.17 Reserved |
38 |
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PAGE | ||||
4.18 Certain Other Transactions |
39 | |||
4.19 Reserved |
40 | |||
4.20 Non-Voting Shares |
40 | |||
4.21 Cooperation |
40 | |||
Article V Termination |
40 | |||
5.1 Termination |
40 | |||
5.2 Effects of Termination |
41 | |||
Article VI Miscellaneous |
41 | |||
6.1 Survival |
41 | |||
6.2 Amendment |
41 | |||
6.3 Waivers |
42 | |||
6.4 Counterparts and Facsimile |
42 | |||
6.5 Governing Law |
42 | |||
6.6 Waiver of Jury Trial |
42 | |||
6.7 Notices |
42 | |||
6.8 Entire Agreement, Etc |
43 | |||
6.9 Other Definitions |
44 | |||
6.10 Captions |
46 | |||
6.11 Severability |
46 | |||
6.12 No Third Party Beneficiaries |
46 | |||
6.13 Time of Essence |
46 | |||
6.14 Certain Adjustments |
46 | |||
6.15 Public Announcements |
46 | |||
6.16 Specific Performance |
47 | |||
6.17 No Recourse |
47 |
Exhibit A to Investment Agreement
Form of Opinion
Exhibit B to Investment Agreement
Expense Agreement
ii
INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate | 6.9(2) | |
Agency | 2.2(x)(2)(A) | |
Agreement | Preamble | |
Articles of Incorporation | 2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership | 6.9(9) | |
Benefit Plans | 2.2(p)(1) | |
BHC Act | 1.3(c)(1)(iii) | |
Board Representative | 4.4(e) | |
Business Combination | 6.9(11)(C) | |
Business Day | 6.9(7) | |
Capitalization Date | 2.2(c) | |
Change in Control | 6.9(11) | |
CIBC Act | 1.3(c)(1)(i) | |
Closing | 1.3(a) | |
Closing Date | 1.3(a) | |
Common Stock/Common Shares | Recitals | |
Company | Preamble | |
Company Financial Statements | 2.2(f) | |
Company Indemnified Parties | 4.7(b) | |
Company Preferred Stock | 2.2(c) | |
Company Option | 2.2(c) | |
Company Reports | 2.2(g)(1) | |
Company Restricted Stock | 2.2(c) | |
Company Significant Agreement | 2.2(k) | |
Control/Controlling/Controlled by/under Common Control with | 6.9(3) | |
De Minimis Claim | 4.7(d) | |
Disclosed Agreements | 2.2(r)(2) | |
Disclosure Schedule | 2.1(a) | |
Employees | 2.2(p)(1) | |
Environmental Law | 2.2(t) | |
ERISA | 2.2(p)(1) | |
ERISA Affiliate | 2.2(p)(3) | |
ERISA Plans | 2.2(p)(2) | |
Exchange Act | 4.1(2)(b) | |
FDIC | 2.2(b) | |
Federal Reserve | 1.3(c)(i) | |
GAAP | 2.1(b) | |
Governmental Entity | 1.3(c)(1)(i) | |
Hazardous Substance | 2.2(t) |
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Location of Definition | ||
herein/hereof/hereunder | 6.9(6) | |
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) | |
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3(b) | |
Interim Financials | 2.2(f) | |
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1(b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Option | 4.19 | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Previously Disclosed | 2.1(c) | |
Purchase Price | 1.3(b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(11)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1(b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
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INVESTMENT AGREEMENT, dated as of March 20, 2012 (this Agreement), between
Coastal Financial Corporation, a Washington corporation (the Company), Montlake Capital II,
L.P. and Montlake Capital II-B, L.P., each a limited partnership (each herein individually and
collectively the Investor).
RECITALS:
A. The Investment. The Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), up to 9,411,765 shares of its common stock, no par value (the Common Stock), at a purchase price of $0.85 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 2,176,471 shares of Common Stock for a purchase price of $0.85 per share.
B. Placement Agent. The Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering. (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties,
covenants and agreements set forth herein, the parties agree as follows:
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ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor 2,176,471 shares of Company Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation , or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $1,850,000.00 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 2,176,471 shares of Company Common Stock to be registered to Montlake Capital II, L.P. and Montlake Capital II-B, L.P. as they shall direct in writing.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Authority shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement; and
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(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing.
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date hereof and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1 (b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of Transaction, including without limitation the Offering and the Purchase contemplated hereby; and
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(ix) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date, except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date hereof.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3 (c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this agreement is irrevocable.
ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or within five Business Days prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section
4
2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision.
2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
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(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock, of which 67,000,000 shares are Voting Common Stock and 1,000,000 shares are Class B Non-Voting Common Stock, and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on February 29, 2012 (the Capitalization Date), there were 21,655,054 shares of Common Stock outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company
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Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
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(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Common Stock, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Common Stock by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement. The Common Stock to be issued has been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Common Stock, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Common Stock, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
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(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2011, and the unaudited consolidated balance sheets of the Company and the Bank as of February 29, 2012 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 29, 2012, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2008, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
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(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). To the Companys knowledge, the Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to
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a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2009. (14) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a
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member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2010, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of the date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
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(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the Common Shares (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Common Stock or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might
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subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Common Stock to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2010 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
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(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2007 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
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(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
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(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
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(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty, securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
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(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Common Stock (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor any of the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
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For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
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(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2008, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2010 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
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(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $155,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $90,000,000 certificates of deposits, excluding governmental and brokered deposits.
(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
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2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
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(c) Purchase for Investment. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
(f) Ownership. As of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of shares of Common Stock, securities convertible into or exchangeable for Common Stock or any other equity or equity linked security of the Company or the Bank other than the 1,750,000 shares of Common Stock purchased on March 31, 2011 and the Option to Purchase up to 3,250,000 shares of Company Common Stock, as provided in Section 4.19 of the Investment Agreement dated March 30, 2011 between the Investor and the Company.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Company Common Stock, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Common Stock to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
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(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents.
(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Common Stock, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Common Stock involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Common Stock will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
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(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Common Stock or made any finding or determination as to the fairness of this investment and (iii) the Common Stock is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Common Stock as the Investor has deemed necessary to make an investment decision.
(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary,
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personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
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3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the shares of Common Stock owned by the Investor represent less than 4.9% of the outstanding Common Shares, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the
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Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, without the prior approval of the Board of Directors, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; (ii) owning in the aggregate 25% or more of the total equity of the Company, provided, however, if the aggregate Beneficial Ownership by the Investor and its Affiliates constitutes less than 15% of any class of voting securities of the Company, the Investor may make any acquisition that would result in the Investor and its Affiliates owning, in the aggregate, less than 33% of the total equity of the Company; (iii) or having Beneficial Ownership or control of 25% or more in aggregate of the outstanding shares of a class of voting securities (in each case in (ii) and (iii), within the meaning of the BHC Act and Regulation Y). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such voting securities or Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying voting securities or Common Stock and (y) any security convertible into, or exercisable for, the Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are then entitled to vote generally in the election of directors.
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(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
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(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the
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initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of such New Securities.
(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor. Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
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(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of Common Stock outstanding (the Qualifying Ownership Interest). For the avoidance of doubt, the parties acknowledge and agree that the rights granted to the Investor pursuant to Section 4.4 are duplicative of those granted to the Investor pursuant to Section 4.4 of the Prior Investment Agreement, and the Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank, including pursuant to the rights granted hereunder, the Prior Investment Agreement or otherwise. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees. At all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve as Chairman of the Board or as Chairman of any Board committee, so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
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(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Andrew R. Dale or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF MARCH 20, 2012, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
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(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Reserved.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(e)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice
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shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible
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to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof
(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to exercise any voting rights of any Securities in excess of 24.9% of the total outstanding Voting Securities of the Company unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company (or, if the Investor and its Affiliates in the aggregate own less than 15% of any class of voting securities of the Company, 33% of the total outstanding equity of the Company) unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of Common Stock, of securities or rights, options, or warrants to purchase Common Stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for Common Stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the
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Investors pro rata proportion) that, based on the advice of legal counsel, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms. For the avoidance of doubt any investment made as a result of the common stock offering approved by the Companys Board of Directors on February 9th, 2012, or any investment made as a result of any extension or modification of this offering, will be considered to have occurred at the same time with the investment contemplated by this Agreement.
4.14 No Change in Control. The Company shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
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4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of Common Stock or securities convertible or exchangeable into or exercisable for shares of Common Stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of Common Stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing Date for the payment of any non-stock dividend or distribution on the Common Stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Common Stock to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Common Stock to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
39
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Common Stock by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Common Stock to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Reserved.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock, with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to acquire additional shares or to convert or exchange any portion of the Common Stock held by it to or for non-voting shares, by the issuance of non-voting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares. Such non-voting shares shall be subject to such transfer restrictions as are necessary to cause such non-voting shares not to be treated as voting securities for purposes of the BHCA and 12 C.F.R. Part 225.
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3 and 4.20, including, but not limited to, securing any required approvals or consents or issuing non-voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2012 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of or shall have resulted in, the failure of the Closing to occur on or prior to such date;
40
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
41
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) | If to the Investor: |
Montlake Capital II, L.P.
1200 Fifth Avenue, Suite 1800
Seattle, WA 98101
Attn: Andrew Dale
Facsimile: (206) 956-0863
Email: adale@montlakecapital.com
Montlake Capital II-B, L.P.
1200 Fifth Avenue, Suite 1800
Seattle, WA 98101
Attn: Andrew Dale
Facsimile: (206) 956-0863
Email: adale@montlakecapital.com
42
with a copy to (which copy alone shall not constitute notice):
Foster Pepper, LLC
Attn: Robert Diercks, Esq.
1111 Third Avenue, Suite 3400
Seattle, WA 98101-3299
Facsimile: (206) 749-1926
Email: dierr@foster.com
(2) If to the Company:
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each of any confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
43
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
44
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 24.9% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
45
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Common Stock shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
46
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
* * *
47
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first herein above written.
COASTAL FINANCIAL CORPORATION | ||||
By: | /s/ Eric Sprink | |||
Name: | Eric Sprink | |||
Title: | President and Chief Executive Officer |
[Company Signature Page to Investment Agreement]
48
Montlake Capital II, L.P. | Montlake Capital II-B, L.P. | |||||||
By: | /s/ Andrew R. Dale |
By: | /s/ Andrew R. Dale | |||||
Name: | Andrew R. Dale | Name: | Andrew R. Dale | |||||
Title: | Managing Member, Montlake Capital LLC:, managing member of Montlake Capital Advisor II, LLC, general partner | Title: | Managing Member, Montlake Capital LLC, managing member of Montlake Capital Advisor II, LLC, general partner |
[Investor Signature Page to Investment Agreement]
49
Exhibit 10.16
EXECUTION COPY
MARCH 30, 2011
INVESTMENT AGREEMENT
dated as of March 30, 2011
between
COASTAL FINANCIAL CORPORATION
and
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LP,
a Cayman Islands Limited Partnership
TABLE OF CONTENTS
ARTICLE I Purchase Closing |
2 | |||||
1.1 |
Purchase | 2 | ||||
1.2 |
Reserved | 2 | ||||
1.3 |
Closing | 2 | ||||
1.4 |
Treatment of Stock Plans | 4 | ||||
1.5 |
Termination | 4 | ||||
ARTICLE II Representations and Warranties |
5 | |||||
2.1 |
Disclosure | 5 | ||||
2.2 |
Representations and Warranties of the Company | 6 | ||||
2.3 |
Representations and Warranties of the Investor | 22 | ||||
ARTICLE III Covenants |
26 | |||||
3.1 |
Filings; Other Actions | 26 | ||||
3.2 |
Expenses | 27 | ||||
3.3 |
Access, Information and Confidentiality | 27 | ||||
3.4 |
Conduct of the Business | 28 | ||||
ARTICLE IV Additional Agreements |
29 | |||||
4.1 |
Agreement | 29 | ||||
4.2 |
No Rights Agreement | 30 | ||||
4.3 |
Gross-Up Rights | 30 | ||||
4.4 |
Governance Matters | 32 | ||||
4.5 |
Legend | 34 | ||||
4.6 |
Adjustment to Number of Shares Issued | 34 | ||||
4.7 |
Indemnity | 34 | ||||
4.8 |
Reserved | 36 | ||||
4.9 |
Reserved | 36 | ||||
4.10 |
Reserved | 37 | ||||
4.11 |
Voting and Equity | 37 | ||||
4.12 |
Additional Regulatory Matters | 37 | ||||
4.13 |
Most Favored Nation | 38 | ||||
4.14 |
No Change in Control | 38 | ||||
4.15 |
Reserved | 38 |
i
4.16 |
Reserved | 38 | ||||
4.17 |
Reserved | 38 | ||||
4.18 |
Certain Other Transactions | 38 | ||||
4.19 |
Option | 39 | ||||
4.20 |
Non-Voting Shares | 39 | ||||
4.21 |
Cooperation | 40 | ||||
ARTICLE V Termination |
40 | |||||
5.1 |
Termination | 40 | ||||
5.2 |
Effects of Termination | 40 | ||||
ARTICLE VI Miscellaneous |
41 | |||||
6.1 |
Survival | 41 | ||||
6.2 |
Amendment | 41 | ||||
6.3 |
Waivers | 41 | ||||
6.4 |
Counterparts and Facsimile | 41 | ||||
6.5 |
Governing Law | 41 | ||||
6.6 |
Waiver of Jury Trial | 42 | ||||
6.7 |
Notices | 42 | ||||
6.8 |
Entire Agreement, Etc. | 43 | ||||
6.9 |
Other Definitions | 43 | ||||
6.10 |
Captions | 46 | ||||
6.11 |
Severability | 46 | ||||
6.12 |
No Third Party Beneficiaries | 46 | ||||
6.13 |
Time of Essence | 46 | ||||
6.14 |
Certain Adjustments | 46 | ||||
6.15 |
Public Announcements | 46 | ||||
6.16 |
Specific Performance | 46 | ||||
6.17 |
No Recourse | 47 |
Exhibit A to Investment Agreement
Form of Opinion
Exhibit B to Investment Agreement
Expense Agreement
ii
INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate |
6.9(2) | |
Agency |
2.2(x)(2)(A) | |
Agreement |
Preamble | |
Articles of Incorporation |
2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership |
6.9(9) | |
Benefit Plans |
2.2(p)(1) | |
BHC Act |
1.3(c)(1)(iii) | |
Board Representative |
4.4(e) | |
Business Combination |
6.9(11)(C) | |
Business Day |
6.9(7) | |
Capitalization Date |
2.2(c) | |
Change in Control |
6.9(11) | |
CIBC Act |
1.3(c)(1)(i) | |
Closing |
1.3(a) | |
Closing Date |
1.3(a) | |
Common Stock/Common Shares |
Recitals | |
Company |
Preamble | |
Company Financial Statements |
2.2(f) | |
Company Indemnified Parties |
4.7(b) | |
Company Preferred Stock |
2.2(c) | |
Company Option |
2.2(c) | |
Company Reports |
2.2(g)(1) | |
Company Restricted Stock |
2.2(c) | |
Company Significant Agreement |
2.2(k) | |
Control/Controlling/Controlled by/under Common Control with |
6.9(3) | |
De Minimis Claim |
4.7(d) | |
Disclosed Agreements |
2.2(r)(2) | |
Disclosure Schedule |
2.1(a) | |
Employees |
2.2(p)(1) | |
Environmental Law |
2.2(t) | |
ERISA |
2.2(p)(1) | |
ERISA Affiliate |
2.2(p)(3) | |
ERISA Plans |
2.2(p)(2) | |
Exchange Act |
4.1(2)(b) | |
FDIC |
2.2(b) | |
Federal Reserve |
1.3(c)(i) | |
GAAP |
2.1(b) | |
Governmental Entity |
1.3(c)(1)(i) | |
Hazardous Substance |
2.2(t) | |
herein/hereof/hereunder |
6.9(6) |
iii
Location of Definition | ||
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) | |
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3(b) | |
Interim Financials | 2.2(f) | |
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1(b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Option | 4.19 | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Previously Disclosed | 2.1(c) | |
Purchase Price | 1.3(b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(11)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1(b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
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INVESTMENT AGREEMENT, dated as of March 30, 2011 (this Agreement), between Coastal Financial Corporation,
a Washington corporation (the Company), CJA Private Equity Financial Restructuring Master Fund I LP,
a Cayman Islands limited partnership (herein the Investor).
RECITALS:
A. The Investment. The Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), up to 8,000,000 shares of its common stock, no par value (the Common Stock), at a purchase price of $1.00 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 1,750,000 shares of Common Stock for a purchase price of $1.00 per share.
B. Placement Agent. The Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering. (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and
agreements set forth herein, the parties agree as follows:
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ARTICLE I
Purchase Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor 1,750,000 shares of Company Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation , or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $1,750,000 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 1,750,000 shares of Company Common Stock to be registered to CJA Private Equity Financial Restructuring Master Fund I LP.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Authority shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
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(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall have received gross proceeds from investors participating in the Offering, including the Investor and other investors including Steven D. Hovde, Montlake Capital II, L.P. and Montlake Capital II-B, L.P. , in an amount not less than $5,000,000, on the same terms and conditions as set forth herein, provided that the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date hereof and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1 (b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
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(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of Transaction, including without limitation the Offering and the Purchase contemplated hereby; and
(ix) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date, except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date hereof.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3 (c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this agreement is irrevocable.
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ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision.
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2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
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(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on March 30, 2011 (the Capitalization Date), there were 13,206,868 shares of Common Stock outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including the any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the
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Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Common Stock, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Common Stock by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement. The Common Stock to be issued has been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Common Stock, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Common Stock, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of
8
incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2010, and the unaudited consolidated balance sheets of the Company and the Bank as of February 28, 2011 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 28, 2011, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2008, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
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(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). The Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or
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may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) The Company does not have any 5-Percent Shareholders (as defined by Section 382(k)(7) of the Code). (14) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2009. (15) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the
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payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2010, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of the date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
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(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the Common Shares (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Common Stock or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might subject the offering, issuance or sale of any of such Securities to the registration
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requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Common Stock to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2010 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
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(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2007 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
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(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
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(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty,
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securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Common Stock (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
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(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or
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reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
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(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2008, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2010 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
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(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
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(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Common Stock as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
(c) Purchase for Investment. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
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(f) Ownership. As of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of shares of Common Stock, securities convertible into or exchangeable for Common Stock or any other equity or equity linked security of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Company Common Stock, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Common Stock to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents and no independent counsel has been retained to represent Investor or any other Investor.
(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Common Stock, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence
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and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Common Stock involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Common Stock will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Common Stock or made any finding or determination as to the fairness of this investment and (iii) the Common Stock is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Common Stock as the Investor has deemed necessary to make an investment decision.
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(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case,
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subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the shares of Common Stock owned by the Investor represent less than 4.9% of the outstanding Common Shares, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
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(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
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ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, without the prior approval of the Board of Directors, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; (ii) owning in the aggregate 25% or more of the total equity of the Company, provided, however, if the aggregate Beneficial Ownership by the Investor and its Affiliates constitutes less than 15% of any class of voting securities of the Company, the Investor may make any acquisition that would result in the Investor and its Affiliates owning, in the aggregate, less than 33% of the total equity of the Company; or (iii) having Beneficial Ownership or control of 25% or more in aggregate of the outstanding shares of a class of voting securities (in each case in (ii) and (iii), within the meaning of the BHC Act and Regulation Y). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such voting securities or Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying voting securities or Common Stock and (y) any security convertible into, or exercisable for, the Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are then entitled to vote generally in the election of directors.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company
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or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the
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Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of, such New Securities.
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(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor. Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of Common Stock outstanding (the Qualifying Ownership Interest). Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from
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the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees. At all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve as a Chairman of the Board or as Chairman of any Board committee, so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Jack Thompson or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
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4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF MARCH 30, 2011, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Adjustment to Number of Shares Issued. In the event the Company shall, at any time during the two year period following the Closing Date and for so long as the Investor has a Qualifying Ownership Interest, issue, sell or exchange any New Security other than in an Excluded New Issuance, for a consideration per share less than $1.00 per share (the consideration for any such issuance the Dilutive Price and any such issuance, sale or exchange a Dilutive Transaction), then and thereafter successively upon the consummation of any Dilutive Transaction, the Investor shall issue and deliver to the Investor certificates representing such number of additional shares of Company Common Stock in an amount such that, when added to the number of shares delivered to the Investor at Closing (or previously pursuant to this Section 4.6), the Investor has received an aggregate number of shares equal to the amount Investor would have received if Investor had purchased shares at a per share purchase price equal to the Dilutive Price for an aggregate purchase price equal to the Purchase Price. The Investor may elect to receive such securities in nonvoting form. Such shares shall be registered in the name of the Investor.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and
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regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof.; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed),
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settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate(, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof.
(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
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4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to exercise any voting rights of any Securities in excess of 9.9% of the total outstanding Voting Securities of the Company unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company (or, if the Investor and its Affiliates in the aggregate own less than 15% of any class of voting securities of the Company, 33% of the total outstanding equity of the Company) unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of Common Stock, of securities or rights, options, or warrants to purchase Common Stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for Common Stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CBIC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
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4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of Common Stock or securities convertible or exchangeable into or exercisable for shares of Common Stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of Common Stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing Date for the payment of any non-stock dividend or distribution on the Common Stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Common Stock to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Common Stock to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with
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shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Common Stock by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Common Stock to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Option. The Company hereby grants to the Investor an Option, exercisable on one or more occasions, to purchase for $1.00 per share up to 3,250,000 additional shares of Common Stock or other similar non-voting shares of the Company (Option); provided the exercise of said Option shall not cause the Investor to be deemed to control more than 9.9% of any class of voting securities of the Company within the meaning of 12 C.F.R. Part 225 without the receipt of any necessary regulatory approvals. The Option shall expire on the first anniversary of the Agreement and shall be of no further force or effect. Any such Common Stock shall be voting or non-voting at the direction of the Investor.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock, with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to acquire additional shares or to convert or exchange any portion of the Common Stock held by it to or for non-voting shares, by the issuance of non-voting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Common Stock held by the Investor cannot be reasonably obtained. The
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Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares. Such non-voting shares shall be subject to such transfer restrictions as are necessary to cause such non-voting shares not to be treated as voting securities for purposes of the BHCA and 12 C.F.R. Part 225.
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, 4.6, 4.19, and 4.20, including, but not limited to, securing any required approvals or consents or issuing non-voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2011 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
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ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
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6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) | If to the Investor: |
CJA Private Equity Financial Restructuring Master Fund I LP c/o Hedgserv, Ltd.
Attn: Mr. Donal Murphy
75 St Stephens Green 2nd Floor
Dublin 2 Ireland
Telephone: +353-12341009
Facsimile: +353-16099117
Email: HS CJANAV@hedgeserv.corn & CJAinvestors@hedgeserv.com
with a copy to (which copy alone shall not constitute notice):
CJA Private Equity Financial Restructuring Master Fund I LP
c/o Gapstow Capital Partners LP
Attn: Brian Shapiro
130 East 59th Street 12th Floor
New York, NY 10022
Telephone: (646) 735-3322
Facsimile: (646) 735-3494
Email: brian.shapiro@gapstow.com & fundops@gapstow.com
Wiggin and Dana LLP
Attn: Mark S. Kaduboski
400 Atlantic Street
Stamford, CT 06901
Facsimile: (203) 363-7676
Email: mkaduboski@wiggin.com
(2) | If to the Company: |
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
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Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each of any confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
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(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
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(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
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(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Common Stock shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
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6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first herein above written.
COASTAL FINANCIAL CORPORATION
By: | /s/ Eric Sprink | |
Name: | Eric Sprink | |
Title: | President and Chief Executive Officer |
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LLP
By: | /s/ Christopher J. Acito | |
Name: Christopher J. Acito | ||
Title: General Partner CJA Private Equity Financial Restructuring Master Fund I LLP |
Tax ID: [Intentionally Omitted]
[Investor Signature Page to Investment Agreement]
Exhibit 10.17
EXECUTION COPY
MARCH 30, 2012
INVESTMENT AGREEMENT
dated as of March 30, 2012
between
COASTAL FINANCIAL CORPORATION
and
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LP,
a Cayman Islands Limited Partnership
TABLE OF CONTENTS
ARTICLE I Purchase; Closing | 2 | |||||
1.1 |
Purchase | 2 | ||||
1.2 |
Reserved | 2 | ||||
1.3 |
Closing | 2 | ||||
1.4 |
Treatment of Stock Plans | 4 | ||||
1.5 |
Termination | 4 | ||||
ARTICLE II Representations and Warranties | 5 | |||||
2.1 |
Disclosure | 5 | ||||
2.2 |
Representations and Warranties of the Company | 6 | ||||
2.3 |
Representations and Warranties of the Investor | 23 | ||||
ARTICLE III Covenants | 26 | |||||
3.1 |
Filings; Other Actions | 26 | ||||
3.2 |
Expenses | 28 | ||||
3.3 |
Access, Information and Confidentiality | 28 | ||||
3.4 |
Conduct of the Business | 28 | ||||
ARTICLE IV Additional Agreements | 29 | |||||
4.1 |
Agreement | 29 | ||||
4.2 |
No Rights Agreement | 31 | ||||
4.3 |
Gross-Up Rights | 31 | ||||
4.4 |
Governance Matters | 33 | ||||
4.5 |
Legend | 35 | ||||
4.6 |
Reserved | 35 | ||||
4.7 |
Indemnity | 35 | ||||
4.8 |
Reserved. | 37 | ||||
4.9 |
Reserved. | 37 | ||||
4.10 |
Reserved | 37 | ||||
4.11 |
Voting and Equity | 37 | ||||
4.12 |
Additional Regulatory Matters | 38 | ||||
4.13 |
Most Favored Nation | 38 | ||||
4.14 |
No Change in Control | 39 | ||||
4.15 |
Reserved | 39 | ||||
4.16 |
Reserved | 39 |
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4.17 |
Reserved | 39 | ||||
4.18 |
Certain Other Transactions | 39 | ||||
4.19 |
Reserved | 40 | ||||
4.20 |
Non-Voting Shares | 40 | ||||
4.21 |
Cooperation | 41 | ||||
ARTICLE V Termination | 41 | |||||
5.1 |
Termination | 41 | ||||
5.2 |
Effects of Termination | 41 | ||||
ARTICLE VI Miscellaneous | 42 | |||||
6.1 |
Survival | 42 | ||||
6.2 |
Amendment | 42 | ||||
6.3 |
Waivers | 42 | ||||
6.4 |
Counterparts and Facsimile | 42 | ||||
6.5 |
Governing Law | 42 | ||||
6.6 |
WAIVER OF JURY TRIAL | 42 | ||||
6.7 |
Notices | 43 | ||||
6.8 |
Entire Agreement, Etc | 44 | ||||
6.9 |
Other Definitions | 44 | ||||
6.10 |
Captions | 46 | ||||
6.11 |
Severability | 46 | ||||
6.12 |
No Third Party Beneficiaries | 47 | ||||
6.13 |
Time of Essence | 47 | ||||
6.14 |
Certain Adjustments | 47 | ||||
6.15 |
Public Announcements | 47 | ||||
6.16 |
Specific Performance | 47 | ||||
6.17 |
No Recourse | 47 |
Exhibit A to Investment Agreement
Form of Opinion
Exhibit B to Investment Agreement
Expense Agreement
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INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate | 6.9(2) | |
Agency | 2.2(x)(2)(A) | |
Agreement | Preamble | |
Articles of Incorporation | 2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership | 6.9(9) | |
Benefit Plans | 2.2(p)(1) | |
BHC Act | 1 .3 (c)(1 )(iii) | |
Board Representative | 4.4(e) | |
Business Combination | 6.9(11)(C) | |
Business Day | 6.9(7) | |
Capitalization Date | 2.2(c) | |
Change in Control | 6.9(11) | |
CIBC Act | 1.3(c)(1)(i) | |
Closing | 1.3(a) | |
Closing Date | 1.3(a) | |
Company | Preamble | |
Company Financial Statements | 2.2(f) | |
Company Indemnified Parties | 4.7(b) | |
Company Preferred Stock | 2.2(c) | |
Company Option | 2.2(c) | |
Company Reports | 2.2(g)(1) | |
Company Restricted Stock | 2.2(c) | |
Company Significant Agreement | 2.2(k) | |
Control/Controlling/Controlled by/under Common Control with | 6.9(3) | |
De Minimis Claim | 4.7(d) | |
Disclosed Agreements | 2.2(r)(2) | |
Disclosure Schedule | 2.1(a) | |
Employees | 2.2(p)(1) | |
Environmental Law | 2.2(t) | |
ERISA | 2.2(p)(1) | |
ERISA Affiliate | 2.2(p)(3) | |
ERISA Plans | 2.2(p)(2) | |
Exchange Act | 4.1(2)(b) | |
FDIC | 2.2(b) | |
Federal Reserve | 1.3(c)(i) | |
GAAP | 2.1(b) | |
Governmental Entity | 1.3(c)(1)(i) | |
Hazardous Substance | 2.2(t) | |
Location of Definition herein/hereof/hereunder | 6.9(6) | |
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) |
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Location of Definition | ||
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3(b) | |
Interim Financials | 2.2(f) | |
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1(b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Non-Voting Common Stock | Recitals | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Placement Agent | Recitals | |
Previously Disclosed | 2.1(c) | |
Prior Investment Agreement | 2.1(c) | |
Purchase Price | 1.3(b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Securities | Recitals | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(11)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1(b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Common Stock | Recitals | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
iv
INVESTMENT AGREEMENT (this Agreement), dated as of March 30, 2012, between Coastal Financial Corporation, a Washington corporation (the Company), and CJA Private Equity Financial Restructuring Master Fund I LP, a Cayman Islands limited partnership (herein the Investor).
RECITALS:
WHEREAS, the Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), (i) up to 10,588,235 shares of its common stock, issuable as either Company Voting Common Stock, no par value (Voting Common Stock) or Company Class B Non-Voting Common Stock, no par value (Non-Voting Common Stock and together with the Voting Common Stock, the Securities), with the number of shares of Voting Common Stock not to exceed 10,588,235 shares and the number of shares of Non-Voting Common Stock not to exceed 500,000 shares, provided, if Non-Voting Common Stock is issued, the maximum number of shares of Voting Common Stock that may be issued (10,588,235) shall be reduced by the number of shares of Non-Voting Stock issued such that the total number of Securities issued shall not exceed 10,588,235 Securities, at a purchase price of $0.85 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 705,882 shares of Voting Common Stock (for a purchase price of $0.85 per share); and
WHEREAS, the Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:
ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor, 705,882 shares of Voting Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation, or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $600,000 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 705,882 shares of Voting Common Stock to be registered to CJA Private Equity Financial Restructuring Master Fund I LP.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Entity shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
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(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Company securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date of this Agreement and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1(b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
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(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of the transactions contemplated by this Agreement, including without limitation the Offering and the purchase contemplated hereby; and
(xi) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date), except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date of this Agreement.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3(c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this Agreement is irrevocable.
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ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or within five Business Days prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
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(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision; and provided, further, that the terms of that certain Amended and Restated Investment Agreement dated as of March 2, 2012 between the Company and the Investor (the Prior Investment Agreement) are hereby deemed Previously Disclosed for all purposes notwithstanding any non-disclosure of the terms of such agreement on a partys Disclosure Schedule.
2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership
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or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock, of which 67,000,000 shares are Voting Common Stock and 1,000,000 shares are Non-Voting Common Stock, and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on February 29, 2012 (the Capitalization Date), there were 21,655,054 shares of securities outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including the any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof no bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of
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Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Securities, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Securities by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement. The Securities to be issued have been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Securities, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
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(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Securities, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2011, and the unaudited consolidated balance sheets of the Company and the Bank as of February 29, 2012 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 29, 2012, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
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(g) Reports.
(1) Since December 31, 2009, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). To the Companys knowledge, the Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
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(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section
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355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2010. (14) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
For the purposes of this Agreement, the term Tax (including, with correlative meaning, the teen Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2011, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
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(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material
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violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the outstanding capital stock of the Company (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Securities or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Securities to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2011 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage
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Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2008 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
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(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
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(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
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(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty, securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code,
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license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Securities (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
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(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof; in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling,
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servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2009, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any
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material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2011 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
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(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the
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properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
(c) Purchase for Investment. The Investor acknowledges that the Securities purchased pursuant to this Agreement have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
(f) Ownership. Except for the shares of Voting Common Stock purchased by the Investor on or about March 31, 2011, as of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of any equity securities of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior
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written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Securities, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Securities to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents.
(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Securities, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Securities involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Securities will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
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(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Securities or made any finding or determination as to the fairness of this investment and (iii) the Securities is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Securities as the Investor has deemed necessary to make an investment decision.
(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits,
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consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
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(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the Securities owned by the Investor represent less than 4.9% of the outstanding shares of capital stock, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its
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organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; or (ii) owning in the aggregate 25% or more of the total equity of the Company; or (iii) having Beneficial Ownership or control of shares of a class of Voting Securities in an aggregate amount equal to or greater than the number of shares owned or controlled by the investor then holding the largest number of shares of such class of Voting Securities (which ownership limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by the Investor or any of its Affiliates). For the avoidance of doubt, for purposes of calculating the
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Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such Voting Securities or Voting Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying Voting Securities or Voting Common Stock and (y) any security convertible into, or exercisable for, the Voting Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are deemed voting securities within the meaning of the BHC Act and the Federal Reserves Regulation Y.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
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(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including common stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate common stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the
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aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of common stock held by the Investor, and the denominator of which is the number of shares of common stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor and its Affiliates exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of such New Securities.
(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor.
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Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of common stock outstanding (the Qualifying Ownership Interest). For the avoidance of doubt, the parties acknowledge and agree that the rights granted to the Investor pursuant to this Section 4.4 are duplicative of those granted to the Investor pursuant to Section 4.4 of the Prior Investment Agreement, and the Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank, including pursuant to the rights granted hereunder, the Prior Investment Agreement or otherwise. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees; provided, however, at all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve
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as: (i) a Chairman of either of the Boards or as Chairman of any committee of either Board; (ii) a member of any committee of either Board if the Board Representative occupies more than 25% of the seats on the committee; or (iii) a member of any committee that has the authority or practical ability to unilaterally make (or block the making of) policy or other decisions that bind either Board, in each case so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Jack Thompson or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
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4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF MARCH 23, 2012, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities purchased under this Agreement have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Reserved.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
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(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Investor shall be responsible for all such claims.
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(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof.
(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to own, control or hold the power to vote any Voting Securities equal to or in excess of the percentage of the total outstanding Voting Securities of the Company owned or controlled by the shareholder then holding the largest percentage of the total outstanding Voting Securities of the Company (which percentage limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by the
37
Investor or any of its Affiliates) unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of common stock, of securities or rights, options, or warrants to purchase common stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for common stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement, terms more favorable, in fonn or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
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4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of common stock or securities convertible or exchangeable into or exercisable for shares of common stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of common stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing Date for the payment of any non-stock dividend or distribution on the common stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Securities to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Securties to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
39
(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Securities by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Securities to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Reserved.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock (including shares of Non-Voting Common Stock), with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Voting Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to convert or exchange any portion of the Voting Common Stock held by it to or for non-voting shares, by the issuance of nonvoting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Voting Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares (which non-voting shares shall not be convertible into or exchangible for Voting Securities). Any such non-voting shares will be subject to certain transfer restrictions, and shall not be transferred or disposed of by the Investor or any of its Affiliates except as follows: (A) in a widely distributed public offering that is registered under the Securities Act; (B) to a person that is acquiring a majority of the Companys voting securities; or (C) to a person who shall not, after giving effect to such transfer, own more than 2% of any class of voting securities of the Company.
40
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, and 4.20, including, but not limited to, securing any required approvals or consents or issuing non-voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2012 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
41
ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing are for the sole benefit of such party and may be waived by such party in whole or in part to the extent pen-nitted by applicable law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
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6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) If to the Investor:
CJA Private Equity Financial Restructuring Master Fund I LP
C/o Hedgserv, Ltd.
Attn: Mr. Donal Murphy
75 St Stephens Green 2nd Floor
Dublin 2 IrelandTelephone: +353-12341009
Facsimile: +353-16099117
Email: HS_CJANAV@hedgeserv.com & CJAinvestors@hedgeserv.com
with a copy_to. (which-copy alone shall not constitute notice):
CM Private Equity Financial Restructuring Master Fund I LP
C/o Gapstow Capital Partners LP
Attn: Brian Shapiro
130 East 59th Street 12th Floor
New York, NY 10022
Telephone: (646) 735-3322
Facsimile: (646) 735-3494
Email: brian.shapiro@gapstow.com & fundrops@gapstow.com
Wiggin and Dana LLP
Attn: Mark S. Kaduboski
400 Atlantic Street
Stamford, CT 06901
Facsimile: (203) 363-7676
Email: mkaduboski@wiggin.com
(2) If to the Company:
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
43
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
44
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereto and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by
45
virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
46
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Securities shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first above written.
COASTAL FINANCIAL CORPORATION
By: | /s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer |
[Company Signature Page to Investment Agreement]
48
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I, LIP.
By: | /s/ Christopher J. Acito | |
Name: Christopher J. Acito | ||
Title: Managing Member |
CJA Private Equity Financial Restructuring Master Fund I, L.P.
Tax ID: [Intentionally Omitted]
[Investor Signature Page to Investment Agreement]
49
Exhibit 10.18
EXECUTION COPY
April 6, 2012
INVESTMENT AGREEMENT
dated as of April 6, 2012
between
COASTAL FINANCIAL CORPORATION
and
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LP,
a Cayman Islands Limited Partnership
TABLE OF CONTENTS
RECITALS: | 1 | |||||
ARTICLE I Purchase; Closing | 2 | |||||
1.1 |
Purchase | 2 | ||||
1.2 |
Reserved | 2 | ||||
1.3 |
Closing | 2 | ||||
1.4 |
Treatment of Stock Plans | 4 | ||||
1.5 |
Termination | 4 | ||||
ARTICLE II Representations and Warranties | 5 | |||||
2.1 |
Disclosure | 5 | ||||
2.2 |
Representations and Warranties of the Company | 6 | ||||
2.3 |
Representations and Warranties of the Investor | 22 | ||||
ARTICLE III Covenants | 26 | |||||
3.1 |
Filings; Other Actions | 26 | ||||
3.2 |
Expenses | 27 | ||||
3.3 |
Access, Information and Confidentiality | 27 | ||||
3.4 |
Conduct of the Business | 28 | ||||
ARTICLE IV Additional Agreements | 29 | |||||
4.1 |
Agreement | 29 | ||||
4.2 |
No Rights Agreement | 30 | ||||
4.3 |
Gross-Up Rights | 30 | ||||
4.4 |
Governance Matters | 32 | ||||
4.5 |
Legend | 34 | ||||
4.6 |
Reserved | 34 | ||||
4.7 |
Indemnity | 35 | ||||
4.8 |
Reserved | 36 | ||||
4.9 |
Reserved | 37 | ||||
4.10 |
Reserved | 37 | ||||
4.11 |
Voting and Equity | 37 | ||||
4.12 |
Additional Regulatory Matters | 37 | ||||
4.13 |
Most Favored Nation | 38 | ||||
4.14 |
No Change in Control | 38 | ||||
4.15 |
Reserved | 38 | ||||
4.16 |
Reserved | 38 | ||||
4.17 |
Reserved | 38 | ||||
4.18 |
Certain Other Transactions | 38 | ||||
4.19 |
Reserved | 39 | ||||
4.20 |
Non-Voting Shares | 39 | ||||
4.21 |
Cooperation | 40 |
i
ARTICLE V Termination | 40 | |||||
5.1 |
Termination | 40 | ||||
5.2 |
Effects of Termination | 41 | ||||
ARTICLE VI Miscellaneous | 41 | |||||
6.1 |
Survival | 41 | ||||
6.2 |
Amendment | 41 | ||||
6.3 |
Waivers | 41 | ||||
6.4 |
Counterparts and Facsimile | 41 | ||||
6.5 |
Governing Law | 41 | ||||
6.6 |
WAIVER OF JURY TRIAL | 42 | ||||
6.7 |
Notices | 42 | ||||
6.8 |
Entire Agreement, Etc | 43 | ||||
6.9 |
Other Definitions | 43 | ||||
6.10 |
Captions | 45 | ||||
6.11 |
Severability | 46 | ||||
6.12 |
No Third Party Beneficiaries | 46 | ||||
6.13 |
Time of Essence | 46 | ||||
6.14 |
Certain Adjustments | 46 | ||||
6.15 |
Public Announcements | 46 | ||||
6.16 |
Specific Performance | 46 | ||||
6.17 |
No Recourse | 47 |
Exhibit A to Investment Agreement |
Form of Opinion |
Exhibit B to Investment Agreement |
Expense Agreement |
ii
INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate | 6.9(2) | |
Agency | 2.2(x)(2)(A) | |
Agreement | Preamble | |
Articles of Incorporation | 2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership | 6.9(9) | |
Benefit Plans | 2.2(p)(1) | |
BHC Act | 1.3 (c)(1)(iii) | |
Board Representative | 4.4(e) | |
Business Combination | 6.9(11)(C) | |
Business Day | 6.9(7) | |
Capitalization Date | 2.2(c) | |
Change in Control | 6.9(11) | |
CIBC Act | 1.3(c)(1)(i) | |
Closing | 1.3(a) | |
Closing Date | 1.3(a) | |
Company | Preamble | |
Company Financial Statements | 2.2(f) | |
Company Indemnified Parties | 4.7(b) | |
Company Preferred Stock | 2.2(c) | |
Company Option | 2.2(c) | |
Company Reports | 2.2(g)(1) | |
Company Restricted Stock | 2.2(c) | |
Company Significant Agreement | 2.2(k) | |
Control/Controlling/Controlled by/under Common Control with | 6.9(3) | |
De Minimis Claim | 4.7(d) | |
Disclosed Agreements | 2.2(r)(2) | |
Disclosure Schedule | 2.1(a) | |
Employees | 2.2(p)(1) | |
Environmental Law | 2.2(t) | |
ERISA | 2.2(p)(1) | |
ERISA Affiliate | 2.2(p)(3) | |
ERISA Plans | 2.2(p)(2) | |
Exchange Act | 4.1 (2)(b) | |
FDIC | 2.2(b) | |
Federal Reserve | 1.3(c)(i) | |
GAAP | 2.1(b) | |
Governmental Entity | 1.3(c)(1)(i) | |
Hazardous Substance | 2.2(t) | |
herein/hereof/hereunder | 6.9(6) | |
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) |
iii
Location of Definition | ||
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3 (b) | |
Interim Financials | 2.2(f) | |
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1 (b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Non-Voting Common Stock | Recitals | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Placement Agent | Recitals | |
Previously Disclosed | 2.1(c) | |
Prior Investment Agreement | 2.1 (c) | |
Purchase Price | 1.3 (b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Securities | Recitals | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(1 1)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1 (b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Common Stock | Recitals | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
iv
INVESTMENT AGREEMENT (this Agreement), dated as of April 6, 2012, between Coastal Financial Corporation, a Washington corporation (the Company), and CJA Private Equity Financial Restructuring Master Fund I LP, a Cayman Islands limited partnership (herein the Investor).
RECITALS:
WHEREAS, the Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), (i) up to 10,588,235 shares of its common stock, issuable as either Company Voting Common Stock, no par value (Voting Common Stock) or Company Class C Voting Common Stock, no par value (Voting Common Stock and together with the Voting Common Stock, the Securities), with the number of shares of Voting Common Stock not to exceed 10,588,235 shares and the number of shares of Non-Voting Common Stock not to exceed 1,500,000 shares, provided, if Non-Voting Common Stock is issued, the maximum number of shares of Voting Common Stock that may be issued (10,588,235) shall be reduced by the number of shares of Non-Voting Stock issued such that the total number of Securities issued shall not exceed 10,588,235 Securities, at a purchase price of $0.85 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 1,150,000 shares of Voting Common Stock (for a purchase price of $0.85 per share); and
WHEREAS, the Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:
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ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor, 1,150,000 shares of Voting Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation, or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $977,500 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 1,150,000 shares of Class C Voting Common Stock to be registered to CJA Private Equity Financial Restructuring Master Fund I LP.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Entity shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
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(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Company securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date of this Agreement and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1(b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
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(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of the transactions contemplated by this Agreement, including without limitation the Offering and the purchase contemplated hereby; and
(xi) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date), except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date of this Agreement.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3(c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this Agreement is irrevocable.
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ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or within five Business Days prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
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(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision; and provided, further, that the terms of that certain Amended and Restated Investment Agreement dated as of March 2, 2012 between the Company and the Investor (the Prior Investment Agreement) are hereby deemed Previously Disclosed for all purposes notwithstanding any non-disclosure of the terms of such agreement on a partys Disclosure Schedule.
2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington-state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
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(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock, of which 67,000,000 shares are Voting Common Stock, 1,000,000 shares are Class B Non-Voting Common Stock, 1,500,000 are Class C Voting Common Stock, and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on February 29, 2012 (the Capitalization Date), there were 21,655,054 shares of securities outstanding and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including the any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the
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Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, (iii) has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Securities, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Securities by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement. The Securities to be issued have been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Securities, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
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(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Securities, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2011, and the unaudited consolidated balance sheets of the Company and the Bank as of February 29, 2012 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 29, 2012, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2009, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and
9
payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). To the Companys knowledge, the Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
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(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2010. (14) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
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For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2011, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
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(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the outstanding capital stock of the Company (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
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(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Securities or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Securities to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2011 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
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(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2008 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
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(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
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(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti-dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
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(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty, securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
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(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Securities (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
(v) Intellectual Property:
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
(4) Neither the Company nor the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
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For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect
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to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2009, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2011 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
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(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
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(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of (A) its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
(c) Purchase for Investment. The Investor acknowledges that the Securities purchased pursuant to this Agreement have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities
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Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
(f) Ownership. Except for the shares of Voting Common Stock purchased by the Investor on or about March 31, 2011, as of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of any equity securities of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Securities, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Securities to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents.
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(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Securities, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Securities involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Securities will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
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(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Securities or made any finding or determination as to the fairness of this investment and (iii) the Securities is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Securities as the Investor has deemed necessary to make an investment decision.
(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further
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certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the Securities owned by the Investor represent less than 4.9% of the outstanding shares of capital stock, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
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(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit
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Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; or (ii) owning in the aggregate 25% or more of the total equity of the Company; or (iii) having Beneficial Ownership or control of shares of a class of Voting Securities in an aggregate amount equal to or greater than the number of shares owned or controlled by the investor then holding the largest number of shares of such class of Voting Securities (which ownership limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by the Investor or any of its Affiliates). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such Voting Securities or Voting Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying Voting Securities or Voting Common Stock and (y) any security convertible into, or exercisable for, the Voting Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are deemed voting securities within the meaning of the BHC Act and the Federal Reserves Regulation Y.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
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(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic
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offering or sale of any equity (including common stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate common stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of common stock held by the Investor, and the denominator of which is the number of shares of common stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor and its Affiliates exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
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(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of, such New Securities.
(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor. Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of common stock outstanding (the Qualifying
32
Ownership Interest). For the avoidance of doubt, the parties acknowledge and agree that the rights granted to the Investor pursuant to this Section 4.4 are duplicative of those granted to the Investor pursuant to Section 4.4 of the Prior Investment Agreement, and the Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank, including pursuant to the rights granted hereunder, the Prior Investment Agreement or otherwise. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees; provided, however, at all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed to serve as: (i) a Chairman of either of the Boards or as Chairman of any committee of either Board; (ii) a member of any committee of either Board if the Board Representative occupies more than 25% of the seats on the committee; or (iii) a member of any committee that has the authority or practical ability to unilaterally make (or block the making of) policy or other decisions that bind either Board, in each case so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
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(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Jack Thompson or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF APRIL 6, 2012, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities purchased under this Agreement have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Reserved.
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4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent;
35
provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof
(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
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4.9 Reserved.
4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to own, control or hold the power to vote any Voting Securities equal to or in excess of the percentage of the total outstanding Voting Securities of the Company owned or controlled by the shareholder then holding the largest percentage of the total outstanding Voting Securities of the Company (which percentage limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by the Investor or any of its Affiliates) unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of common stock, of securities or rights, options, or warrants to purchase common stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for common stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
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4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement, terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the
Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of common stock or securities convertible or exchangeable into or exercisable for shares of common stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of common stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing
38
Date for the payment of any non-stock dividend or distribution on the common stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Securities to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Securities to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
(c) Reserved.
(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Securities by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Securities to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Reserved.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock (including shares of Non-Voting Common Stock), with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Voting Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to convert or exchange any portion of the Voting Common Stock held by it to or for non-voting shares, by the issuance of nonvoting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Voting Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-
39
voting shares (which non-voting shares shall not be convertible into or exchangeable for Voting Securities). Any such non-voting shares will be subject to certain transfer restrictions, and shall not be transferred or disposed of by the Investor or any of its Affiliates except as follows: (A) in a widely distributed public offering that is registered under the Securities Act; (B) to a person that is acquiring a majority of the Companys voting securities; or (C) to a person who shall not, after giving effect to such transfer, own more than 2% of any class of voting securities of the Company.
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, and 4.20, including, but not limited to, securing any required approvals or consents or issuing nonvoting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before March 31, 2012 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
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5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
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6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) | If to the Investor: |
CJA Private Equity Financial Restructuring Master Fund I LP
C/o Hedgserv, Ltd.
Attn: Mr. Donal Murphy
75 St Stephens Green 2nd Floor
Dublin 2 Ireland Telephone: +353-12341009
Facsimile: +353-16099117
Email: HS_CJANAV@hedgeserv.com & CJAinvestors@hedgeserv.com
with a copy to (which copy alone shall not constitute notice):
CIA-Private Equity Financial Restructuring Master Fund I LP
C/o Gapstow Capital Partners LP
Attn: Brian Shapiro
130 East 59th Street 12th Floor New York, NY 10022
Telephone: (646) 735-3322
Facsimile: (646) 735-3494
Email:iindaps@gapstow.com
Wiggin and Dana LLP
Attn: Mark S. Kaduboski
400 Atlantic Street
Stamford, CT 06901
Facsimile: (203) 363-7676
Email: mkaduboski@wiggin.com
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(2) | If to the Company: |
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
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(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
44
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
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6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Securities shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
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6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
* * *
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the dare first above written.
COASTAL FINANCIAL CORPORATION
By: | /s/ Eric Sprink | |
Name: | Eric Sprink | |
Title: | President and Chief Executive Officer |
(Company Signature Page to Investment Agreement]
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CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LLP
By: | /s/ Christopher J. Acito | |
Name: | Christopher J. Acito | |
Title: | Managing Member |
CJA Private Equity Financial Restructuring Master Fund I LLP
Tax ID: [Intentionally Omitted]
[Investor Signature Page to Investment Agreement]
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Exhibit 10.19
EXECUTION COPY
APRIL 13, 2012
INVESTMENT AGREEMENT
dated as of April 13, 2012 between
COASTAL FINANCIAL CORPORATION
and
CJA PRIVATE EQUITY FINANCIAL RESTRUCTURING MASTER FUND I LP,
a Cayman Islands Limited Partnership
TABLE OF CONTENTS
PAGE | ||||||
ARTICLE I Purchase; Closing |
1 | |||||
1.1 |
Purchase | 1 | ||||
1.2 |
Reserved | 1 | ||||
1.3 |
Closing | 1 | ||||
1.4 |
Treatment of Stock Plans | 3 | ||||
1.5 |
Termination | 3 | ||||
ARTICLE II Representations and Warranties |
3 | |||||
2.1 |
Disclosure | 3 | ||||
2.2 |
Representations and Warranties of the Company | 4 | ||||
2.3 |
Representations and Warranties of the Investor | 18 | ||||
ARTICLE III Covenants |
22 | |||||
3.1 |
Filings; Other Actions | 22 | ||||
3.2 |
Expenses | 23 | ||||
3.3 |
Access, Information and Confidentiality | 23 | ||||
3.4 |
Conduct of the Business | 23 | ||||
ARTICLE IV Additional Agreements |
24 | |||||
4.1 |
Agreement | 24 | ||||
4.2 |
No Rights Agreement | 25 | ||||
4.3 |
Gross-Up Rights | 25 | ||||
4.4 |
Governance Matters | 27 | ||||
4.5 |
Legend | 28 | ||||
4.6 |
Reserved | 29 | ||||
4.7 |
Indemnity | 29 | ||||
4.8 |
Reserved | 31 | ||||
4.9 |
Reserved | 31 | ||||
4.10 |
Reserved | 31 | ||||
4.11 |
Voting and Equity | 31 | ||||
4.12 |
Additional Regulatory Matters | 31 | ||||
4.13 |
Most Favored Nation | 32 | ||||
4.14 |
No Change in Control | 32 | ||||
4.15 |
Reserved | 32 | ||||
4.16 |
Reserved | 32 | ||||
4.17 |
Reserved | 32 | ||||
4.18 |
Certain Other Transactions | 32 | ||||
4.19 |
Reserved | 33 | ||||
4.20 |
Non-Voting Shares | 33 | ||||
4.21 |
Cooperation | 33 |
i
ARTICLE V Termination |
34 | |||||
5.1 |
Termination | 34 | ||||
5.2 |
Effects of Termination | 34 | ||||
ARTICLE VI Miscellaneous |
34 | |||||
6.1 |
Survival | 34 | ||||
6.2 |
Amendment | 35 | ||||
6.3 |
Waivers | 35 | ||||
6.4 |
Counterparts and Facsimile | 35 | ||||
6.5 |
Governing Law | 35 | ||||
6.6 |
WAIVER OF JURY TRIAL | 35 | ||||
6.7 |
Notices | 35 | ||||
6.8 |
Entire Agreement, Etc. | 36 | ||||
6.9 |
Other Definitions | 37 | ||||
6.10 |
Captions | 38 | ||||
6.11 |
Severability | 39 | ||||
6.12 |
No Third Party Beneficiaries | 39 | ||||
6.13 |
Time of Essence | 39 | ||||
6.14 |
Certain Adjustments | 39 | ||||
6.15 |
Public Announcements | 39 | ||||
6.16 |
Specific Performance | 39 | ||||
6.17 |
No Recourse | 39 |
Exhibit A to Investment Agreement
Form of Opinion
Exhibit B to Investment Agreement
Expense Agreement
ii
INDEX OF DEFINED TERMS
Location of Definition | ||
Affiliate | 6.9(2) | |
Agency | 2.2(x)(2)(A) | |
Agreement | Preamble | |
Articles of Incorporation | 2.2(a) | |
Beneficially Own/Beneficial Owner/Beneficial Ownership | 6.9(9) | |
Benefit Plans | 2.2(p)(1) | |
BHC Act | 1.3(c)(1)(iii) | |
Board Representative | 4.4(e) | |
Business Combination | 6.9(11)(C) | |
Business Day | 6.9(7) | |
Capitalization Date | 2.2(c) | |
Change in Control | 6.9(11) | |
CIBC Act | 1.3(c)(1)(i) | |
Class C Non-Voting Common Stock | Recitals | |
Closing | 1.3(a) | |
Closing Date | 1.3(a) | |
Company | Preamble | |
Company Financial Statements | 2.2(f) | |
Company Indemnified Parties | 4.7(b) | |
Company Preferred Stock | 2.2(c) | |
Company Option | 2.2(c) | |
Company Reports | 2.2(g)(1) | |
Company Restricted Stock | 2.2(c) | |
Company Significant Agreement | 2.2(k) | |
Control/Controlling/Controlled by/under Common Control with | 6.9(3) | |
De Minimis Claim | 4.7(d) | |
Disclosed Agreements | 2.2(r)(2) | |
Disclosure Schedule | 2.1(a) | |
Employees | 2.2(p)(1) | |
Environmental Law | 2.2(t) | |
ERISA | 2.2(p)(1) | |
ERISA Affiliate | 2.2(p)(3) | |
ERISA Plans | 2.2(p)(2) | |
Exchange Act | 4.1(2)(b) | |
FDIC | 2.2(b) | |
Federal Reserve | 1.3(c)(i) | |
GAAP | 2.1(b) | |
Governmental Entity | 1.3(c)(1)(i) | |
Hazardous Substance | 2.2(t) | |
herein/hereof/hereunder | 6.9(6) | |
including/includes/included/include | 6.9(5) | |
Incumbent Directors | 6.9(11)(A) | |
Indemnified Party | 4.7(c) | |
Indemnifying Party | 4.7(c) | |
Information | 3.3(b) | |
Interim Financials | 2.2(f) |
iii
Location of Definition | ||
Internal Revenue Code | 2.2(c) | |
Insurer | 2.2(x)(2)(C) | |
Intellectual Property | 2.2(v) | |
Investment | Recitals | |
Investor | Preamble | |
Investor Indemnified Parties | 4.7(a) | |
IRS | 2.2(i)(2)(i) | |
IT Assets | 2.2(v) | |
Liens | 2.2(b) | |
Loan Investor | 2.2(x)(2)(B) | |
Losses | 4.7(a) | |
Material Adverse Effect | 2.1(b) | |
New Security | 4.3(a) | |
Nominating Committee | 4.4(a) | |
Non-Qualifying Transaction | 6.9(11)(C) | |
or | 6.9(4) | |
Parent Corporation | 6.9(11)(C) | |
Pension Plan | 2.2(p)(2) | |
Placement Agent | Recitals | |
Previously Disclosed | 2.1(c) | |
Prior Investment Agreement | 2.1(c) | |
Purchase Price | 1.3(b) | |
Qualifying Ownership Interest | 4.4(a) | |
Registered | 2.2(v) | |
Regulatory Agreement | 2.2(y) | |
Required Approvals | 2.2(e) | |
Scheduled Intellectual Property | 2.2(v)(1) | |
Securities | Recitals | |
Stock Plans | 2.2(c) | |
Subsidiary | 6.9(1) | |
Surviving Corporation | 6.9(11)(C) | |
Tax/Taxes | 2.2(i) | |
Tax Return/Tax Returns | 2.2(i) | |
to the knowledge of the Company/Companys knowledge | 6.9(10) | |
Transaction Deadline | 5.1(b) | |
Transaction Expenses | 3.2 | |
Unlawful Gains | 2.2(n)(5) | |
Voting Common Stock | Recitals | |
Voting Debt | 2.2(c) | |
Voting Securities | 4.1(a)(1) | |
Written Agreement | 2.2(n)(4) |
iv
INVESTMENT AGREEMENT (this Agreement), dated as of April 13, 2012, between Coastal Financial Corporation, a Washington corporation (the Company), and CJA Private Equity Financial Restructuring Master Fund I LP, a Cayman Islands limited partnership (herein the Investor).
RECITALS:
WHEREAS, the Company is offering, pursuant to a private placement offering to private equity investors and accredited investors within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the Act), up to 10,588,235 shares of its common stock, issuable as either Company Voting Common Stock, no par value (Voting Common Stock), or Company Class C Non- Voting Common Stock, no par value (Class C Non-Voting Common Stock, and together with the Voting Common Stock, the Securities), with the number of shares of Voting Common Stock not to exceed 10,588,235 shares and the number of shares of Class C Non-Voting Common Stock not to exceed 1,500,000 shares, provided, if Class C Non-Voting Common Stock is issued, the maximum number of shares of Voting Common Stock that may be issued (10,588,235) shall be reduced by the number of shares of Non-Voting Stock issued such that the total number of Securities issued shall not exceed 10,588,235 Securities, at a purchase price of $0.85 per share (the Offering), and intends to sell to the Investor, and the Investor intends to purchase from the Company, as an investment in the Company, the securities as described herein. The securities to be purchased at the Closing (as defined below) are 320,588 shares of Class C Non-Voting Common Stock (for a purchase price of $0.85 per share); and
WHEREAS, the Company has engaged Hovde Securities, LLC as placement agent in connection with the Offering (the Placement Agent).
NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:
1
ARTICLE I
Purchase; Closing
1.1 Purchase. On the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company shall sell to the Investor, 320,588 shares of Class C Non-Voting Common Stock.
1.2 Reserved.
1.3 Closing. (a) Unless this Agreement has been terminated pursuant to Article V, and subject to the satisfaction (or to the extent permitted, the waiver) of the conditions set forth in Article I, the closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of Coastal Financial Corporation, or remotely via the electronic or other exchange of documents and signature pages, as soon as practicable (the Closing Date), but in no event later than the second business day after the satisfaction or waiver of the conditions set forth in Article I (excluding conditions that, by their terms, cannot be satisfied until the Closing, but the Closing shall be subject to the satisfaction or waiver of those conditions), or at such other place or such other date as agreed to by the parties hereto.
(b) Subject to the satisfaction or waiver on the Closing Date of the conditions to the Closing in Section 1.3(c), at the Closing, the Investor shall remit to the Company by wire transfer of immediately available United States funds to a bank account designated by the Company for an aggregate purchase price of $272,499.80 (the Purchase Price), and the Company shall deliver to the Investor certificates representing 320,588 shares of Class C Non-Voting Common Stock to be registered to CJA Private Equity Financial Restructuring Master Fund I LP.
(c) Closing Conditions. (1) The respective obligation of each of the Investor and the Company to consummate the Closing is subject to the fulfillment or written waiver by the Investor and the Company prior to the Closing of the following conditions:
(i) all approvals and authorizations of, filings and registrations with, rebuttals of control and notifications to all governmental or regulatory authorities, agencies, courts, commissions or other entities, whether federal, state, local or foreign, or applicable self-regulatory organizations (each, a Governmental Entity), required to consummate the Closing (including, but not limited to, (x) the approval of the Board of Governors of the Federal Reserve System (the Federal Reserve) of any notice or rebuttal of control filed by the Investor pursuant to the Change in Bank Control Act of 1978, as amended (the CIBC Act), (y) the granting by the Federal Reserve of the Investors exemption request (if any) under the Depository Institution Management Interlocks Act with respect to the Board Representative and (z) the approval, if required, of the State of Washington Department of Financial Institutions) shall have been obtained or made and shall be in full force and effect provided, however, that, with respect to the Investor, no such approval, authorization, filing, registration or notification by a Governmental Entity shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(ii) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict the Investor or its Affiliates from owning or voting any Company securities in accordance with the terms thereof and no lawsuit has been commenced by a Governmental Entity or a third party seeking to effect any of the foregoing; and
(iii) if required by the Investor, the Investor shall have received, from the Federal Reserve, written confirmation, satisfactory to the Investor in its reasonable judgment, to the effect that neither the Investor
1
nor any of its Affiliates (which for purposes of this paragraph shall include all affiliates as defined in the Bank Holding Company Act of 1956 (the BHC Act) or Regulation Y of the Federal Reserve) shall be deemed to control the Company or the Bank after the Closing for purposes of the BHC Act by reason of the consummation of the transactions contemplated by this Agreement;
(2) The obligation of the Investor to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment of those conditions) of each of the following conditions and subject to the matters set forth in Section 1.3(c) of the Disclosure Schedule:
(i) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date);
(ii) the Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing under this Agreement;
(iii) any Required Approvals (other than those of any Governmental Entity) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided, however, that no such Required Approval (other than those of any Governmental Entity) shall impose any restraint or condition that would be expected to impair in any respect the benefits to the Investor of the transactions contemplated by this Agreement;
(iv) at the Closing, the Company shall not have agreed to enter into or entered into any transaction that resulted in, or would result in if consummated, a Change in Control of the Company;
(v) since (and excluding) the date of this Agreement and through the Closing, no Material Adverse Effect (within the meaning of Section 2.1(b)) shall have occurred and be continuing;
(vi) at the Closing, the Company shall have caused the Investor to receive, substantially in the forms attached hereto as Exhibit A, opinions of Gerrish McCreary Smith, PC, counsel to the Company;
(vii) the Investor shall have received a certificate, dated the Closing Date, signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(2)(i) and (ii) have been satisfied or waived;
(viii) no proceedings shall have been initiated or threatened by any Governmental Entity or other governmental authority seeking to enjoin or otherwise restrain or to obtain an award for damages in connection with the consummation of the transactions contemplated by this Agreement, including without limitation the Offering and the purchase contemplated hereby; and
(ix) Investor and its respective agents and representatives shall have completed, to the Investors satisfaction, any additional due diligence investigation of the assets and operations of the Company and the financial, organization, legal, regulatory, employment and other affairs of the Company that are appropriate based upon the information set forth in the Disclosure Schedules;
(3) The obligation of the Company to consummate the Closing is also subject to the fulfillment or written waiver prior to the Closing of the following conditions:
2
(i) the representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects on and as of the date of this Agreement and on and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties are made as of a specified date, in which case, such representations and warranties shall be true and correct in all material respects as of such date), except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifications contained therein), individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect with respect to the Investor;
(ii) the Investor has performed in all material respects all obligations required to be performed by it at or prior to Closing under Section 3.1; and
(iii) the Company shall have received a certificate signed on behalf of the Investor by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.3(c)(3)(i) and (ii) have been satisfied.
1.4 Treatment of Stock Plans. The Company shall take all actions necessary to ensure the continuation of the Company Options and other awards issued under the Stock Plans in accordance with their terms as exist on the date of this Agreement.
1.5 Termination. Other than pursuant to Article V hereof, this Agreement may not be terminated by the Investor at any time following the Investors delivery of an executed counterpart of this Agreement to the Company. Investor understands that, subject only to the provisions of section 1.3(c) and Article V of this Agreement, Investor (i) is not entitled to cancel, terminate or revoke this Agreement or any of the agreements, representations or warranties of Investor hereunder, and (ii) acknowledges that this Agreement is irrevocable.
ARTICLE II
Representations and Warranties
2.1 Disclosure.
(a) On or within five Business Days prior to the date of this Agreement, each of the Company and the Investor delivered to the other a schedule (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 Section 2.2 with respect to the Company, or in Section 2.3 with respect to the Investor, or to one or more of the Companys covenants contained in Article III; provided, however, that notwithstanding anything in this Agreement to the contrary, the mere inclusion of an item in such schedule shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Material Adverse Effect on the Company or the Investor, as applicable.
(b) Material Adverse Effect means, with respect to the Investor, only clause (2) that follows, or, with respect to the Company, both clauses (1) and (2) that follow, any circumstance, event, change, development or effect that, individually or in the aggregate (1) is or would reasonably be expected to be material and adverse to the financial position, results of operations, business, assets or liabilities, properties, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole, respectively, or (2) would or would reasonably be expected to (x) materially impair the ability of either the Investor or the Company, respectively, to perform its obligations under this Agreement or (y) otherwise materially impede the consummation of the Closing and the other
3
transactions contemplated by this Agreement; provided, however, that in determining whether a Material Adverse Effect has occurred under clause (1), any effect shall be excluded to the extent that it results from (A) changes, after the date of this Agreement, in the U.S. generally accepted accounting principles (GAAP), (B) general changes in the economic conditions that affect the industries in which the Company and its subsidiaries operate, (C) any acts of war, terrorism, insurrection or civil disobedience, (D) any change in law applicable to the Company or subsidiaries (not including any changes in banking or bank holding company laws, rules and regulations), (E) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor or (F) the failure of the Company to meet any internal projections, forecasts, or estimates (but not the underlying causes of such failure), in each case, to the extent that such circumstances, events, changes, developments or effects described in any of the foregoing clauses (A), (B), (C) or (D) do not have a disproportionate effect on the Company and the Company subsidiaries, taken as a whole relative to other similarly situated participants in the industries, markets or geographic areas in which the Company and its subsidiaries compete, or (3) a material and adverse effect on the legality, validity or enforceability of this Investment Agreement.
(c) Previously Disclosed means information set forth on a partys Disclosure Schedule corresponding to the provision of this Agreement, to which such information relates; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement shall also be deemed to be Previously Disclosed with respect to such other provision; and provided, further, that the terms of that certain Amended and Restated Investment Agreement dated as of March 2, 2012 between the Company and the Investor, that certain Investment Agreement dated as of March 30, 2012 between the Company and the Investor and that certain Investment Agreement dated as of April 6, 2012 between the Company and the Investor (collectively, the Prior Investment Agreements) are hereby deemed Previously Disclosed for all purposes notwithstanding any non-disclousre of the terms of such agreement on a partys Disclosure Schedule.
2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) to the Investor that:
(a) Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, is duly qualified to do business and is in good standing in all other jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Company and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is duly registered as a bank holding company under the BHC Act. The Company has furnished to the Investor true, correct and complete copies of the Companys Articles of Incorporation and bylaws, as amended, through the date of this Agreement.
(b) Subsidiaries Organizational Authority. The Companys only subsidiary is Coastal Community Bank (the Bank), a Washington State chartered commercial bank, and is subject to the supervision and regulation of the Washington state Department of Financial Institutions. The Bank is a member bank of the Federal Reserve System and is subject to the regulations of the Federal Reserve Bank of San Francisco. All shares of the outstanding capital stock of the Bank are owned directly by the Company. All of such shares so owned by the Company are duly authorized and validly issued, fully paid and nonassessable and are owned by it free and clear of any lien, adverse right or claim, charge, option, pledge, covenant, title defect, security interest or other encumbrances of any kind (Liens) or equitable interests, with no personal liability attaching to the ownership thereof. No equity security of the Bank is or may be required to be issued by reason of any option, warrant, scrip, preemptive right, right to subscribe to, gross-up right, call or commitment of any character whatsoever relating to, or security or
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right convertible into, shares of any capital stock of the Bank, and there are no contracts, commitments, understandings or arrangements by which the Bank is bound to issue additional shares of its capital stock, or any option, warrant or right to purchase or acquire any additional shares of its capital stock. The Bank is duly organized, validly existing, duly qualified to do business and, to the extent applicable, in good standing under the laws of its jurisdiction of incorporation, and has corporate or other appropriate organizational power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted, except as would not reasonably be expected to have a Material Adverse Effect on the Bank. Except in respect of the Bank, neither the Company nor the Bank own beneficially, directly or indirectly, more than 5% of any class of equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture. The Bank is duly organized and validly existing as a Washington- state chartered bank, its deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by the Federal Deposit Insurance Act and the rules and regulations of the FDIC thereunder, and all premiums and assessments required to be paid in connection therewith have been paid when due.
(c) Capitalization. The authorized capital stock of the Company consists of 68,000,000 shares of Common Stock (of which 65,500,000 shares are Voting Common Stock, 1,000,000 shares are Class B Non-Voting Common Stock and 1,500,000 shares are Class C Non-Voting Common Stock) and 500,000 shares of preferred stock, no par value (the Company Preferred Stock). As of the close of business on April 13, 2012 (the Capitalization Date), there were 29,496,681 shares of Voting Common Stock outstanding, 500,000 shares of Class B Non-Voting Common Stock outstanding, no shares of Class C Non-Voting Common Stock outstanding, and no shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, including any other private placements of Common Stock, the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (Voting Debt) are issued and outstanding. Section 2.2(c) of the Disclosure Schedule sets forth the following information with respect to each outstanding option to purchase shares of Common Stock (a Company Option) or right to acquire shares of stock (Company Restricted Stock) under the Companys 2006 Equity and Stock Option Plan (the Stock Plans) which is true and correct as of the date of this Agreement: (i) the name and, to the knowledge of the Company, the country and state of residence of each holder of Company Options; (ii) the number of shares of Company Common Stock subject to such Company Option, and as applicable for each Company Option, the date of grant, exercise price, number of shares vested or not otherwise subject to repurchase rights, reacquisition rights or other applicable restrictions as of the date hereof, vesting schedule or schedule providing for the lapse of repurchase rights, reacquisition rights or other applicable restrictions, the type of Company Option and the Company Stock Plan or other plan under which such Company Options were granted or purchased; and (iii) whether, in the case of a Company Option, such Company Option is an Incentive Stock Option (within the meaning of the Internal Revenue Code (Code)). The Company has made available to the Investor copies of each form of stock option agreements evidencing outstanding Company Options and has also delivered any other stock option agreements to the extent there are variations from the form of agreement, specifically identifying the holder(s) to whom such variant forms apply. As of the date of this Agreement, except for (i) the outstanding Company Options described in this Section 2.2(c) and listed on Section 2.2(c) of the Disclosure Schedule and (ii) as set forth elsewhere in this Section 2.2(c), the Company does not have and
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is not bound by any outstanding subscriptions, options, warrants, calls, commitments or oral or written agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable or exercisable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). The Company has Previously Disclosed all shares of Company capital stock that have been purchased, redeemed or otherwise acquired, directly or indirectly, by the Company or the Bank since December 31, 2010 and all dividends or other distributions have been declared, set aside, made or paid to the stockholders of the Company since that date. Each Company Option under the Stock Plans (i) was granted in compliance with all applicable laws and all of the terms and conditions of the Stock Plans pursuant to which it was issued, (ii) has an exercise price equal to or greater than the fair market value of a share of Common Stock at the close of business on the date of such grant, has a grant date identical to or following the date on which the Companys board of directors or compensation committee actually awarded such Company Option, (iv) otherwise is exempt from or complies with Section 409A of the Code so that the recipient of such Company Option is not subject to the additional taxes and interest pursuant to Section 409A of the Code and (v) except for disqualifying dispositions, qualifies for the tax and accounting treatment afforded to such Company Option in the Companys tax returns and the Companys financial statements, respectively. The capitalization of the Company, as of the Closing, including all Company Options or rights to Company Restricted Stock is set forth in Section 2.2 (c) of the Disclosure Schedule.
(d) Authorization.
(1) The Company has the corporate power and authority to enter into or issue, as applicable, this Agreement, and the Securities, and to carry out its obligations hereunder. The execution, delivery and performance, as applicable, of this Agreement, and the Securities by the Company and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed, issued and delivered, as applicable, by the Company and, assuming due authorization, execution and delivery of this Agreement by the Investor, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws relating to or affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Companys knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement. The Securities to be issued have been duly authorized for issuance by the Company and, when duly issued and delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, shall not subject the holders thereof to personal liability and the issuance thereof will not be subject to any preemptive or other similar rights. No other corporate proceedings are necessary for the execution, issuance and delivery, as applicable, by the Company of this Agreement, and the issuance of the Securities, the performance by it of its obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby. The Board of Directors has resolved that the transactions contemplated hereby are in the best interests of stockholders of the Company.
(2) Neither the execution, issue, delivery and performance, as applicable, by the Company of this Agreement, and the Securities, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions thereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the
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performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien, upon any of the properties or assets of the Company or the Bank under any of the terms, conditions or provisions of (A) its articles of incorporation or bylaws (or similar governing documents) or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Bank is a party or by which it may be bound, or to which the Company or the Bank or any of the properties or assets of the Company or the Bank may be subject, or (ii) subject to compliance with the statutes and regulations referred to in Section 2.2(e) below, violate any ordinance, permit, concession, grant, franchise, law, statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or the Bank or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. Section 2.2(e) of the Disclosure Schedule lists all governmental and any other consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the Required Approvals). Other than the securities or blue sky laws of the various states and the Required Approvals, no notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.
(f) Financial Statements. Each of the audited consolidated balance sheets of the Company and the Bank and the related consolidated statements of income, stockholders equity and cash flows, together with the notes thereto as of December 31, 2011, and the unaudited consolidated balance sheets of the Company and the Bank as of February 29, 2012 and the related consolidated statements of income, stockholders equity and cash flows for the period ending February 29, 2012, together with the notes thereto and in the form Previously Disclosed to the Investor (the Interim Financials and, collectively, the Company Financial Statements), (1) have been prepared from, and are in accordance with, the books and records of the Company and the Bank, (2) have been prepared in accordance with GAAP applied on a consistent basis for the periods presented, (3) present fairly in all material respects the consolidated financial position of the Company and the Bank and are consistent with any financial statements and other reports filed by the Company and the Bank filed with applicable federal and state banking authorities for the periods stated therein (subject to the absence of notes and year-end audit adjustments in the case of the Interim Financials).
(g) Reports.
(1) Since December 31, 2009, the Company and the Bank have filed all material reports, registrations, documents, filings, statements and submissions together with any required amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the Company Reports) and has paid all material fees and assessments due and payable in connection therewith. As of their respective filing dates, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities, as the case may be. As of the date of this Agreement, there are no outstanding comments from any Governmental Entity with respect to any Company Report that were enumerated within such report or otherwise were the subject of written correspondence with respect thereto.
(2) The records, systems, controls, data and information of the Company and the Bank 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 the Company or the Bank or accountants (including all means of access thereto and therefrom), except for any nonexclusive ownership and nondirect control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls.
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(3) The Company and the Bank maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with managements general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with managements general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Company and the Bank, Stovall, Grandey & Allen, L.L.P. are with respect to the Company and the Bank, independent registered public accountants within the applicable rules of the Public Company Accounting Oversight Board (United States). To the Companys knowledge, the Company and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Companys and the Banks ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys or the Banks internal accounting controls.
(h) Properties and Leases. The Company and the Bank have good and marketable title to all real properties and all other properties and assets owned by them (except as set forth in Disclosure Schedule 2.2(h)), in each case, free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and the Bank own or lease all properties as are necessary to their operations as now conducted. All leases of real property and all other leases material to the Company or the Bank pursuant to which the Company or the Bank, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any such lease, any existing default by the Company or the Bank or any event which, with notice or lapse of time or both, would constitute such a default except for such as would not reasonably be expected to have a Material Adverse Effect.
(i) Taxes. (1) Each of the Company and the Bank has filed all material federal, state, county, local and foreign Tax Returns, including information returns, required to be filed by it and all such filed Tax Returns are, true, complete and correct in all material respects, and paid all material Taxes owed by it and no Taxes owed by it or assessments received by it are delinquent. (2) (i) No Tax Returns of the Company and the Bank referred to in subsection (1) above have been the subject of an audit by the Internal Revenue Service (the IRS) or the appropriate state, local or foreign taxing authority for the period for assessment where the statute of limitations remains open; (ii) all deficiencies asserted or assessments made as a result of any such audits have been paid in full; and (iii) no claim has ever been made by an authority in a jurisdiction where the Company and the Bank do not file Tax Returns that the Company and the Bank are or may be subject to taxation by that jurisdiction. (3) Neither the Company nor the Bank has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case, that is still in effect, or has pending a request for any such extension or waiver. (4) Neither the Company nor the Bank is a party to any pending action or proceeding, nor to the Companys knowledge is any such action or proceeding threatened by any Governmental Entity, for the assessment or collection of Taxes, interest, penalties, assessments or deficiencies that could reasonably be likely to have a Material Adverse Effect on the Company and no issue has been raised by any federal, state, local or foreign taxing authority in connection with an audit or examination of the Tax returns, business or properties of the Company or the Bank which has not been settled, resolved and fully satisfied, or adequately reserved for (other than those issues that are not reasonably likely to have a Material Adverse Effect on the Company). (5) Except as is not reasonably likely to have a Material Adverse Effect on the Company, each of the Company and the Bank has
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withheld and paid all Taxes that it is required to withhold from amounts owing to employees, creditors or other third parties. (6) Neither the Company nor the Bank has been informed by any jurisdiction that the jurisdiction believes that the Company or the Bank was required to file any material Tax return that was not filed. (7) Neither the Company nor the Bank has entered into any listed transaction within the meaning of Treasury Regulations Section 1.6011-4(b)(2), or any other transaction requiring disclosure under analogous provisions of state, local or foreign law. (8) Neither the Company nor the Bank has liability for the Taxes of any person other than the Company or the Bank under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law). (9) Neither the Company nor the Bank is currently subject to a Section 382 Limitation, as defined in Section 382 of the Code. (10) Neither the Company nor the Bank is a party to or is otherwise bound by or has any obligation under any Tax allocation or sharing agreement other than the agreement between the Company and the Bank. (11) Neither the Company nor the Bank is a party to any agreement, contract, arrangement, or plan that could result, separately or in the aggregate, in the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any corresponding provision of state, local, or foreign Tax law). (12) Neither the Company nor the Bank has been a distributing corporation or a controlled corporation in a distribution of stock intended to qualify for Tax-free treatment under Section 355(a) of the Code: (i) at any time during the two-year period prior to the date hereof, (ii) at any time during the period commencing on the date hereof and ending on the Closing Date or (iii) which could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) in conjunction with and including the transactions contemplated by this Agreement. (13) No Ownership Change (as defined by Section 382(g) of the Code) has occurred since December 31, 2010. (14) The Company makes no representation with respect to the use of any net operating loss carryforwards, built-in losses or other tax attributes at any time following the Closing.
For the purposes of this Agreement, the term Tax (including, with correlative meaning, the term Taxes) shall mean (1) any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, unemployment, social security, workers compensation or net worth, and taxes in the nature of excise, withholding, ad valorem or value added, (2) liability for the payment of any amounts of the type described in clause (1) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, and (3) liability for the payment of any amounts as a result of being party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other person with respect to the payment of any amounts of the type described in clause (1) or (2). For the purposes of this Agreement, the term Tax Return (including, with correlative meaning, the term Tax Returns) shall mean all federal, state, local and foreign returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns and any amendments thereto) required to be filed or delivered pursuant to applicable tax laws.
(j) Absence of Certain Changes. Since December 31, 2011, (1) the Company and the Bank have conducted their respective businesses in all material respects in the ordinary course, consistent with prior practice, (2) the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (3) through (and including) the date of this Agreement, no Material Adverse Effect has occurred with respect to the Company and is continuing and (4) there has not been (i) any capital expenditure or series of related capital expenditures made by or on behalf of the Company or the Bank in excess of $25,000; or (ii) any capital investment or acquisition of the securities or assets of, or series of related capital investments or acquisitions, any other person by or on behalf of the Company or the Bank involving more than $25,000 and, in the case of both clauses (i) and (ii), outside of the ordinary course of business consistent with past practice.
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(k) Commitments and Contracts. The Company has Previously Disclosed or provided to the Investor or its representatives true, correct and complete copies of each of the following to which the Company or the Bank is a party or subject as of date of this Agreement (whether written or oral, express or implied) (each, a Company Significant Agreement):
(1) any material employment contract or understanding (including any understandings or obligations with respect to severance or termination pay, liabilities or fringe benefits) with any present or former officer, director, employee or consultant (other than those that are terminable at will by the Company or the Bank);
(2) any material plan, contract or understanding providing for any bonus, pension, option, deferred compensation, retirement payment, profit sharing or similar arrangement with respect to any present or former officer, director, employee or consultant;
(3) any material labor contract or agreement with any labor union;
(4) any contract containing covenants that limit the ability of the Company or the Bank to compete in any line of business or with any person or which involve any restriction of the geographical area in which, or method by which or with whom, the Company or the Bank may carry on its business (other than as may be required by law or applicable regulatory authorities);
(5) any joint venture, partnership, strategic alliance or other similar contract (including any franchising agreement, but in any event excluding introducing broker agreements); and any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations or contains continuing indemnity obligations of the Company or the Bank;
(6) any contract with any Governmental Entity that imposes any material obligation or restriction on the Company or the Bank;
(7) any contract relating to indebtedness for borrowed money, letters of credit, capital lease obligations, obligations secured by a Lien or interest rate or currency hedging agreements (including guarantees in respect of any of the foregoing, but in any event excluding trade payables, securities transactions and brokerage agreements arising in the ordinary course of business consistent with past practice, intercompany indebtedness and immaterial leases for telephones, copy machines, facsimile machines and other office equipment) in excess of $25,000, except for those issued in the ordinary course of business;
(8) any real property lease and any other lease with annual rental payments aggregating $25,000 or more;
(9) any material agreement, contract or understanding with any current or former director, officer, employee, consultant, financial adviser, broker, dealer, or agent providing for any rights of indemnification in favor of such person or entity, except for those entered into in the ordinary course of business; and
(10) any other agreement material to the business of the Company or the Bank.
Each of the Company Significant Agreements is valid and binding on the Company and the Bank, as applicable, and in full force and effect. The Company and the Bank, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. Neither the Company nor the Bank knows of, or has received notice of, any material violation or default (or any condition which with
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the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. To the Companys knowledge, as of the date of this Agreement, there are no material transactions or series of related transactions, agreements, arrangements or understandings, nor are there any currently proposed material transactions, or series of related transactions between the Company or the Bank, on the one hand, and the Company, any current or former director or executive officer of the Company or the Bank or any person who Beneficially Owns 5% or more of the outstanding capital stock of the Company (or any of such persons immediate family members or Affiliates) (other than the Bank), on the other hand.
(l) Offering of Securities. Neither the Company nor any person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the Securities or has taken any action (including, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Securities to be issued pursuant to this Agreement or any other Transaction Document under the Securities Act and the rules and regulations of the SEC promulgated thereunder) which might subject the offering, issuance or sale of any of such Securities to the registration requirements of the Securities Act. Assuming the accuracy of the representations and warranties made by Investor contained herein and similar representations by the other investors in the Offering, the offer and sale of the Securities to Investor in the manner contemplated by this Agreement, are exempt from the registration requirements of the Securities Act and any other applicable laws.
(m) Litigation and Other Proceedings; No Undisclosed Liabilities.
(1) There is no pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or the Bank, nor is the Company or the Bank subject to any order, judgment or decree, in each case, except as would not reasonably be expected to have a material effect on the Company.
(2) Neither the Company nor the Bank has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the financial statements described in Section 2.2(f) to the extent required to be so reflected or reserved against in accordance with GAAP, except for liabilities that have arisen since December 31, 2011 in the ordinary and usual course of business and consistent with past practice and that have not had a material effect.
(n) Compliance with Laws and Other Matters; Insurance. To their best knowledge each of the Company and the Bank:
(1) in the conduct of its business is in material compliance with all, and the condition and use of its properties does not violate or infringe, except when such violation or infringement would not have a material effect, any domestic (federal, state or local) or foreign laws, statutes, ordinances, licenses, rules, regulations, policies or guidelines, judgments, demands, writs, injunctions, orders or decrees applicable thereto or to employees conducting its business, including the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, all other applicable fair lending laws or other laws relating to discrimination and the Bank Secrecy Act except when such violation or infringement would not have a Material Adverse Effect, and, as of the date hereof, the Bank has a Community Reinvestment Act rating of satisfactory or better;
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(2) has all material permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to the business of the Company or the Bank; and all such material permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the knowledge of the Company, no material suspension or cancellation of any of them is threatened, and all such filings, applications and registrations are current;
(3) is currently is complying in all material respects with, and is not under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, all applicable federal, state, local and foreign laws, regulations, rules, judgments, injunctions or decrees;
(4) has, except (i) for statutory or regulatory restrictions of general application, (ii) the Written Agreement between Coastal Financial Corporation and the Federal Reserve Bank of San Francisco, dated September 25, 2009 (the Written Agreement), and (iii) the Consent Order between the Bank and the Washington Department of Financial Institutions, dated January 19, 2010 (the Consent Order), not been placed under any material restriction by a Governmental Entity on its business or properties, and except for routine examinations by applicable Governmental Entities, as of the date of this Agreement, received no notification or communication from any Governmental Entity that an investigation by any Governmental Entity with respect to the Company or the Bank is pending or threatened;
(5) has not, since December 31, 2008 nor to its knowledge, has any other person on behalf of the Company or the Bank that qualifies as a financial institution under the U.S. Anti-Money Laundering laws, knowingly acted, by itself or in conjunction with another, in any act in connection with the concealment of any currency, securities or other proprietary interest that is the result of a felony as defined in the U.S. Anti-Money Laundering laws (Unlawful Gains), nor knowingly accepted, transported, stored, dealt in or brokered any sale, purchase or any transaction of other nature for Unlawful Gains;
(6) to the extent it qualifies as a financial institution under the U.S. Anti-Money Laundering laws, has implemented in all material respects such anti-money laundering mechanisms and kept and filed all material reports and other necessary material documents as required by, and otherwise complied in all material respects with, the U.S. Anti-Money Laundering laws and the rules and regulations thereunder; and
(7) is presently insured, and during each of the past three calendar years has been insured, for reasonable amounts with financially sound and reputable insurance companies against such risks as companies engaged in a similar business would, in accordance with good business practice, customarily be insured.
(o) Labor. Employees of the Company and the Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or the Bank has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority, nor have there been in the last three years. There are no organizing activities, strikes, work stoppages, slowdowns, labor picketing lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or the Bank, nor have there been for the last three years.
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(p) Company Benefit Plans.
(1) All benefit and compensation plans, contracts, policies or arrangements covering current or former employees of the Company and the Bank (the Employees) and current or former directors of the Company, including, but not limited to, employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and deferred compensation, stock option, stock purchase, stock appreciation rights, stock based, incentive and bonus plans (the Benefit Plans) are listed on Schedule 2.2(p)(1), and each Benefit Plan which has received a favorable opinion letter from the Internal Revenue Service National Office, including any master or prototype plan, has been separately identified. True and complete copies of all Benefit Plans listed Schedule 2.2(p)(1) including, but not limited to, any trust instruments, insurance contracts and, with respect to any employee stock ownership plan, loan agreements forming a part of any Benefit Plans, and all amendments thereto, have been made available to the Investor.
(2) All Benefit Plans are in substantial compliance with ERISA, the Code and other applicable laws. Each Benefit Plan which is subject to ERISA (the ERISA Plans) that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (Pension Plan) and that is intended to be qualified under Section 401(a) of the Code, has received a favorable determination letter from the IRS and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter or the loss of the qualification of such Pension Plan under Section 401(a) of the Code. Neither the Company nor the Bank has engaged in a transaction with respect to any ERISA Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject the Company or the Bank to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which would be material. Neither the Company nor the Bank has incurred or reasonably expects to incur a material tax or penalty imposed by Section 4980F of the Code or Section 502 of ERISA.
(3) Neither the Company, the Bank nor any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an ERISA Affiliate) (x) maintains or contributes to or has within the past six years maintained or contributed to a Pension Plan that is subject to Subtitles C or D of Title IV of ERISA or (y) maintains or has an obligation to contribute to or has within the past six years maintained or had an obligation to contribute to a multiemployer plan, as defined in Section 3(37) of ERISA. All contributions required to be made under each Benefit Plan, as of the date hereof, have been timely made and all obligations in respect of each Benefit Plan have been properly accrued and reflected in the Company Financial Statements.
(4) As of the date hereof, there is no material pending or, to the knowledge of the Company threatened, litigation relating to the Benefit Plans. Neither the Company nor the Bank has any obligations for retiree health and life benefits under any ERISA Plan or collective bargaining agreement. The Company or the Bank may amend or terminate any such retiree health and life plan at any time without incurring any liability thereunder other than in respect of claims incurred prior to such amendment or termination.
(5) None of the transactions contemplated by this Agreement, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any anti- dilution adjustment under the Stock Plans or the Employment Agreements or any other contract or agreement to which the Company or the Bank is a party.
(6) There has been no amendment to, announcement by the Company or the Bank relating to, or change in employee participation or coverage under, any Benefit Plan which would increase materially the expense of maintaining such plan above the level of the expense incurred therefor for the most recent fiscal year. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby shall (v) entitle any Employee, officer or director of the Company or the Bank to
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unemployment compensation or severance pay or any increase in severance pay upon any termination of employment after the date hereof; (w) increase any benefits otherwise payable under any Benefit Plan; (x) accelerate the time of payment or vesting or result in any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or result in any other material obligation pursuant to, any of the Benefit Plans; (y) limit or restrict the right of the Company or, after the consummation of the transactions contemplated hereby, the Investor to merge, amend or terminate any of the Benefit Plans or (z) result in payments under any of the Benefit Plans which would not be deductible Section 280G of the Code.
(q) Investment Company. Neither the Company nor any of the Company subsidiaries is or acts as the principal investment adviser to an investment company as defined under the Investment Company Act of 1940, as amended, and neither the Company nor the Bank sponsors any person that is such an investment company.
(r) Risk Management; Derivatives.
(1) The Company and the Bank have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by persons of similar size and in similar lines of business as the Company and the Bank.
(2) All material derivative instruments, including swaps, forwards, caps, floors and option agreements, whether entered into for the Companys own account, or for the account of one or more of the Bank or their customers, were entered into (i) only for purposes of mitigating identified risk and in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (iii) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or the Bank, enforceable in accordance with its terms. Neither the Company nor the Bank, nor any other party thereto, is in material breach of or has materially defaulted under any such agreement or arrangement except as listed on Schedule 2.2(s) (such agreements, the Disclosed Agreements).
(s) Foreign Corrupt Practices and International Trade Sanctions. Neither the Company nor the Bank, nor any of their respective directors, officers, agents, employees or any other persons acting on their behalf (i) has violated the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., as amended, or any other similar applicable foreign, federal, or state legal requirement, (ii) has made or provided, or caused to be made or provided, directly or indirectly, any payment or thing of value to a foreign official, foreign political party, candidate for office or any other person knowing that the person shall pay or offer to pay the foreign official, party or candidate, for the purpose of influencing a decision, inducing an official to violate their lawful duty, securing any improper advantage, or inducing a foreign official to use their influence to affect a governmental decision, (iii) has paid, accepted or received any unlawful contributions, payments, expenditures or gifts, (iv) has violated or operated in noncompliance with any export restrictions, money laundering law, anti-terrorism law or regulation, anti-boycott regulations or embargo regulations, or (v) is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department.
(t) Environmental Matters. Except as has not had and would not reasonably be expected to have a Material Adverse Effect on the Company, to their best knowledge the Company and the Bank: (i) have complied at all times with all applicable Environmental Laws; (ii) have not owned or operated any property that has been contaminated with any Hazardous Substance that could be expected to result in liability pursuant to any Environmental Law; (iii) are not liable for Hazardous Substance disposal or contamination on any third party property; (iv) have not received any notice, demand, letter, claim or
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request for information or threat indicating that it may be in violation of or subject to liability under any Environmental Law; (v) are not subject to any order, decree, injunction or agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Law; (vi) are not subject to any circumstances or conditions that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use, or transfer of any property in connection with any Environmental Law; (vii) have not participated in the management of any borrower or other third party property, or taken any other actions such that they could be deemed an owner or operator of such property for purposes of any Environmental Law and (viii) have made available to the Investor copies of all environmental reports, studies, assessments, and memoranda in its possession relating to the Company or the Bank or any of their current or former properties or operations. For purposes of this Agreement, Environmental Law means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component and Hazardous Substance means any substance that is regulated pursuant to any Environmental Law including any waste, petroleum products, asbestos, mold and lead products.
(u) Anti-Takeover Provisions and Agreed Plan Not Applicable. The Board of Directors has taken all necessary action to ensure that, prior to the Closing (x) each of the consummation of the Investment and any other private placements of Securities (collectively, the Recapitalization Transactions) (1) shall have been approved pursuant to Section 23B.19.040(1)(a)(ii) of the Revised Code of Washington and (2) shall be deemed to be exceptions to the prohibitions and restrictions of Section 23B.19.040 of the Revised Code of Washington, (y) any other similar moratorium, control share, fair price, takeover or interested stockholder law does not and shall not apply to the Recapitalization Transactions and (z) none of the Recapitalization Transactions shall cause any Person, solely by virtue of the consummation of any or all of the Recapitalization Transactions, to become an acquiring person.
(v) Intellectual Property.
(1) The Company has Previously Disclosed or provided to the Investor or its representatives a true, complete and correct list of all Registered Intellectual Property owned by the Company and the Bank, indicating for each Registered item the registration or application number and the applicable filing jurisdiction (the Scheduled Intellectual Property), and, to the knowledge of the Company, such Scheduled Intellectual Property is not subject to any outstanding order, judgment, decree or agreement adversely affecting the use thereof by the Company or the Bank. The Company and each of the Bank owns, or is licensed to use (in each case, free and clear of any material claims, liens or encumbrances), all Intellectual Property used in or necessary for the conduct of its business as currently conducted.
(2) To the knowledge of the Company, the use of any Intellectual Property by the Company and the Bank does not currently infringe on or otherwise violate the rights of any person, and has not done so in the past five years, and such use is in accordance with any applicable license pursuant to which the Company or any of the Bank acquired the right to use any Intellectual Property.
(3) To the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company or the Bank with respect to any material Intellectual Property owned by or licensed to the Company or the Company subsidiaries.
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(4) Neither the Company nor the Bank has received any notice of any pending claim with respect to any Intellectual Property used by the Company or the Bank.
(5) To the knowledge of the Company, no Intellectual Property owned or licensed by the Company or the Bank is being used or enforced in a manner that would be expected to result in the abandonment, cancellation or unenforceability of such Intellectual Property.
(6) The IT Assets owned, used or held for use by the Company or the Bank operate and perform in all material respects in accordance with their documentation and functional specifications and otherwise as required in connection with the business. To the Companys knowledge, no person has gained unauthorized access to the IT Assets. The Company and the Bank have implemented reasonable backup and disaster recovery technology consistent with industry practices. The Company and the Bank take reasonable measures, directly or indirectly, to ensure the confidentiality, privacy and security of customer, employee and other confidential information. The Company and the Bank have complied with all Internet domain name registration and other requirements of Internet domain registrars concerning Internet domain names that are used in the business.
For the purposes of this Agreement, Intellectual Property shall mean trademarks, service marks, brand names, certification marks, trade dress, domain names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, know-how, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; and registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. IT Assets shall mean the computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation used in the business of the Company and the Bank. For purposes of this Section (w), Registered shall mean issued by, registered with, renewed by or the subject of a pending application before any Governmental Entity or internet domain registrar.
(w) Brokers and Finders. Except for the Placement Agent, neither the Company nor the Bank nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Company or the Bank, in connection with the transactions contemplated hereby.
(x) Mortgage Banking Business. Except as has not had and would not reasonably be expected to have a material effect on the Company:
(1) The Company and the Bank have complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or the Bank satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the
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Company or the Bank and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and
(2) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or the Bank or (C) indicated in writing to the Company or the Bank that it has terminated or intends to terminate its relationship with the Company or the Bank for poor performance, poor loan quality or concern with respect to the Companys or the Banks compliance with laws.
For purposes of this Section 2.2(x):
(A) Agency shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;
(B) Loan Investor shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or the Bank or a security backed by or representing an interest in any such mortgage loan; and
(C) Insurer shall mean a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.
(y) Agreements with Regulatory Agencies. Neither the Company nor the Bank is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2009, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a Regulatory Agreement), with the exception of the Written Agreement and the Consent Order, nor has the Company or the Bank been advised since December 31, 2011 and until the date of this Agreement by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as Previously Disclosed, the Company and the Bank are in compliance in all material respects with each Regulatory Agreement to which it is party or subject (including, for the avoidance of doubt, the Written Agreement and the Consent Order), and neither the Company nor the Bank has received any notice from any Governmental Entity indicating that either the Company or the Bank is not in compliance in all material respects with any such Regulatory Agreement.
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(aa) As of the date hereof, the characteristics of the loan portfolio of the Company have not materially changed from the characteristics of the loan portfolio of the Company as of December 31, 2010.
(bb) Prior to the Closing, no counterparty to any of the Disclosed Agreements (other than the Company or the Bank) has declared or otherwise asserted that an event of default has occurred under any of the Disclosed Agreements, and as of immediately prior to the Closing, no event of default shall exist with respect to any of the Disclosed Agreements.
(cc) As of the date hereof, the Bank shall have at least $105,000,000 in core deposits (including money market, demand, checking, savings and transactional accounts and excluding secured governmental deposits and certificates of deposits) and at least $80,000,000 certificates of deposits, excluding governmental and brokered deposits.
(dd) Neither the Company nor the Bank is in violation of (i) any term of its Articles of Incorporation, as amended, or its Amended and Restated Bylaws, or is in material violation of (ii) any agreement or instrument to which it is a party or by which it or any of its properties or assets is bound; or (iii) of any applicable law, ordinance, rule or regulation or any applicable order, judgment or decree of any court or governmental authority.
(ee) Except for the Written Agreement and the Consent Order, and except for restrictions of applicable State and Federal laws and regulations, there are no contractual encumbrances or restrictions or requirements on the ability of the Company or the Bank, (A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party.
(ff) Except as Previously Disclosed or with respect to the investors designated on Schedule I hereto, none of the terms in the Offering offered to another investor therein is more favorable than any provision of this Agreement, and no such other investor has been offered any rights under any side letter which have not also been offered to Investor.
(gg) The Company and the Bank carry, or are covered by, insurance in such amounts and covering such risks as deemed reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(hh) To the best knowledge of the Company, all of the loans represented as assets of the Company or the Bank in the Company Financial Statements, in all material respects, meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a material effect.
2.3 Representations and Warranties of the Investor. Except as Previously Disclosed, the Investor hereby represents and warrants as of the date of this Agreement (except to the extent made only as of a specified date, in which case as of such date) to the Company that:
(a) Organization and Authority. The Investor is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and failure to be so qualified would have a Material Adverse Effect on the Investor and has full power and authority to own its properties and assets and to carry on its business as it is now being conducted.
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(b) Authorization.
(1) The Investor has the partnership power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly authorized by the Investor and no further approval or authorization by any of the partners is required. The signatures on the Agreement are genuine, and the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Investor, and are enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganizations, fraudulent transfer or similar laws affecting creditors generally or by general equitable principles (whether applied in equity or at law). To the Investors knowledge, except as contemplated by this Agreement or as Previously Disclosed, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Investor in connection with the consummation by the Investor of its purchase of the Securities as contemplated by this Agreement.
(2) Neither the execution, delivery and performance by the Investor of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Investor with any of the provisions hereof, shall (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of the Investor under any of the material terms, conditions or provisions of its partnership agreement or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Investor is a party or by which it may be bound, or to which the Investor or any of the properties or assets of the Investor may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or, to the knowledge of the Investor, any judgment, ruling, order, writ, injunction or decree applicable to the Investor or any of their respective properties or assets except in the case of clauses (i)(B) and (ii) for such violations, conflicts and breaches as would not reasonably be expected to have a Material Adverse Effect on the Investor.
(c) Purchase for Investment. The Investor acknowledges that the Securities purchased pursuant to this Agreement have not been registered under the Securities Act or under any state securities laws. The Investor (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (4) is an accredited investor (as that term is defined by Rule 501 of the Securities Act).
(d) Financial Capability. At Closing, the Investor shall have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement.
(e) Brokers and Finders. Neither the Investor nor its Affiliates or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for the Investor, in connection with the Transaction Documents or the transactions contemplated hereby and thereby.
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(f) Ownership. Except for the shares of Voting Common Stock purchased by the Investor on or about March 31, 2011, March 30, 2012 and April 6, 2012, as of the date of this Agreement, the Investor is not the owner of record or the Beneficial Owner of any equity securities of the Company or the Bank.
(g) No Joint Activity or Participation. Investor (i) has no present intention of acquiring control of the Company, as control is defined in 12 C.F.R. Part 225, (or any other applicable banking regulation); (ii) will not acquire control in the future without the prior approval of all applicable Government Entities; and (iii) is not participating, has not participated with, and has no current intention to participate in the future with any other investor in the Offering in any joint activity or parallel action towards a common goal between or among such investors of acquiring control of, or exerting control over, the Company. Except as previously disclosed to the Company, Investor is not an Affiliate of any other investor in the Company. Other than this Agreement, Investor has no agreement, arrangement or understanding with any other person for the purpose of acquiring, holding, controlling, voting, distributing or disposing of any securities of the Company. Any such agreement, arrangement or understanding shall be subject to the prior written approval of the Company and compliance with any applicable regulatory requirements. In making its decision to invest in the Securities, the Investor has conducted its own due diligence review and has not participated in or relied upon the due diligence review of any other investor or any person or entity affiliated with any other investor.
(h) Investor understands and acknowledges that the certificates evidencing the Securities to be purchased hereunder will bear substantially the legend contained in Section 4.5 of this Agreement.
(i) The Investor represents and warrants that neither the Company nor the Placement Agent is acting as a fiduciary or financial or investment adviser for the Investor.
(j) The Investor represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Company, the Placement Agent or their respective legal counsel, advisors and agents.
(k) The Investor acknowledges that it has conducted a review and analysis of the business, assets, condition, operations and prospects of the Company, together with the representations and warranties of the Company set forth in this Agreement, that the Investor considers sufficient for purposes of its purchase. The Investor represents and warrants that (i) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (ii) it has had a reasonable opportunity to ask questions of and receive answers from officers of the Company concerning the Companys financial condition and results of operations and the purchase of the Securities, and any such questions have been answered to its satisfaction, (iii) it has had the opportunity to review all publicly available records and filings concerning the Company and the Bank and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (iv) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary. The Investor further represents and warrants that, except for the Companys management, no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or completeness of the information contained in this Agreement or otherwise provided to the Investor in connection with this Offering.
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(l) The Investor acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by it and that no public solicitation or advertisement with respect to the offering of the securities purchased hereby has been made to it.
(m) The Investor acknowledges and agrees that the Offering involves securities for which only a limited trading market exists, thereby requiring any investment to be maintained for an indefinite period of time. The purchase of the Securities involves risks which the Investor has evaluated, and the Investor is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The Investors overall commitment to investments that are not readily marketable is not, and its acquisition of the Securities will not cause such overall commitment to become, disproportionate to its net worth and the Investor has adequate means of providing for its current needs and contingencies.
(n) The Investor acknowledges and agrees that once funds are transferred in payment of the Purchase Price and the other conditions to Closing are satisfied or, if waivable, waived by the Company or the Investor, as applicable, the Company may schedule Closing in its sole discretion and such will be immediately released to the Company upon completion of Closing.
(o) Investor agrees to provide any information requested by the Company which the Company reasonably believes will enable the Company to (i) comply with all applicable laws, rules and regulations, including without limitation any anti-money laundering and any other laws, rules and regulations applicable to the Company or to any investment held or proposed to be held by the Company, and (ii) determine whether or not Investor is, or will be as of Closing, an accredited investor as defined in Regulation D, promulgated under the Securities Act.
(p) Investor acknowledges and agrees that: (i) neither the Company nor the Placement Agent has provided legal or tax advice or acted as or is an agent or employee of or has advised Investor in connection with the investment in the Company by Investor; (ii) no federal, state, local or foreign agency has passed upon the Securities or made any finding or determination as to the fairness of this investment and (iii) the Securities is not a savings account, deposit or other obligation of a depository institution and is not insured by the FDIC or any other Governmental Entity (as defined herein).
(q) The Investor represents and warrants that it has been given access to information regarding the Company (including the opportunity to meet with officers of the Company) and have utilized such access to its satisfaction for the purpose of obtaining such information concerning the Company and the Securities as the Investor has deemed necessary to make an investment decision.
(r) Investor has reviewed the merits of investing in the Company and has reached its decision to invest in the Company independently from any other investors in the Company.
Investor authorizes the Placement Agent to rely on and agrees that Placement Agent shall be a third party beneficiary of all of Investors representations and warranties contained in this Agreement and in any investor questionnaire.
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ARTICLE III
Covenants
3.1 Filings; Other Actions.
(a) Each of the Investor and the Company shall cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, and expiration or termination of any applicable waiting periods, including the Additional Agreements set forth in Article IV, necessary or advisable to consummate the transactions contemplated by this Agreement and to perform covenants contemplated by this Agreement; the Investor shall make or file any such applications, notices, petitions or filings required to be made by it with Governmental Entities as promptly as practicable, and in any event not later than the date that is 10 calendar days, after the date of this Agreement; provided, however, that nothing in this Agreement shall obligate the Investor to provide any of its, its Affiliates or its control persons or equity holders nonpublic, proprietary, personal or otherwise confidential information. In furtherance and not in limitation of the foregoing, the Investor and the Company will use reasonable best efforts to seek and obtain the written confirmation described in Section 1.3(c)(2)(iii), and in the event that the Federal Reserve demands changes to the structure of the transactions contemplated by this Agreement as a condition precedent to providing such written confirmation, each of the Investors and the Company will cooperate and consult with the other and use all reasonable efforts to make such changes, subject to Section 4.12; provided that no such changes shall, in the Investors sole discretion, adversely affect the economic and accounting aspects of the transactions contemplated by this Agreement with respect to the Investment and/or the Company and its Affiliates. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, the Investor shall use its reasonable best efforts to promptly obtain, and the Company shall cooperate as may reasonably be requested by the Investor and use its reasonable best efforts to help the Investor promptly obtain or submit, as the case may be, as promptly as practicable, all notices to and, to the extent required by applicable law or regulation, consents, approvals or exemptions from bank regulatory authorities (including the Investors notice to the Federal Reserve pursuant to the Change in Bank Control Act, as amended, and applicable rules and regulations thereunder and application to the FDIC pursuant to the Depository Institution Management Interlocks Act and applicable rules and regulations thereunder), for the transactions contemplated by this Agreement. Each of the Investor and the Company shall have the right to review in advance, and to the extent practicable each shall consult with the other, in each case, subject to applicable laws relating to the exchange of information, with respect to all the information relating to the other party, and any of their respective subsidiaries, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. The Investor and the Company shall promptly furnish each other to the extent permitted by applicable laws with copies of written communications received by them or their subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.
(b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its subsidiaries, Affiliates, directors, officers, partners and stockholders and such other matters as may, in the written opinion of counsel for the Company, be necessary in connection with any filing, notice or application made by or on behalf of such other party or any of its subsidiaries to any Governmental Entity in connection with the Closing.
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3.2 Expenses.
(a) Except as set forth in Exhibit B or otherwise agreed to in writing, each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by this Agreement.
3.3 Access, Information and Confidentiality.
(a) From the date of this Agreement, until the date when the Securities owned by the Investor represent less than 4.9% of the outstanding shares of capital stock, the Company shall ensure that upon reasonable notice, the Company and the Bank shall use reasonable efforts to afford to the Investor and its representatives (including officers and employees of the Investor, and counsel, accountants and other professionals retained by the Investor) such access during normal business hours to its books, records (including Tax returns and appropriate work papers of independent auditors under normal professional courtesy), properties and personnel and to such other information as the Investor may reasonably request.
(b) Except as otherwise provided in Section 6.15, each party to this Agreement shall hold, and shall cause its respective subsidiaries and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a Governmental Entity is necessary or appropriate in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any Governmental Entity, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the other party hereto furnished to it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a nonconfidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities.
(c) The Company shall promptly provide the Investor with written notice of the occurrence of any circumstance, event, change, development or effect occurring after the date hereof and relating to the Company or the Bank of which the Company has knowledge and which constitutes a Material Adverse Effect or otherwise cause or render any of the representations and warranties of the Company set forth in this Agreement to be inaccurate.
3.4 Conduct of the Business. Prior to the earlier of the Closing Date or the termination of this Agreement pursuant to Section 5.1, the Company shall, and, shall cause the Bank to: (a) use commercially reasonable efforts to carry on its business in the ordinary course of business and use reasonable best efforts to maintain and preserve its and the Banks business (including its organization, assets, properties, goodwill and insurance coverage) and preserve business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it; provided, that nothing in this clause (a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Companys obligations under applicable law or imposed by any Governmental Entity, (b) if the Company shall (1) declare or pay any dividend or distribution (other than ordinary cash dividends consistent with past practices) on any shares of Company capital stock, or (2) take any action that would require any adjustment to be made under the terms of the Securities as if such Securities were issued on the date of this Agreement, make appropriate adjustments with respect to the Investor such that
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the Investor shall receive the benefit of such transaction as if the Securities to be issued to the Investor at the Closing had been outstanding as of the date of such action and (c) to the extent reasonably practicable, shall consult with the Investor prior to taking any material actions outside of the ordinary course of business. Additionally, except as required pursuant to existing written, binding agreements in effect prior to the date of this Agreement and set forth in Section 3.4 of the Disclosure Schedule, the Company shall and shall cause the Bank to not take any of the following actions: (i) grant or provide any severance or termination payments or benefits to any director, officer or Employee of the Company or the Bank; (ii) increase the compensation, bonus or pension, welfare, severance or other benefits of, pay any bonus to, or make any new equity awards to any director, officer or Employee of the Company or the Bank; (iii) establish, adopt, amend or terminate any Benefit Plan or amend the terms of any outstanding equity-based awards; (iv) take any action to accelerate the vesting or payment, or fund or in any other way secure the payment, of compensation or benefits under any Benefit Plan, to the extent not already provided in any such Benefit Plan; (v) change any actuarial or other assumptions used to calculate funding obligations with respect to any Benefit Plan or to change the manner in which contributions to such plans are made or the basis on which such contributions are determined, except as may be required by GAAP; or (vi) forgive any loans to directors, officers or Employees of the Company or the Bank.
ARTICLE IV
Additional Agreements
4.1 Agreement. The Investor agrees that until such time as the Investor no longer has a Qualifying Ownership Interest, neither the Investor nor any of its Affiliates shall, directly or indirectly:
(a) in any way acquire, offer or propose to acquire or agree to acquire, Beneficial Ownership of any Voting Securities if such acquisition would result in the Investor or its Affiliates: (i) being deemed to control the Company within the meaning of either the BHC Act or the CIBC Act; or (ii) owning in the aggregate 25% or more of the total equity of the Company; or (iii) having Beneficial Ownership or control of shares of a class of Voting Securities in an aggregate amount equal to or greater than the number of shares owned or controlled by the investor then holding the largest number of shares of such class of Voting Securities (which ownership limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by theInvestor or any of its Affiliates). For the avoidance of doubt, for purposes of calculating the Beneficial Ownership of the Investor and its Affiliates hereunder, (x) any security that is convertible into, or exercisable for, any such Voting Securities or Voting Common Stock that is Beneficially Owned by the Investor or its Affiliates shall be treated as fully converted or exercised, as the case may be, into the underlying Voting Securities or Voting Common Stock and (y) any security convertible into, or exercisable for, the Voting Common Stock that is Beneficially Owned by any person other than the Investor or any of its Affiliates shall not be taken into account.
(1) For purposes of this Agreement, Voting Securities shall mean at any time shares of any class of capital stock of the Company that are deemed voting securities within the meaning of the BHC Act and the Federal Reserves Regulation Y.
(2) Notwithstanding the foregoing, the parties hereby agree that nothing in this Section 4.1 shall apply to any portfolio company with respect to which the Investor is not the party exercising control over the decision to purchase Voting Securities or to vote such Voting Securities; provided, that the Investor does not provide to such entity any non-public information concerning the Company or the Bank and such portfolio company is not acting at the request or direction of or in coordination with the Investor; and provided, further, that ownership of such shares is not attributed to the Investor under the BHC Act and the rules and regulations promulgated thereunder.
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(b) make, or in any way participate in, any solicitation of proxies (as such terms are defined under Regulation 14A under the Securities Exchange Act of 1934 (the Exchange Act), disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any Voting Securities of the Company or the Bank;
(c) propose a director (other than the Board Representative) or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of the Company or the Bank, or call or seek to call a meeting of the stockholders of the Company or any of the Company subsidiaries or initiate any stockholder proposal for action by stockholders of the Company or any of the Company subsidiaries, form, join or in any way participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder) with respect to any Voting Securities, or seek, propose or otherwise act alone or in concert with others, to otherwise influence or control the management, board of directors or policies of the Company or the Bank;
(d) bring any action or otherwise act to contest the validity of this Section 4.1 (provided that neither the Investor nor any of its Affiliates shall be restricted from contesting the applicability of this Section 4.1 to the Investor or any of its Affiliates under any particular circumstance) or seek a release of the restrictions contained herein, or make a request to amend or waive any provision of this Section 4.1;
(e) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into any acquisition transaction, merger or other business combination relating to all or part of the Company or the Bank or any acquisition transaction for all or part of the assets of the Company or the Bank or any of their respective businesses;
(f) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing; provided, that without limiting the Investors obligations under Section 4.12, nothing in this Section 4.1 shall prevent the Investor or its Affiliates from voting or disposing of any Voting Securities then Beneficially Owned by the Investor or its Affiliates in any manner; provided, further, that nothing in clauses (b), (c) or (e) of this Section 4.1 shall apply to the Investors Board Representative solely in his or her capacity as a director of the Company;
(g) enter into any agreement with the Company or the Bank that substantially limits the discretion of the Companys management over major policies and decisions; or
(h) dispose or threaten to dispose of Investors equity interests in the Company as a condition or inducement of specific material action or non-action by the Company or the Bank.
4.2 No Rights Agreement. The Company shall not enter into any poison pill agreement, stockholders rights plan or similar agreement that shall limit the Investors rights to acquire up to the caps set forth in Section 4.1.
4.3 Gross-Up Rights.
(a) Sale of New Securities. After the Closing, for so long as the Investor owns securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering provisions of this Section 4.3), at any time that the Company makes any public or nonpublic offering or sale of any equity (including common stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock
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incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are proposed to be offered to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate common stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of common stock held by the Investor, and the denominator of which is the number of shares of common stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor and its Affiliates exceeding the ownership limitations set forth in Section 4.1(a).
(b) Notice. In the event the Company proposes to offer or sell New Securities that are subject to the Investors rights under Section 4.3(a), it shall give the Investor written notice of its intention, describing the price (or range of prices), anticipated amount of securities, timing and other terms upon which the Company proposes to offer the same (including, in the case of a registered public offering and to the extent possible, a copy of the prospectus included in the registration statement filed with respect to such offering), no later than five business days, as the case may be, after the initial filing of a registration statement with the SEC with respect to an underwritten public offering, after the commencement of marketing with respect to a Rule 144A offering or after the Company proposes to pursue any other offering. The Investor shall have 10 business days from the date of receipt of such a notice to notify the Company in writing that it intends to exercise its rights provided in this Section 4.3 and as to the amount of New Securities the Investor desires to purchase, up to the maximum amount calculated pursuant to Section 4.3(a). Such notice shall constitute a nonbinding indication of interest of the Investor to purchase the amount of New Securities so specified at the price and other terms set forth in the Companys notice to it. The failure of the Investor to respond within such 10 business day period shall be deemed to be a waiver of the Investors rights under this Section 4.3 only with respect to the offering described in the applicable notice.
(c) Purchase Mechanism. If the Investor exercises its rights provided in this Section 4.3, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within 30 calendar days after the giving of notice of such exercise, which period of time may be extended for a maximum of 30 days in order to comply with applicable laws and regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the Company and the Investor agree to use their commercially reasonable efforts to secure any regulatory or stockholder approvals or other consents, and to comply with any law or regulation necessary in connection with the offer, sale and purchase of, such New Securities.
(d) Failure of Purchase. In the event the Investor fails to exercise its rights provided in this Section 4.3 within the 10 day period described in Section 4.3(b) or, if so exercised, the Investor is unable to consummate such purchase within the time period specified in Section 4.3(c) above because of its failure
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to obtain any required regulatory or stockholder consent or approval, the Company shall thereafter be entitled during the period of 90 days following the conclusion of the applicable period to sell or enter into an agreement (pursuant to which the sale of the New Securities covered thereby shall be consummated, if at all, within 30 days from the date of such agreement) to sell the New Securities not elected to be purchased pursuant to this Section 4.3 or which the Investor is unable to purchase because of such failure to obtain any such consent or approval, at a price and upon other terms that, taken in the aggregate, are not more favorable to the purchasers of such securities than were specified in the Companys notice to the Investor.
Notwithstanding the foregoing, if such sale is subject to the receipt of any regulatory or stockholder approval or consent or the expiration of any waiting period, the time period during which such sale may be consummated shall be extended until the expiration of five business days after all such approvals or consents have been obtained or waiting periods expired, but in no event shall such time period exceed 90 days from the date of the applicable agreement with respect to such sale. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 90-day period (or sold and issued New Securities in accordance with the foregoing within 30 days from the date of said agreement (as such period may be extended in the manner described above for a period not to exceed 90 days from the date of such agreement)), the Company shall not thereafter offer, issue or sell such New Securities without first offering such securities to the Investor in the manner provided above.
(e) Non-Cash Consideration. In the case of the offering of securities for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors; provided, however, that such fair value as determined by the Board of Directors shall not exceed the aggregate market price of the securities being offered as of the date the Board of Directors authorizes the offering of such securities.
4.4 Governance Matters. (a) The Company shall cause the Board Representative to be elected or appointed, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Companys and Banks Nominating Committees (each the Nominating Committee) (such approval not to be unreasonably withheld or delayed), to the Board of Directors of the Company and the Bank as soon as reasonably practical following the Closing and thereafter as long as the Investor owns in aggregate 4.9% or more of the number of shares of common stock outstanding (the Qualifying Ownership Interest). For the avoidance of doubt, the parties acknowledge and agree that the rights granted to the Investor pursuant to this Section 4.4 are duplicative of those granted to the Investor pursuant to Section 4.4 of each of the Prior Investment Agreements, and the Investor shall not have or seek to have more than one representative on the Board of Directors of the Company or the Bank, including pursuant to the rights granted hereunder, the Prior Investment Agreements or otherwise. The Company shall be required to recommend to its stockholders the election of the Board Representative to the Board of Directors at all of the Companys applicable annual meetings, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and the Bank and to the approval of the Nominating Committees (such approval not to be unreasonably withheld or delayed). If the Investor no longer has a Qualifying Ownership Interest, the Investor shall have no further rights under Sections 4.4(a) through 4.4(c) and, in each case, at the written request of the Board of Directors, shall use all reasonable best efforts to cause their Board Representative to resign from the Boards of Directors as promptly as possible thereafter. The Boards of Directors shall cause the Board Representative to be appointed to two committees of the Boards as shall be selected by the Board Representative, so long as the Board Representative qualifies to serve on such committees under the applicable rules of the NASDAQ, the SEC and the Companys corporate governance guidelines and the charters of such committees; provided, however, at all times of service as a Director, the Board Representative shall not be eligible and is strictly prohibited from being nominated, elected or appointed
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to serve as: (i) a Chairman of either of the Boards or as Chairman of any committee of either Board; (ii) a member of any committee of either Board if the Board Representative occupies more than 25% of the seats on the committee; or (iii) a member of any committee that has the authority or practical ability to unilaterally make (or block the making of) policy or other decisions that bind either Board, in each case so long as the Investor has a Qualifying Ownership Interest.
(b) The Board Representative shall, subject to applicable law, be the Companys and the Nominating Committees nominees to serve on the Boards of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Company by the stockholders of the Company and the Company shall solicit proxies for the Board Representative to the same extent as it does for any of its other nominees to the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representative elected as a director of the Bank by the Company as the majority shareholder.
(c) Subject to Section 4.4(a), upon the death, resignation, retirement, disqualification or removal from office of the Board Representative, the Investor shall have the right to nominate a replacement for the Board Representative, which replacement shall satisfy all legal and governance requirements regarding service as a director of the Company and the Bank. The Board of Directors of the Company shall use its reasonable best efforts to take all action required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law, being the Companys and the Nominating Committees nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company by the stockholders of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).
(d) The Board Representative shall be entitled to the same compensation and same indemnification in connection with his or her role as a director as the other members of the Boards of Directors, and the Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Boards of Directors or any committee thereof, to the same extent as the other members of the Boards of Directors. The Company shall notify the Board Representative of all regular meetings and special meetings of the Board of Directors and of all regular and special meetings of any committee of the Board of Directors of which the Board Representative is a member. The Company shall provide the Board Representative with copies of all notices, minutes, consents and other material that it provides to all other members of the Board of Directors concurrently as such materials are provided to the other members.
(e) For purposes of this Agreement, Board Representative means Jack Thompson or such successor as the Investor shall designate as provided herein. Until his appointment as a member of the Boards is effective, the Board Representative shall be entitled to attend Board meetings of the Company and the Bank as a non-voting observer. The appointment of the Board Representative as a director of the Company and the Bank shall be subject to Federal Reserve approval.
4.5 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Securities subject to this Agreement shall bear a legend substantially to the following effect:
(i) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
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(ii) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF APRIL 13, 2012, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.
(b) Upon request of the Investor, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause clause (i) of the legend to be removed from any certificate for any Securities to be so transferred and clause (ii) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement. The Investor acknowledges that the Securities purchased under this Agreement have not been registered under the Securities Act or under any state securities laws and agrees that it shall not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws.
4.6 Reserved.
4.7 Indemnity. (a) The Company agrees to indemnify and hold harmless the Investor and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Investor Indemnified Parties), to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable out-of-pocket attorneys fees, expenses and disbursements), amounts paid in settlement and other costs (collectively, Losses) arising out of or resulting from (1) any inaccuracy in or breach of the Companys representations, warranties or certifications, as applicable (x) in this Agreement or (y) in the certificate delivered pursuant to Section 1.3(c)(2)(vii) and (2) the Companys breach of agreements or covenants made by the Company in this Agreement or (3) any Losses arising out of or resulting from any legal, administrative or other proceedings arising out of the transactions contemplated by this Agreement and the terms of the Securities (other than any Losses attributable to the errors or omissions on the part of the Investor, but not including the transactions contemplated hereby and other than any Losses relating to any specific claim where proceedings are initiated by the Investor or any Investor Indemnified Party where the Investor or such Indemnified Party is not the substantially prevailing party with respect to such claim).
(b) The Investor agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the Company Indemnified Parties), to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of the Investors representations or warranties in this Agreement or (2) the Investors breach of agreements or covenants made by the Investor in this Agreement.
(c) A party entitled to indemnification hereunder (each, an Indemnified Party) shall give written notice to the party indemnifying it (the Indemnifying Party) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.7 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such
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action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at the cost and expense of the Indemnifying Party counsel and conduct the defense thereof; provided, however, that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with regard to any single action or group of related actions. If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and any Indemnified Party shall cooperate in the defense or prosecution of such claim. Such cooperation shall include the retention and (upon the Indemnifying Partys request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided, however, that the Indemnifying Party shall not unreasonably withhold, delay or condition its consent. The Indemnifying Party further agrees that it shall not, without the Indemnified Partys prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.
(d) The Company shall not be required to indemnify any Investor Indemnified Party for any claims pursuant to Section 4.7(a)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Company shall be responsible for the amount of all such claims. The Investor shall not be required to indemnify any Company Indemnified Parties for any claims pursuant to Section 4.7(b)(1) if the amount of Losses incurred with respect to such claims are less than $25,000 in the aggregate, in which event the Investor shall be responsible for all such claims.
(e) No indemnity obligation under this Section 4.7 shall result from a breach of the representation set forth in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) or 2.3(b). The cumulative indemnification obligation of (1) the Company to all of the Investor Indemnified Parties or (2) the Investor to all of the Company Indemnified Parties, in each case, for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price.
(f) The obligations of the Indemnifying Party under this Section 4.7 shall survive the Transfer, redemption or conversion of the Securities issued pursuant to this Agreement, or the closing or termination of this Agreement and any other Transaction Document. The indemnity provided for in this Section 4.7 shall be the sole and exclusive remedy, except as provided for in Section 6.16, of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided, that nothing herein shall limit in any way any such partys remedies in respect of intentional and willful fraud, intentional and willful misrepresentation or omission or intentional and willful misconduct by the other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party to this Agreement (or any of its Affiliates) for any consequential (i.e., speculative damages and damages and expenses that arise solely from special circumstances of the Indemnified Party that have not been communicated to the Indemnified Party) or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof, except the foregoing limitation on punitive damages shall not apply if such damages are sought as a result of a claim brought by a Person or entity not a party to this Agreement. The indemnification rights contained in this Section 4.7 are not limited or deemed waived by any investigation or knowledge by the Indemnified Party prior to or after the date hereof.
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(g) Any indemnification payments pursuant to this Section 4.7 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.
4.8 Reserved.
4.9 Reserved.
4.10 Reserved.
4.11 Voting and Equity. Notwithstanding anything to the contrary in this Agreement, the Investor together with its Affiliates shall not have the ability to own, control or hold the power to vote any Voting Securities equal to or in excess of the percentage of the total outstanding Voting Securities of the Company owned or controlled by the shareholder then holding the largest percentage of the total outstanding Voting Securities of the Company (which percentage limit shall not be reduced by the amount of any Voting Securities or any security that by its terms can be converted into or is exercisable for Voting Securities that has been sold or transferred by the Investor or any of its Affiliates) unless the Investor has made all the required filings and received all the required approvals contemplated by Section 3.1(a), and shall not acquire any equity in the Company in excess of 24.9% of the total outstanding equity of the Company unless the Investor has received all the required approvals contemplated by Section 3.1(a).
4.12 Additional Regulatory Matters. So long as the Investor has a Qualifying Ownership Interest:
(a) each of the Company and the Investor agree to cooperate and use its reasonable best efforts to communicate with each other with respect to their respective purchases of equity capital securities of the Company with the objective, among other things, that Company repurchases not cause the Investor or its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision);
(b) the Company shall not take any action, (including, any redemption, repurchase or recapitalization of common stock, of securities or rights, options, or warrants to purchase common stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for common stock in each case, where the Investor is not given the right to participate in such redemption, repurchase or recapitalization to the extent of the Investors pro rata proportion) that, based on the advice of legal, could cause the Investor or any of its Affiliates to be deemed to become, or control, a bank holding company with respect to the Company and its Affiliates within the meaning of the BHC Act or CIBC Act, including the rules and regulations promulgated thereunder (or any successor provision); provided, however, that the Company shall not be deemed to have violated this Section 4.12(b) if it has given the Investor the opportunity to participate in such redemption, recapitalization or repurchase to the extent the Investors pro rata proportion and the Investor fails to so participate; and
(c) the Investor shall not take, permit or allow any action that would cause the Bank to become a commonly controlled insured depository institution (as that term is defined for purposes of 12 U.S.C. §1815(e), as may be amended or supplemented from time to time, and any successor thereto).
In the event that either party hereto, as applicable, breaches its obligations under this Section 4.12 or believes that it is reasonably likely to breach such obligations, it shall immediately notify the other party and shall cooperate in good faith with such other party to modify an ownership or other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.
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4.13 Most Favored Nation. Subject to Section 4.13 of the Disclosure Schedule, the Company shall not offer any investors in other private placements, or any other capital raising transaction occurring at the same time as the transactions contemplated by this Agreement, terms more favorable, in form or substance, than those offered in connection with the Investment, unless the Investor is also provided with such terms.
4.14 No Change in Control. The Company shall and shall cause the Bank to take all actions necessary to ensure that none of the transactions contemplated by this Agreement, or other private placements, if any, individually or in the aggregate, shall give rise to a change in control under, or result in the breach or the violation of, or the acceleration of any right under, or result in any additional rights, or the triggering of any antidilution adjustment under any Stock Plans, or employment agreements or any other contract or agreement to which the Company or the Bank is a party, including without limitation having any such contracts or agreements waived in writing or amended prior to Closing.
4.15 Reserved.
4.16 Reserved.
4.17 Reserved.
4.18 Certain Other Transactions.
(a) Notwithstanding anything in this Agreement to the contrary, the Company shall not directly or indirectly effect or cause to be effected any transaction with a third party that would reasonably be expected to result in a Change in Control unless such third party shall have provided prior assurance in writing to the Investor (in a form that is reasonably satisfactory to the Investor) that the terms of this Agreement shall be fully performed (i) by the Company or (ii) by such third party if it is the successor of the Company or if the Company is its direct or indirect subsidiary. For the avoidance of doubt, it is understood and agreed that, in the event that a Change in Control occurs on or prior to the Closing, the Investor shall maintain the right under this Agreement to acquire, pursuant to the terms and conditions of this Agreement, the Securities (or such shares of stock or other securities or property (including cash) into which the Securities may have become exchangeable as a result of such Change in Control), as if the Closing had occurred immediately prior to such Change in Control.
(b) In the event that, at or prior to the Closing, (i) the number of shares of common stock or securities convertible or exchangeable into or exercisable for shares of common stock issued and outstanding is changed as a result of any reclassification, stock split (including reverse split), stock dividend or distribution (including any dividend or distribution of securities convertible or exchangeable into or exercisable for shares of common stock), merger, tender or exchange offer or other similar transaction, (ii) the Company fixes a record date that is at or prior to the Closing Date for the payment of any non-stock dividend or distribution on the common stock, then at the Investors option, which may be exercised in the Investors sole discretion, the number of shares of Securities to be issued to the Investor at the Closing under this Agreement shall be equitably adjusted and/or the shares of Securties to be issued to the Investor at the Closing or pursuant to Section 4.6 under this Agreement shall be equitably substituted with shares of other stock or securities or property (including cash), in each case, to provide the Investor with substantially the same economic benefit from this Agreement as the Investor had prior to the applicable transaction. Notwithstanding anything in this Agreement to the contrary, in no event shall the Purchase Price or any component thereof be changed by the foregoing.
(c) Reserved.
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(d) Reserved.
(e) Until the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefit of the Company, or any direct or indirect subsidiary thereof, may be carried forward, the Company shall not take any action with respect to its stock or any options (within the meaning of Section 1.382-4(d) of the Treasury Regulations) to acquire its stock following the Closing, unless the Company shall have first received an unqualified opinion (based on reasonable assumptions and factual representations) of nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service, in either case to the effect that such action would not cause an ownership change of the Company (within the meaning of Section 382(g) of the Code and applicable Treasury Regulations), taking into account the maximum reasonably expected effect of the exercise of any outstanding options (as defined above).
(f) Notwithstanding anything in the foregoing, the provisions of this Section 4.18 shall not be triggered by (i) the transactions contemplated by the Offering, (ii) any issuances of options, restricted stock units or other equity-based awards granted to newly-appointed directors, employees or consultants of the Company at or around the same time as the Investment, (iii) any other private placements of Securties by the Company at or about the same time as the transaction contemplated by the Offering, or (iv) the issuance of Securties to such persons described in (ii), including upon exercise of any such options (not to exceed 2.5% of the capital stock of the Company on a fully-diluted basis).
4.19 Reserved.
4.20 Non-Voting Shares. The Company shall authorize non-voting shares of its capital stock (including shares of Class C Non-Voting Common Stock), with terms and conditions otherwise materially equivalent to the terms and conditions applicable to its Voting Common Stock, as are required by the Company and the Investor in order to comply with the terms of this Agreement and the implicit rights of the Investor under this Agreement to convert or exchange any portion of the Voting Common Stock held by it to or for non-voting shares, by the issuance of non- voting shares under certain conditions if regulatory approval for the acquisition of additional voting shares or the continued holding of any portion of the Voting Common Stock held by the Investor cannot be reasonably obtained. The Investor shall have the right, upon notice to the Company, to convert all or a portion of voting shares held by the Investor into an equivalent number of non-voting shares (which non-voting shares shall not be convertible into or exchangible for Voting Securities). Any such non-voting shares will be subject to certain transfer restrictions, and shall not be transferred or disposed of by the Investor or any of its Affiliates except as follows: (A) in a widely distributed public offering that is registered under the Securities Act; (B) to a person that is acquiring a majority of the Companys voting securities; or (C) to a person who shall not, after giving effect to such transfer, own more than 2% of any class of voting securities of the Company.
4.21 Cooperation. The Company and the Investor shall cooperate in good faith and the Company shall use its best efforts to facilitate the exercise of the Investors rights under Sections 4.3, and 4.20, including, but not limited to, securing any required approvals or consents or issuing non- voting shares or converting voting shares to non-voting shares, as appropriate, to achieve the intent of these sections through the issuance of non-voting shares.
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ARTICLE V
Termination
5.1 Termination. This Agreement shall be terminated prior to the Closing:
(a) by mutual written agreement of the Company and the Investor;
(b) by the Company or the Investor, upon written notice to the other party, in the event that the Closing does not occur on or before April 13, 2012 or such extended time to which the parties shall have agreed in writing (the Transaction Deadline); provided, however, that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available: (i) due to any failure by Investor to obtain required regulatory approvals by such date, provided the Investor is actively and reasonably seeking such approvals or, (ii) to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date;
(c) by the Company or the Investor, upon written notice to the other parties, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;
(d) by the Investor, if the Investor or any of its Affiliates receive written notice from or is otherwise advised by the Federal Reserve that the Federal Reserve shall not grant (or intends to rescind or revoke if previously granted) the written confirmation described in Section 1.3(c)(2)(iii) or any other Required Approvals will not be granted (or the Governmental Entity intends to rescind or revoke, if such approval has been previously granted); or
(e) by the Investor, if any of the conditions to Closing set forth in Section 1.3(c)(2) are not capable of being satisfied on or before the Transaction Deadline.
5.2 Effects of Termination. In the event of any termination of this Agreement as provided in Section 5.1, this Agreement (other than Section 3.2, Section 3.3(b) (except, in respect of any party, in connection with litigation against it by the other party or its Affiliates), Section 4.7, this Section 5.2 and Article VI (excluding Section 6.17), which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided, that (i) nothing herein shall relieve any party from liability for willful breach of this Agreement and (ii) in no event shall the Company be obligated to reimburse any Transaction Expenses in excess of the amounts provided for in Section 3.2.
ARTICLE VI
Miscellaneous
6.1 Survival. Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of 18 months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.7; provided, that the representations and warranties in Sections 2.2(a), 2.2(b), 2.2(c), 2.2(d), 2.3(a) and 2.3(b) shall survive indefinitely and the representations and warranties in Section 2.2(i) shall survive until 60 days after the expiration of the applicable statutory periods of limitations. Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.
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6.2 Amendment. No amendment or waiver of this Agreement shall be effective with respect to any party unless made in writing and signed by an officer or a duly authorized representative of such party.
6.3 Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each partys obligation to consummate the Closing 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 law. No waiver of any party to this Agreement shall be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
6.4 Counterparts and Facsimile. For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles shall be deemed as sufficient as if actual signature pages had been delivered.
6.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington applicable to contracts made and to be performed entirely within such State. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the State of Washington for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.
6.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
6.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy, electronic mail or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
(1) If to the Investor:
CJA Private Equity Financial Restructuring Master Fund I LP
C/o Hedgserv, Ltd.
Attn: Mr. Donal Murphy
75 St Stephens Green 2nd Floor
Dublin 2 Ireland
Telephone: +353-12341009
Facsimile: +353-16099117
Email: HS_CJANAV@hedgeserv.com & CJAinvestors@hedgeserv.com
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with a copy to (which copy alone shall not constitute notice):
CJA Private Equity Financial Restructuring Master Fund I LP
C/o Gapstow Capital Partners LP
Attn: Virginia Hathorn
130 East 59th Street 12th Floor
New York, NY 10022
Telephone: (646) 735-3322
Facsimile: (646) 735-3494
Email: virginia.hathorn@gapstow.com & fundops@gapstow.com
Wiggin and Dana LLP
Attn: Mark S. Kaduboski
400 Atlantic Street
Stamford, CT 06901
Facsimile: (203) 363-7676
Email: mkaduboski@wiggin.com
(2) If to the Company:
Coastal Financial Corporation
2817 Colby Avenue
Everett, WA 98201
Attn: Eric Sprink
Facsimile: (425) 338-0504
Email: esprink@coastalbank.com
with a copy to (which copy alone shall not constitute notice):
Gerrish McCreary Smith, PC
700 Colonial Road, Suite 200
Memphis, TN 38117
Attn: Jeffrey C. Gerrish
Facsimile: (901) 684-2339
Email: jgerrish@gerrish.com
6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits and Disclosure Schedules hereto) constitutes the entire agreement, with the exception of agreements relating to expense reimbursement if any are agreed to in writing pursuant to Section 3.2, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof; and (b) this Agreement shall not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void), except that the Investor shall be permitted to assign any or all of their respective rights or obligations hereunder to (i) any Affiliate entity, but only if such Affiliate agrees in writing to undertake such assigned obligations of the assigning Investor hereunder for the benefit of the Company, with a copy thereof to be furnished to the Company (any such transferee shall be included in the term Investor); provided, further, that no such assignment shall relieve the Investor of any of its obligations under this Agreement. For the avoidance of doubt, each confidentiality agreement entered into prior to the date hereof, by and between the Company and the Investor, and any investment term sheet between the Company and the Investor entered into prior to the date hereof, shall be void and supplanted by the terms of this Agreement.
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6.9 Other Definitions. Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. When used herein:
(1) the term subsidiary means those corporations, banks, savings banks, associations and other persons of which such person owns or controls 51% or more of the outstanding equity securities either directly or indirectly through an unbroken chain of entities as to each of which 51% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, however, that there shall not be included any such entity to the extent that the equity securities of such entity were acquired in satisfaction of a debt previously contracted in good faith or are owned or controlled in a bona fide fiduciary capacity;
(2) the term Affiliate means, with respect to any person, any person directly or indirectly Controlling, Controlled by or under Common Control with, such other person.
(3) Control (including, with correlative meanings, the terms Controlling, Controlled by and under Common Control with), when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise;
(4) the word or is not exclusive;
(5) the words including, includes, included and include are deemed to be followed by the words without limitation;
(6) the terms herein, hereof and hereunder and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;
(7) business day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Washington generally are authorized or required by law or other governmental actions to close;
(8) person has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;
(9) Beneficially Own, Beneficial Owner and Beneficial Ownership are defined in Rules 13d-3 and 13d-5 of the Exchange Act; and
(10) to the knowledge of the Company or Companys knowledge means the actual knowledge after due inquiry of the Chief Executive Officer of the Company.
(11) Change in Control means, with respect to the Company, the occurrence of any one of the following events:
(A) individuals who, on the date of this Agreement, constitute the Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors; provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination
37
for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the relevant party in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director (except that no individuals who were not directors at the time any agreement or understanding with respect to any Business Combination or contested election is reached shall be treated as Incumbent Directors for the purposes of clause (3) below with respect to such Business Combination or this paragraph in the case of a contested election); provided, further, that the Board Representative will be treated as an Incumbent Director even if the person designated to be such Board Representative should change;
(B) any person is or becomes a Beneficial Owner (other than the Investor and its Affiliates), directly or indirectly, of 20% of the aggregate voting power of the Voting Securities; provided, however, that the event described in this clause (2) will not be deemed a Change in Control by virtue of any holdings or acquisitions: (i) by the Company or any of its Subsidiaries, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries; provided that such holdings or acquisitions by any such plan (other than any plan maintained under Section 401(k) of the Internal Revenue Code of 1986, as amended) do not exceed 20% of the then outstanding Voting Securities, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities or (iv) pursuant to a Non-Qualifying Transaction;
(C) the consummation of a merger, consolidation, statutory share exchange or similar transaction that requires adoption by the Companys stockholders (a Business Combination), unless immediately following such Business Combination: (x) more than 50% of the total voting power of the corporation resulting from such Business Combination (the Surviving Corporation), or, if applicable, the ultimate parent corporation that directly or indirectly has Beneficial Ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation), is represented by Voting Securities that were outstanding immediately before such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and (y) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time the Companys Board of Directors approved the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (x) and (y) above will be deemed a Non-Qualifying Transaction); or
(D) the stockholders of the Company approve a plan of liquidation or dissolution of the Company or a sale of all or substantially all of the Companys assets.
(12) Tax Benefit means net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any potential loss or deduction attributable to an existing net unrealized built-in loss within the meaning of Section 382 of the Code.
(13) Treasury Regulations means as the United States Treasury Regulations promulgated under the Code, as in effect from time to time.
6.10 Captions. The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
38
6.11 Severability. If any provision of this Agreement or the application thereof to any person (including, the officers and directors of each Investor and the Company) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall 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. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
6.12 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, and the Placement Agent, for the Investors Representations and Warranties contained in Section 2.3 hereof, any benefit right or remedies, except that the provisions of Section 4.7 shall inure to the benefit of the persons referred to in that Section.
6.13 Time of Essence. Time is of the essence in the performance of each and every term of this Agreement.
6.14 Certain Adjustments. If the representations and warranties set forth in Section 2.2(c) shall not be true and correct as of the Closing Date, the number of shares of Securities shall be, at the Investors option, proportionately adjusted to provide the Investor the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.
6.15 Public Announcements. Subject to each partys disclosure obligations imposed by law or regulation, (i) each of the parties hereto shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and (ii) no party hereto shall make any such news release or public disclosure without first consulting with the other party hereto and receiving its consent (which shall not be unreasonably withheld or delayed), and each party shall coordinate with the other with respect to any such news release or public disclosure.
6.16 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
6.17 No Recourse. This Agreement may only be enforced against the named parties hereto. All claims or causes of action that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement may be made only against the entities that are expressly identified as parties hereto or that are subject to the terms hereof, and no past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or representative of the Investor or any other party hereto (including any person negotiating or executing this Agreement on behalf of a party hereto) shall have any liability or obligation with respect to this Agreement or with respect to any claim or cause of action, whether in tort, contract or otherwise, that may arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement and the transactions contemplated hereby and thereby.
* * *
39
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto and is effective as of the date first above written.
COASTAL FINANCIAL CORPORATION | ||
By: | /s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer |
[Company Signature Page to Investment Agreement]
40
CJAPRIV PRIVATE EQUITY FINANCIAL RECONSTRUCTURING MASTER FUND I LLP
By: | /s/ Christopher J. Acito | |
Name: Christopher J. Acito obo CJA Private Equity Financial Restructuring GP I Ltd | ||
Title: Managing Member | ||
CJA Private Equity Financial Restructuring Master Fund I LLP | ||
Tax ID: [Intentionally Omitted] |
[Investor Signature Page to Investment Agreement]
41
Exhibit 10.20
FIRST AMENDMENT TO INVESTMENT AGREEMENT
This First Amendment to Investment Agreement (this Amendment), dated as of May 9, 2018, is made and entered into by and between Coastal Financial Corporation, a Washington corporation (the Company) and Steven D. Hovde (the Investor).
WHEREAS, the Company and the Investor entered into an Investment Agreement, dated as of March 30, 2011 (the Agreement); and
WHEREAS, in order to facilitate the completion of an initial public offering by the Company, the Company and the Investor desire to amend the terms of the Agreement with respect to the Investors anti-dilution rights.
NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the parties hereto agree as follows:
1. Section 4.3(a) of the Agreement is hereby revised to read in its entirety as follows:
Sale of New Securities. After the Closing, at any time that the Company issues any equity securities (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity securities or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are issued to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock
1
then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a). The purchase rights provided in this Section 4.3(a) shall terminate upon the occurrence of the earlier of (a) the date that the Investor ceases to own Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering the provisions of this Section 4.3) or (b) completion of an underwritten public offering of the Companys Common Stock for cash pursuant to a registration statement or registration statements (other than on Form S-4, Form S-8 or comparable form) under the Securities Act (i) pursuant to which there is established a listing on the Nasdaq Stock Market or other national securities exchange for the Company Common Stock and (ii) with aggregate gross proceeds of at least twenty five million dollars ($25,000,000).
2. The other terms and provisions of the Agreement shall not be affected by this Amendment, and the Agreement shall continue in full force and effect as amended hereby.
3. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Amendment, to the extent signed and delivered by means of a facsimile machine or by e-mail delivery of a .pdf format data file, shall be treated in all manner and respects as an original instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
[signature page follows]
2
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first written above.
Coastal Financial Corporation | ||
By: | /s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer | ||
/s/ Steven D. Hovde | ||
Steven D. Hovde |
3
Exhibit 10.21
FIRST AMENDMENT TO INVESTMENT AGREEMENTS
This First Amendment to Investment Agreements (this Amendment), dated as of May 9, 2018, is made and entered into by and between Coastal Financial Corporation, a Washington corporation (the Company) and Montlake Capital II, L.P. and Montlake Capital II-B, L.P. (each individually and collectively, the Investor).
WHEREAS, the Company and the Investor entered into Investment Agreements, dated as of March 30, 2011, and March 20, 2012 (collectively, the Agreements); and
WHEREAS, in order to facilitate the completion of an initial public offering by the Company, the Company and the Investor desire to amend the terms of the Agreements with respect to the Investors anti-dilution rights.
NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the parties hereto agree as follows:
1. Section 4.3(a) of each of the Agreements is hereby revised to read in its entirety as follows:
Sale of New Securities. After the Closing, at any time that the Company issues any equity securities (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity securities or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are issued to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock
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held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor exceeding the ownership limitations set forth in Section 4.1(a). The purchase rights provided in this Section 4.3(a) shall terminate upon the occurrence of the earlier of (a) the date that the Investor ceases to own Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering the provisions of this Section 4.3) or (b) completion of an underwritten public offering of the Companys Common Stock for cash pursuant to a registration statement or registration statements (other than on Form S-4, Form S-8 or comparable form) under the Securities Act (i) pursuant to which there is established a listing on the Nasdaq Stock Market or other national securities exchange for the Company Common Stock and (ii) with aggregate gross proceeds of at least twenty five million dollars ($25,000,000).
2. The other terms and provisions of the Agreements shall not be affected by this Amendment, and the Agreements shall continue in full force and effect as amended hereby.
3. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Amendment, to the extent signed and delivered by means of a facsimile machine or by e-mail delivery of a .pdf format data file, shall be treated in all manner and respects as an original instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first written above.
Coastal Financial Corporation | ||
By: | /s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer | ||
Montlake Capital II, L.P. | ||
By: | Montlake Capital Advisor II, LLC, | |
its general partner | ||
By: | /s/ Andrew R. Dale | |
Name: Andrew R. Dale | ||
Title: Managing Director | ||
Montlake Capital II-B, L.P. | ||
By: | Montlake Capital Advisor II, LLC, | |
its general partner | ||
By: | /s/ Andrew R. Dale | |
Name: Andrew R. Dale | ||
Title: Managing Director |
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Exhibit 10.22
FIRST AMENDMENT TO INVESTMENT AGREEMENTS
This First Amendment to Investment Agreements (this Amendment), dated as of May 9, 2018, is made and entered into by and between Coastal Financial Corporation, a Washington corporation (the Company) and CJA Private Equity Financial Restructuring Master Fund I LP (the Investor).
WHEREAS, the Company and the Investor entered into Investment Agreements, dated as of March 30, 2011, March 30, 2012, April 6, 2012, and April 13, 2012 (collectively, the Agreements); and
WHEREAS, in order to facilitate the completion of an initial public offering by the Company, the Company and the Investor desire to amend the terms of the Agreements with respect to the Investors anti-dilution rights.
NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the parties hereto agree as follows:
1. Section 4.3(a) of each of the Agreements is hereby revised to read in its entirety as follows:
Sale of New Securities. After the Closing, at any time that the Company issues any equity securities (including Common Stock, preferred stock or restricted stock), or any securities, options or debt that is convertible or exchangeable into equity securities or that includes an equity component (such as, an equity kicker) (including any hybrid security) (any such security, a New Security) (other than (1) pursuant to the granting or exercise of employee stock options or other stock incentives pursuant to the Companys stock incentive plans approved by the Board of Directors (so long as the authorized awards under the Companys stock incentive plans represent less than 10% of the outstanding shares of capital stock) or the issuance of stock pursuant to the Companys employee stock purchase plan approved by the Board of Directors or similar plan where stock is being issued or offered to a trust, other entity or otherwise, for the benefit of any employees, officers or directors of the Company, in each case, in the ordinary course of providing incentive compensation, (2) issuances of capital stock as full or partial consideration for a merger, acquisition, joint venture, strategic alliance, license agreement or other similar nonfinancing transaction (together an Excluded New Issuance)) the Investor shall be afforded the opportunity to acquire from the Company for the same price (net of any underwriting discounts or sales commissions) and on the same terms (except that, to the extent permitted by law and the Articles of Incorporation and bylaws of the Company, the Investor may elect to receive such securities in nonvoting form, convertible into voting securities in a widely dispersed offering) as such securities are issued to others, up to the amount of New Securities in the aggregate required to enable it to maintain its proportionate Common Stock-equivalent interest in the Company immediately prior to any such issuance of New Securities. The amount of New Securities that the Investor shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the total number or principal amount of such offered New
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Securities by (y) a fraction, the numerator of which is the number of shares of Common Stock held by the Investor, and the denominator of which is the number of shares of Common Stock then outstanding. Notwithstanding anything herein to the contrary, in no event shall the Investor have the right to purchase securities hereunder to the extent that such purchase would result in the Investor and its Affiliates exceeding the ownership limitations set forth in Section 4.1(a). The purchase rights provided in this Section 4.3(a) shall terminate upon the occurrence of the earlier of (a) the date that the Investor ceases to own Securities representing the Qualifying Ownership Interest (before giving effect to any issuances triggering the provisions of this Section 4.3) or (b) completion of an underwritten public offering of the Companys Common Stock for cash pursuant to a registration statement or registration statements (other than on Form S-4, Form S-8 or comparable form) under the Securities Act (i) pursuant to which there is established a listing on the Nasdaq Stock Market or other national securities exchange for the Company Common Stock and (ii) with aggregate gross proceeds of at least twenty five million dollars ($25,000,000).
2. The other terms and provisions of the Agreements shall not be affected by this Amendment, and the Agreements shall continue in full force and effect as amended hereby.
3. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Amendment, to the extent signed and delivered by means of a facsimile machine or by e-mail delivery of a .pdf format data file, shall be treated in all manner and respects as an original instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first written above.
Coastal Financial Corporation | ||
By: | /s/ Eric Sprink | |
Name: Eric Sprink | ||
Title: President and Chief Executive Officer | ||
CJA Private Equity Financial Restructuring Master Fund I LP | ||
By: | /s/ Christopher J. Acito | |
Name: Christopher J. Acito | ||
Title: Member of the GP |
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Exhibit 10.23
[* * *] DENOTES CONFIDENTIAL MATERIAL
OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT.
PROGRAM AGREEMENT
THIS PROGRAM AGREEMENT (including all schedules, appendices, exhibits, addenda and amendments, the Agreement) is entered into this 17th day of May, 2018, (the Effective Date) by and between Coastal Community Bank, a Washington chartered bank (Coastal), and Aspiration Financial, LLC, a limited liability company organized under the laws of the state of Delaware (Aspiration). Each of Coastal and Aspiration shall also be referenced as a Party and collectively as the Parties.
RECITALS
WHEREAS, Aspiration is a registered broker-dealer engaged in the business of offering Aspiration-branded financial products to Customers, including a cash management account, through program relationships with financial institutions located in the United States;
WHEREAS, Coastal, a federally-insured depository institution, offers or desires to offer a variety of banking services to the public directly and through private label banking program relationships;
WHEREAS, at the request of Aspiration, Coastal will receive from Aspiration and hold on behalf of Aspirations Customers cash balances in one or more accounts (Omnibus Account(s)), serve as the issuing bank for debit cards issued to Customers, and provide certain other banking services to Aspiration and Aspiration on behalf of its Customers, and Aspiration will periodically sweep certain Aspiration customer cash balances in the Omnibus Account(s) into FDIC-insured interest-bearing accounts at other depository institutions through a sweep network, all of which will be marketed by Aspiration under the Aspiration brand as part of Aspirations cash management account program to current and prospective Customers.
WHEREAS, the Parties, desire to document with greater specificity the Aspiration Account Program contemplated under this Agreement as well as their respective obligations and responsibilities in relation thereto.
NOW, THEREFORE, in consideration of the mutual covenants and representations contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto agree as follows:
ARTICLE 1
Definitions
As used in this Agreement, the following terms have the definitions indicated.
1934 Act means the Securities Exchange Act of 1934, as amended.
Account Statement means a summary of Aspiration Customer Account transactions for an account cycle, which shall be generated by Aspiration or by a Service Provider on behalf of Aspiration, including changes in amount of deposits, interest earned or paid, fees assessed, charged or paid and any other information required by Applicable Law or as determined by Coastal.
Affiliate means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person.
Agreement has the meaning given in the preamble.
AML means anti-money laundering.
Applicable Law means, with respect to any Person, any law (including common law), ordinance, statute, treaty, rule, Order, regulation, official directive, consent, approval, opinion, interpretation, regulatory guidance, authorization or other determination or finding of any Governmental Body, or rule or interpretation of FINRA, applicable to or binding upon such Person or to which such Person is subject, whether federal, state, county, local, foreign or otherwise as may be amended and in effect from time to time, including the GLB Act, the Bank Secrecy Act, the prohibition against unfair and deceptive acts and practices in the Federal Trade Commission Act, state data security laws, and the USA PATRIOT Act.
Aspiration has the meaning given in the preamble.
Aspiration Account Agreement means the brokerage agreement, which will be provided to each Customer in connection with enrollment in the Aspiration Account Program, governing the use of the Aspiration Customer Account, together with any amendments, modifications or supplements that hereafter may be made to such Aspiration Account Agreement.
Aspiration Account Documentation means, with respect to an Aspiration Customer Account, and to the extent not prohibited from transfer or disclosure by Applicable Law, any and all documentation relating to that Aspiration Customer Account, including Aspiration Account Agreements, Debit Card Agreements, Debit Cards, Account Statements, ACH authorizations, bill pay contracts, all applications, checks or other negotiable instruments with respect to an Account, credit bureau reports (to the extent not prohibited from transfer by contract with the credit bureau), notices to Customers, adverse action notices, change in terms notices, privacy notices, other notices, correspondence, memoranda, documents, stubs, instruments, certificates, agreements, magnetic tapes, disks, hard copy formats or other computer-readable data transmissions, any microfilm, electronic or other copy of any of the foregoing, and any other written, electronic or other records or materials of whatever form or nature, whether tangible or intangible, including information arising from or relating or pertaining to any of the foregoing to the extent related to the Aspiration Account Program.
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Aspiration Account Program means the Aspiration Customer Account program contemplated by this Agreement pursuant to which Aspiration may offer to Customers and potential Customers the opportunity to sweep cash balances awaiting investment or withdrawal into an FDIC-insured interest-bearing account and receive the account features set forth on Exhibit A. The term Aspiration Account Program does not include similar program relationships that may be established between Aspiration and financial institutions other than Coastal.
Aspiration Bank has the meaning given in Section 4.23.
Aspiration Customer Account means an Aspiration-branded cash management account having the features set forth on Exhibit A established by a Customer at Aspiration, the Deposits of which are custodied by Aspiration and held by Coastal in one or more Omnibus Accounts and may be swept, in whole or in part, by Aspiration, directly or through its authorized agent, into FDIC-insured interest-bearing accounts at various other depository institutions through a sweep network. The term Aspiration Customer Account as used in this Agreement does not include similar Aspiration-branded accounts that may be established pursuant to program relationships between Aspiration and financial institutions other than Coastal.
Aspiration Customer Account Data means all Customer Information and any and all information related to an Aspiration Customer Account that is obtained from a Customer, or that is obtained, generated or created in connection with Aspiration Customer Account establishment, processing, servicing and maintenance activities, including: (i) Aspiration Customer Account, Customer or transaction data (including Aspiration Customer Account number, purchase, cash advance, payment and other transaction data); (ii) name, address and contact information of an applicant or Aspiration Customer Account holder; (iii) any and all documentation relating to a Aspiration Customer Account, including checks, notices, correspondence, instruments, Aspiration Account Agreements, magnetic tapes, disks, hard copy formats or other computer-readable data transmissions; (iv) customer service and collections data; (v) telephone logs and records; and (vi) other documents, data and information obtained through the establishment, processing, servicing and maintenance of an Aspiration Customer Account.
Aspiration Data means any and all information related to the Aspiration Account Program, excluding Aspiration Customer Account Data and Aspiration Account Documentation. Aspiration Data also includes Aspirations ownership (jointly with Coastal) of all documentation relating to the Aspiration Account Program and used as a basis for Aspiration Customer Account documentation, including without limitation, forms, policies, procedures, notices, account agreements, cardholder agreement, disclosures, and customer service scripts and templates.
Aspiration Designated Program Team Member has the meaning given in Section 4.18.
Coastal has the meaning given in the preamble.
Coastal Content has the meaning given in Section 5.1.
Coastal Designated Program Team Member has the meaning given in Section 4.18(c).
Coastal Marks has the meaning given in Section 5.1.
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Coastal Rules means the policies and procedures of Coastal, including the Risk Management Considerations, to ensure the continued safety and soundness of Coastal and made available to Aspiration, as may be amended from time to time.
Coastal Services means the banking services provided by Coastal to Aspiration and Aspiration on behalf of Aspirations Customers with respect to the Aspiration Account Program under this Agreement. Coastal Services shall include, but are not limited to, serving as the issuing bank with respect to the Debit Cards; facilitating transfers and withdrawals from Aspiration Customer Accounts via direct ACH, debit and check; and custodying funds for the benefit of Aspirations Customers in one or more Omnibus Accounts.
Confidential Information has the meaning given in Section 11.4(a).
Control means, with respect to a Person, the power to direct, or cause the direction of, the management and policies of the Person, whether through ownership of voting securities, by contract or otherwise (provided that the power to direct the voting of securities representing 51% or more of an entitys voting power shall always be deemed to constitute Control).
Criticism has the meaning given in Section 4.10(c).
Customer means any Person who opens and holds an Aspiration Customer Account.
Customer Information has the meaning given in Section 11.4(a).
Debit Card has the meaning given in Section 3.1.
Debit Card Agreement has the meaning given in Section 3.2(b).
Deposits means the Customer ledger balances in the Aspiration Customer Accounts.
Effective Date has the meaning given in the preamble.
Event of Default has the meaning set forth in Section 10.5.
FDIC means the Federal Deposit Insurance Corporation.
FINRA means the Financial Industry Regulatory Authority.
GAAP means, as of a particular time, generally accepted accounting principles as in effect in the United States as of such time.
GLB Act has the meaning given in Section 11.4.
GLB Regulations has the meaning given in Section 11.4.
Governmental Body means any government or governmental or regulatory body thereof, or political subdivision thereof, whether foreign, federal, state or local, or any agency, instrumentality or authority thereof, or any court or arbitrator (public or private).
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IDTP has the meaning given in Section 4.4(b).
IDV means identity verification.
Indemnified Party has the meaning given in Section 11.1(c).
Indemnifying Party has the meaning given in Section 11.1(c).
Internet Service has the meaning given in Section 4.6(b).
KYC means customer identification, commonly referred to as know your customer.
Losses means liabilities, costs, expenses (including reasonable attorneys fees and expenses and costs of defense), damages, judgments, fines, losses, claims, damages or liabilities and amounts paid in settlement.
Marketing Material means any advertisements, brochures, applications, promotional materials, telemarketing scripts and any other written materials relating to the Aspiration Account Program, including all marketing and advertising in paper or electronic or other formats, electronic web pages, electronic web links and any other type of promotional materials related to the Aspiration Account Program, and any such materials sent to, or the scripts or templates used in connection with oral communications with, a Customer or potential Customer.
Network means MasterCard, VISA, Cirrus, Plus or any other card network system of transmitting items and settlement thereof.
Network Rules means, with respect to a Network, the rules and obligations governing the use of the Network by third parties, as may be amended or restated from time to time.
Omnibus Account(s) has the meaning given in the preamble.
Order means any order, injunction, judgment, doctrine, decree, ruling, writ, assessment or arbitration award of a Governmental Body.
Party has the meaning given in the preamble.
Person means any individual, corporation, limited liability company, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization or Governmental Body.
Program Features means those features listed on Exhibit A, as amended from time to time.
Program Team has the meaning given in Section 4.18(a).
Program Website has the meaning given in Section 4.6(a).
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Risk Management Considerations means considerations as identified by the enterprise risk management policies and procedures of Coastal relating to (i) credit risk, (ii) safety and soundness, (iii) reputational risk, (iv) litigation risk and (v) regulatory risk.
Service Provider has the meaning given in Section 4.8.
Term has the meaning set forth in Section 10.1.
Transition Period has the meaning set forth in Section 10.4(a).
ARTICLE 2
The Aspiration Account Program
Section 2.1 Establishment of Aspiration Account Program.
(a) The Parties shall implement the Aspiration Account Program by enrolling Customers beginning on or about July 1, 2018, or such later date as is required by FINRA. The Parties agree that the Aspiration Customer Accounts offered pursuant to the Aspiration Account Program shall initially include, at a minimum, the Program Features. Aspiration may add services or features in the future at its sole discretion; provided, however, that to the extent future services or features added to the Aspiration Account Program require support from Coastal, the addition of such services or features shall be subject to the prior written approval of Coastal. The Parties agree to work together in good faith to implement any additional services and features approved by Coastal. Each additional service or feature added to the Aspiration Account Program that requires support from Coastal will be incorporated into this Agreement through an amendment to Exhibit A, which shall require the written agreement of the Parties.
(b) The Parties shall have the respective roles, duties and responsibilities with regard to the Aspiration Account Program identified on Exhibit B attached hereto.
(c) Notwithstanding anything to the contrary in this Agreement, if Coastal, in its reasonable discretion, determines that an amendment to Exhibit A or Exhibit B is reasonably required to comply with Applicable Law or the Risk Management Considerations, Coastal shall immediately notify Aspiration and shall be permitted to amend Exhibit A or Exhibit B, as applicable, by delivering written notice to Aspiration indicating the minimum changes that Coastal believes are necessary to comply with Applicable Law or the Risk Management Considerations, with the amended version of such exhibit attached thereto and the reason(s) why such amendment was required. Aspiration shall have 45 days from the receipt of such notice to implement the amended version of Exhibit A or Exhibit B, as applicable, unless a shorter period of time is required to comply with Applicable Law or the Risk Management Considerations, as determined by Coastal in its discretion. Notwithstanding the above, Coastal shall not be permitted to amend Exhibit A or Exhibit B if such amendment would cause Aspiration to violate Applicable Law. During the 45 day implementation period, the Parties shall discuss in good faith any additional revisions to Exhibit A or Exhibit B, as applicable.
(d) Each Party shall perform its duties under this Agreement in accordance with the mutually agreed-upon service levels (Service Levels) set forth in the Service Level Rider, to be executed prior to commencement of services.
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(e) Aspiration shall adopt the policies and procedures set forth on Schedule 2.1(e), which shall comply with Applicable Law and the Risk Management Considerations and which shall be subject to the prior approval of Coastal, and shall conduct the Aspiration Account Program in accordance therewith. Notwithstanding anything to the contrary in this Agreement, Aspiration shall not enroll any Customers in the Aspiration Account Program until each of the policies and procedures set forth on Schedule 2.1(e) is agreed upon by the Parties. If Coastal, in its reasonable discretion, determines that an amendment to any of the policies and procedures on Schedule 2.1(e) is required in order to comply with Applicable Law or the Risk Management Considerations, or that an additional policy or procedure is required in order to comply with Applicable Law or the Risk Management Considerations, Coastal deliver written notice to Aspiration with the amended policy or procedure attached thereto, together with the reason(s) why such amendment is required. Notwithstanding the above, if Aspiration in its reasonable discretion determines that an amendment to any of the policies and procedures on Schedule 2.1(e), or any additional policy or procedure proposed by Coastal, would cause Aspiration to violate any Applicable Law, Aspiration shall not be required to comply with such amended or additional policy or procedure.
Section 2.2 Customer Solicitation and Distribution.
(a) Aspiration shall have the exclusive right to market the Aspiration Customer Account under the Aspiration Account Program to potential Customers as further outlined in Exhibit B. Aspiration shall market the Aspiration Customer Account in such manner and through such methods as Aspiration, in its sole discretion, shall determine, subject to the terms and conditions of this Agreement and in accordance with, and subject to, all Applicable Law. Aspiration shall provide Coastal with copies of all Marketing Materials not later than the day of their first use. Aspirations Marketing Materials shall not require the prior approval of Coastal; provided, however, that if Coastal in its reasonable discretion determines that the content or use of the Marketing Materials should be modified in order to comply with Applicable Law, Aspiration shall promptly make such modifications as Coastal shall request unless Aspiration, in its reasonable discretion determines that such modification would cause Aspiration to violate Applicable Law.
(b) Unless otherwise agreed, Aspiration shall be responsible for (i) its own costs and expenses associated with the development of all Marketing Materials and (ii) determining the pricing, fees and expenses to be charged in connection with the Aspiration Account Program (subject to Applicable Law and the Risk Management Considerations). Aspiration shall market the Aspiration Account Program in compliance with Applicable Law and the Network Rules.
Section 2.3 Aspiration Customer Approval. Aspiration will review and approve each potential Customer for participation in the Aspiration Account Program solely in accordance with policies and procedures approved in writing by the Parties.
Section 2.4 Aspiration Account Agreements and Disclosures.
(a) Beginning as of the Effective Date, Aspiration shall develop and provide to Coastal the terms and conditions for the Aspiration Customer Accounts (Aspiration Account Terms), Aspiration Account Agreements as may be necessary under the Aspiration Account
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Program and Applicable Law, and such Aspiration Customer Account-related disclosures as may be required by Applicable Law. The Aspiration Account Terms, Aspiration Account Agreements and Aspiration Customer Account-related disclosures shall comply with Applicable Law. All expenses associated with any changes in the Aspiration Account Terms, Aspiration Account Agreements, or Aspiration Customer Account-related disclosures delivered during the Term, including the costs of materials, preparation, printing and mailing and/or electronically communicating such changes and all other expenses relating to or arising out of such changes, shall be borne by Aspiration.
(b) If Coastal in its reasonable discretion determines that the Aspiration Account Documentation described in Section 2.4(a), as they relate to the Coastal Services, must be modified in order to comply with Applicable Law, Aspiration shall promptly make such modifications as Coastal shall request unless Aspiration, in its reasonable discretion determines that such modification would cause Aspiration to violate Applicable Law.
Section 2.5 Settlement Accounts. The Parties agree that Coastal will establish, on behalf of Aspiration, and maintain one or more settlement accounts for Debit Card, ACH payments, wires, mobile check deposits, and physical check deposits for purposes of settling Aspiration Customer transactions. Each transaction settlement account will be a zero balance account. Coastal will be responsible for moving funds to and from such settlement accounts in accordance with Aspirations instruction.
Section 2.6 Ownership of Data. Aspiration shall have ownership of all Aspiration Customer Account Data, the Aspiration Account Documentation, all documentation relating to the Aspiration Account Program and used as a basis for Aspiration Account Documentation, including without limitation, forms, policies, procedures, notices, account agreements, cardholder agreement, disclosures, and customer service scripts and templates, and all Aspiration Data. Notwithstanding anything to the contrary in this Agreement, Coastal shall, subject to Applicable Law, have reasonable access to, and Aspiration hereby authorizes Coastal to use, Aspiration Customer Account Data and the Aspiration Account Documentation solely as necessary to provide the Coastal Services pursuant to the terms of this Agreement and to exercise its rights under this Agreement. For the avoidance of doubt, Coastal shall have ownership of all policies and procedures developed by or on behalf of Coastal and used by Coastal in connection with delivery of the Coastal Services. Coastal may not, either directly or indirectly, sell Aspiration Customer Account Data to, or share Aspiration Customer Account Data with, any third parties, without the express written consent of Aspiration. Subject to compliance with Aspirations privacy policy and Applicable Law, Aspiration may sell Aspiration Customer Account Data or Aspiration Data to, or share Aspiration Customer Account Data or Aspiration Data with, third parties without the prior consent of Coastal.
ARTICLE 3
Issuance of Debit Cards
Section 3.1 Debit Card Solicitation and Participation. Aspiration shall offer debit cards to all Customers that open Aspiration Customer Accounts. Coastal shall serve as the issuing bank for debit cards for Aspiration Customer Accounts (the Debit Cards) in accordance with the terms of this Agreement for any Customer who requests a Debit Card.
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Section 3.2 Debit Card Features.
(a) Aspiration shall develop and Coastal shall approve a mutually agreeable form of debit card agreement to be used in connection with the Debit Cards associated with Aspiration Customer Accounts (the Debit Card Agreement). If, at any time during the Term (and the Transition Period) of this Agreement, Coastal in its reasonable discretion determines that changes to the terms of the form of Debit Card Agreement are advisable (including because such form does not comply with any Applicable Law, the Risk Management Considerations, or the Network Rules), Coastal shall deliver written notice to Aspiration indicating the minimum changes that Coastal believes are necessary to comply with Applicable Law, the Risk Management Considerations or Network Rules, with the amended version of the Debit Card Agreement attached thereto, and the reason(s) why such amendment was required. Aspiration shall cease delivery and use of the existing Debit Card Agreement, and shall commence use of the amended version of the Debit Card Agreement delivered by Coastal pursuant to this Section 3.2(b), as soon as practicable, and in any event within 45 days of receipt of written notice from Coastal or a shorter period as required to comply with Applicable Law, the Risk Management Considerations or Network Rules, as determined by Coastal in its discretion. Promptly thereafter, the Parties shall discuss in good faith any additional revisions to the Debit Card Agreement.
Section 3.3 Debit Card Disclosures. Aspiration shall develop and Coastal shall approve Debit Card-related disclosures as may be required by and consistent with Applicable Law or the Network Rules or otherwise mutually determined to be advisable in connection with the Aspiration Account Program, subject to the final approval of Coastal. If, at any time during the Term (and Transition Period) of this Agreement, Coastal in its reasonable discretion determines that changes to Debit Card-related disclosures are advisable (including because such disclosures do not comply with any Applicable Law, the Risk Management Considerations or the Network Rules), Coastal shall deliver written notice to Aspiration indicating the minimum changes that Coastal believes are necessary to comply with Applicable Law, the Risk Management Considerations or Network Rules, with the amended version of the Debit Card-related disclosures attached thereto, and the reason(s) why such amendment was required. Aspiration shall cease delivery and use of such Debit Card-related disclosures, and shall commence use of the amended version of the Debit Card-related disclosures delivered by Coastal pursuant to this Section 3.3, as soon as practicable and permitted by Applicable Law, and in any event within 45 days of receipt of written notice from Coastal or a shorter period as required to comply with Applicable Law, the Risk Management Considerations or Network Rules, as determined by Coastal in its discretion. Promptly thereafter, the Parties shall discuss in good faith any additional revisions to the Debit Card-related disclosures.
Section 3.4 Distribution of Debit Cards, Debit Card Agreements and Debit Card-Related Disclosures. Aspiration, or its chosen vendor, shall, at Aspirations expense, manufacture, print and distribute all Debit Cards and Debit Card Agreements, including any new or replacement Debit Cards issued in order to comply with Applicable Law or Network Rules or standards. Aspiration shall cause all Debit Cards and Debit Card Agreements to identify Coastal as the sponsor and to include such other names and Coastal Marks as may be required to comply with Applicable Law and the Network Rules. Designs of all Debit Card and Debit Card Agreements shall be subject to Coastals prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Aspiration shall ensure that all Debit Cards are handled, shipped and distributed in accordance with Applicable Law and the Network Rules.
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Section 3.5 Cancellation of Debit Cards. A Debit Card is subject to cancellation at any time by either Party pursuant to this Agreement, the Debit Card Agreement or, on a case-by-case basis, where either Party believes a Customer is using the Debit Card for fraudulent or illegal purposes. Upon receipt of a notice from either Party of cancellation of any Debit Cards or upon termination of this Agreement for any reason, Aspiration shall, at its sole expense and in compliance with the Network Rules, promptly destroy such cancelled Debit Cards in Aspirations possession or under Aspirations control and provide written certification to Coastal of destruction of any cancelled Debit Cards. For the avoidance of doubt, Aspirations obligation to destroy any cancelled Debit Cards does not extend to Debit Cards that are not within Aspirations possession or under Aspirations control, such as Debit Cards that remain under the control of Customers.
Section 3.6 Primary Memberships in Network. Subject to Section 3.2(a), the Parties shall mutually agree with regard to selection of two or more Networks to be used for the Debit Cards. Coastal shall maintain the required licenses with at least two Networks and shall timely pay all normal fees, membership fees, dues and assessments associated therewith, all of which shall be subject to reimbursement by Aspiration.
Section 3.7 Liability for Costs and Losses Associated with Debit Cards. In addition to the indemnification provisions of Section 11.1, Aspiration shall be liable for, and shall indemnify and hold harmless Coastal from and against, all Losses incurred by Coastal arising out of any claim, demand, allegation, complaint, proceeding or investigation relating to the Debit Cards, except to the extent that such Losses are caused by Coastals error, negligence, or willful misconduct. By way of example, and not of limitation, if a retailer experiences a cyber-attack on its computer systems or databases, and Customer Debit Card account information is compromised, Aspiration shall be liable for, among other things, the cost of reissuing Debit Cards, reimbursing Customers for unauthorized payments, and investigation costs.
ARTICLE 4
Servicing of Aspiration Account Program; General Obligations
Section 4.1 Customer Service.
(a) Aspiration shall service all customer inquiries related to any Aspiration Customer Account or Debit Card. If Coastal receives any inquiry from a Customer with respect to an Aspiration Customer Account or Debit Card, Coastal shall promptly refer such inquiry to Aspiration. If Aspiration receives any inquiry from a Customer or any other Person with respect to Coastal or a Coastal product or service that is unrelated to an Aspiration Customer Account or Debit Card, Aspiration shall promptly refer such inquiry to Coastal.
(b) Without limiting the generality of the foregoing, if Aspiration or any of Aspirations Service Providers receives from a Customer an oral or written notice of error as defined by 12 CFR 1005.11(a) of Regulation E, Aspiration shall respond to such inquiries in accordance with the terms of the Aspiration Account Agreement, Debit Card Agreement and
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Regulation E, as applicable. Aspiration shall retain all error-related information with regard to Aspiration Customer Accounts and Debit Cards and shall provide the same to Coastal as it may reasonably request from time to time. To the extent Coastal responds to any such errors, Aspiration shall use its commercially reasonable efforts to cooperate with Coastal in the reasonable resolution of any Customer-reported error, all in accordance with Applicable Law and the Network Rules.
Section 4.2 Account Operations. Aspiration shall be responsible for all day-to-day Aspiration Customer Account operations, as more fully set out in Exhibit B.
Section 4.3 Account Termination. Aspiration shall have the right to cancel, suspend or terminate any Aspiration Customer Account in accordance with the Aspiration Account Agreement and Applicable Law. Furthermore, Aspiration shall cancel, suspend or terminate (as appropriate) any Aspiration Customer Account that is required to be terminated by Applicable Law. If reasonably determined to be necessary or advisable under Applicable Law, Coastal may, by written notice providing the reason therefor, direct Aspiration to cancel, suspend or terminate the provision of Coastal Services to a particular Customer, and Aspiration shall promptly cancel, suspend or terminate such Customers access to such Coastal Services as so directed and as permitted under Applicable Law.
Section 4.4 Aspiration Policies and Procedures.
(a) The Parties acknowledge and agree that the Aspiration Account Program is under the principal oversight and control of Aspiration. Aspiration shall develop and implement policies and procedures necessary to comply with all KYC, AML, and IDV rules and regulations applicable to the Aspiration Customer Account under Applicable Law and shall be responsible for compliance with all Applicable Law pertaining to KYC, AML and IDV in connection with the Aspiration Account Program and for maintaining appropriate record-keeping relating to the foregoing. Such policies and procedures, which shall be in effect prior to enrolling any Customers in an Aspiration Customer Account, are subject to prior review and approval by Coastal as set forth in Section 2.1. Any material changes to such policies or procedures must be approved in writing in advance by Coastal. If Coastal in its reasonable discretion determines that changes to such policies or procedures are necessary or advisable (including because such policies do not comply with any Applicable Law or the Risk Management Considerations), the Parties shall promptly modify such policies or procedures; provided, that Aspiration shall always retain sole authority regarding the supervision of Aspiration and its activities as a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of FINRA as required by Applicable Law.
(b) Prior to enrolling any Customers in an Aspiration Customer Account, Aspiration shall develop and implement an Identity Theft Prevention Program (IDTP) designed to detect, prevent, and mitigate identity theft in connection with the Aspiration Account Program. The IDTP shall be designed to comply with the provisions of 12 CFR 41.90-41.91 and the Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation set forth at Appendix J to 12 CFR Part 41. Aspiration shall submit the proposed IDTP to Coastal for its prior review and approval, which approval shall not be unreasonably delayed, conditioned or withheld. If Coastal in its reasonable discretion determines that changes to the IDTP are reasonably
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required to comply with any Applicable Law or the Risk Management Considerations, the Parties shall promptly modify the IDTP; provided, Aspiration shall always retain sole authority regarding the supervision of Aspiration and its activities as a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of FINRA as required by Applicable Law.
(c) Aspiration shall develop, implement and maintain a comprehensive information security program designed to meet the objectives of the security and confidentiality guidelines of the federal banking agencies Interagency Guidelines Establishing Standards for Safeguarding Consumer Information and the Interagency Guidelines Establishing Information Security Standards, including the implementation of appropriate policies, procedures and other measures designed to protect against unauthorized access to or use of Aspiration Customer Account Data associated with the Coastal Services maintained or used by Aspiration that could result in substantial harm or inconvenience to any Customer and the proper disposal of Customer Information. Aspiration shall conduct regular testing of its security systems and safeguards, including penetration testing and vulnerability scans. Aspiration shall further develop and maintain a response program in accordance with the Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice and, in accordance with such program, shall take appropriate actions to address incidents of unauthorized access to Customer Information or other information, including notification to Coastal and the Customers as soon as reasonably possible following any such incident related to or affecting a Customer. If there is any conflict between any of the federal banking agencies Interagency Guidelines Establishing Standards for Safeguarding Consumer Information and the Interagency Guidelines Establishing Information Security Standards, and the Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice and Applicable Law governing broker-dealers, the Parties agree that they will work together to resolve any such conflict, including, as required, consulting with the relevant Governmental Body and/or FINRA. Aspiration shall further use commercially reasonable efforts to ensure that any third party Service Provider having access to Customer Information as part of the provision of the Coastal Services shall maintain similar security measures and response programs.
Section 4.5 Coastal Information Security. Coastal shall comply with its privacy policy and Applicable Law in connection with the Aspiration Account Program. Coastals privacy policy or other applicable policies shall include a response program whereby Coastal shall take appropriate actions to address incidents of unauthorized access to Aspiration Customer Account Data or other information, including notification to Aspiration as soon as reasonably possible following any such incident related to or affecting an Aspiration Customer Account. Coastal shall further use commercially reasonable efforts to ensure that any third party Service Provider engaged by Coastal having access to Customer Information shall maintain similar security measures and response programs.
Section 4.6 Program Website.
(a) Aspiration shall maintain a website and mobile application for Customers and potential Customers (Program Website). The Program Website shall be accessible by means of links from the website of Aspiration or its Affiliates, subject to Applicable Law. Aspiration shall ensure that the Aspiration privacy policy, and if required by Applicable Law, the Coastal privacy policy, is clearly and prominently posted on the pages of the Program Website.
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(b) The Program Website shall permit Customers to (i) view the Customers Aspiration Customer Account information and Account Statements, (ii) make payments and withdrawals from the Customers Aspiration Customer Account via automated clearing house transfer or other payment mechanism approved by the parties, (iii) perform account maintenance (update address or telephone, request replacement cards, update account cycle etc.), (iv) contact customer service and (v) other functions as determined by Aspiration in its sole discretion (the Program Website and such functionality, collectively, the Internet Services). To the extent any of the above features or any future features require support from Coastal, such features may be added as may be approved by the Program Team from time to time.
(c) Aspiration represents and, warrants and covenants during the Term (and the Transition Period) that:
(i) the Program Website is solely under Aspirations control (subject to Coastals rights under this Agreement, including Coastals rights with respect to any content relating to the Aspiration Account Program); and
(ii) Aspiration has the license, right or privilege to use the hardware, software and content acquired from third parties for use in the Internet Services, and that it is the owner of all other hardware, software and content used in the Internet Services and that neither the Internet Services as a whole, nor any part thereof, infringes upon or violates any patent, copyright, trade secret, trademark, invention, proprietary information, nondisclosure or other rights of any third party.
Section 4.7 Non-solicit.
(a) During the Term and for one (1) year after the Term, neither Coastal nor its Affiliates shall knowingly solicit, contact or communicate with, directly or indirectly, any Customer for any reason, including but not limited to soliciting, contacting, or communicating with, such Customer for any products or services that directly compete with products or services offered through the Aspiration Account Program except with the prior approval of Aspiration (it being understood that this provision shall not require Coastal to affirmatively identify or otherwise exclude such Customers from any marketing or advertising made to the public generally). Notwithstanding the foregoing, Coastal may continue to (i) service competing products or services marketed to customers prior to the date of this Agreement, (ii) develop and offer additional products and services similar to those offered through the Aspiration Account Program and (iii) undertake its general customer/potential customer marketing activities.
(b) During the Term, neither Aspiration nor its Affiliates shall solicit, directly or indirectly, any Coastal customers for any products or services other than those offered through the Aspiration Account Program, except with the prior approval of Coastal (it being understood that this provision shall not require Aspiration to affirmatively identify or otherwise exclude such Coastal customers from any marketing or advertising made to the public generally or to Aspiration Customers generally).
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Section 4.8 Service Providers. Aspiration may outsource to, or otherwise subcontract with, third parties for the performance of any of Aspiration duties under this Agreement (each such party, a Service Provider); provided, that use of any such Service Provider shall not release Aspiration of its obligations to Coastal under this Agreement and Aspiration shall remain fully liable to Coastal for any breach of this Agreement caused by such Service Providers. The activities of Service Providers, to the extent such activities are substantial and material to the Aspiration Account Program, as determined by Coastal in its reasonable discretion, will be subject to the Coastal Vendor Management Policy to the same extent that Aspiration is subject to such program and policies, and such Service Provider will be deemed a Material Service Provider. Service Providers to be used initially by Aspiration for certain services that are substantial and material to the Aspiration Account Program are set forth on Schedule 4.8. Material Service Providers that are in compliance with Coastal Vendor Management Policy, Applicable Law and the Risk Management Considerations, as determined by Coastal in its reasonable discretion, will be approved. Coastal will provide prompt notice to Aspiration of any material changes to the Coastal Vendor Management Policy.
Section 4.9 Good Standing. Each Party shall (a) keep in full effect and in good standing its corporate or other status in the jurisdictions where it operates and (b) obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is necessary to enable it to perform its duties under this Agreement, except, in either case, where the failure to so qualify would not have a material adverse effect on the ability of such Party to perform its duties hereunder.
Section 4.10 Certain Notices.
(a) Coastal agrees that Aspiration may accept notice of unauthorized activity from a Customer on behalf of Coastal, and notify each Customer that notification of unauthorized activity and any complaints regarding the Aspiration Customer Account will be accepted by Aspiration.
(b) Coastal agrees that it will only accept instructions regarding the movement of funds to or from the Omnibus Account(s) from an authorized employee or agent of Aspiration.
(c) To the extent permitted by Applicable Law, each Party shall promptly provide written notice to the other Party of any material adverse change in its business, properties, assets or conditions (financial or otherwise), including any tax deficiencies or other proceedings before Governmental Bodies that might reasonably be expected to materially and adversely impact such Partys ability to fulfill its obligations under this Agreement. For the avoidance of doubt, Coastal acknowledges that Aspiration is a venture capital-backed entity, and Aspirations financial condition leading up to, and immediately preceding a new funding round shall not be considered a material adverse change triggering notice to Coastal under this Section 4.10(c).
(d) Without limiting the generality of Section 4.10(c):
(i) If Aspiration or any Service Provider receives notice of a Customer complaint from any third party, including any Governmental Body or consumer protection or consumer advocacy agency, directly asserting a compliance or regulatory
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violation related to Coastals participation in the Aspiration Account Program, Aspiration shall, unless prohibited by Applicable Law, promptly forward such complaint and any written documentation related to such complaint to Coastal for review, investigation and resolution. Unless otherwise permitted by Coastal, Aspiration shall not respond to any complaining party on behalf of Coastal. Aspiration shall use its commercially reasonable efforts to cooperate with Coastal in the reasonable resolution of any such complaints.
(ii) If Coastal receives notice of a Customer complaint from any third party, including any Governmental Body, FINRA, or consumer protection or consumer advocacy agency, directly asserting a compliance or regulatory violation related to Aspirations participation in the Aspiration Account Program, Coastal shall, unless prohibited by Applicable Law, promptly forward such complaint and any written documentation related to such complaint to Aspiration for review, investigation and resolution. Unless otherwise permitted by Aspiration, Coastal shall not respond to any complaining party on behalf of Aspiration. Coastal shall use its commercially reasonable efforts to cooperate with Aspiration in the reasonable resolution of any such complaints.
(iii) Each Party shall advise the other in writing of any misappropriation or misuse of Customer Information promptly after such Party becomes aware of such misappropriation or misuse and shall provide an appropriate response in consultation with the other Party and cooperate therewith, which may include notification of Customers, Government Bodies, or FINRA.
(iv) Aspiration shall promptly notify Coastal of any Debit Card activities that it suspects may involve fraud, money laundering, terrorist financing or other impermissible actions. The Parties shall cooperate to perform all necessary and prudent security functions to minimize fraud in the Aspiration Account Program due to lost, stolen or counterfeit Debit Cards and fraudulent Debit Card applications.
(v) Aspiration shall promptly notify Coastal of (i) any breach or default by a Material Service Provider with respect to the Aspiration Account Program and (ii) the termination of any Material Service Provider and the reasons therefore.
(e) In the event that a Party receives criticism in a report of examination or in a related document, or is subject to formal or informal supervisory action by, or enters into an agreement with any Governmental Body or any Network with respect to any matter whatsoever relating to (including omissions therefrom) the Aspiration Account Program (any such event a Criticism), such Party, as applicable, shall advise the other Party in writing of the Criticism received and share with the other Party relevant portions of any written documentation, to the extent not specifically prohibited by Applicable Law or Network Rules. Following receipt of such Criticism the Parties shall in good faith consult as to the appropriate action to be taken to address such Criticism. Aspiration shall take all actions deemed necessary by Coastal, in its commercially reasonable discretion, to address the Criticism in the manner and time period specified by Coastal. Coastal may seek specific performance under this Section 4.10(c).
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(f) Aspiration shall promptly notify Coastal of the completion of any funding round, the amount of the funding round, and whether such funding round resulted in a change in Control of Aspiration.
Section 4.11 Records and Reporting.
(a) Each Party shall keep and maintain such records as are necessary for the implementation of such Partys obligations under this Agreement. The Parties shall cooperate with one another in providing such reports as may be reasonably required in order to satisfy each Partys business requirements or the recordkeeping or reporting requirements of any Applicable Law or Network Rule.
(b) Without limiting the generality of Section 4.11(a), for fiscal years commencing on or after January 1, 2018: (i) Aspiration shall provide Coastal with its balance sheets and related statements of income and cash flow and all notes and schedules thereto as of the end of such period promptly (and in any event within 60 days after the end of Aspirations fiscal year), (ii), Aspiration shall provide Coastal such information as Coastal may reasonably request to perform an annual due diligence review and (iii) Aspiration shall provide Coastal with all necessary data as reasonably requested by Coastal for regulatory or tax purposes and as required by Applicable Law or the Risk Management Considerations promptly (and in any event within 10 business days, unless a shorter time period is required to comply with Applicable Law, after a request from Coastal). Aspiration shall also provide Coastal any monthly or quarterly balance sheets and related statements of income and cash flow as requested.
Section 4.12 Program Audit and Examination Rights.
(a) Each Party shall coordinate its annual audit plan with the other party in an effort to create efficiencies, control audit costs and minimize duplicate audits. To that end, each Party shall share their annual audit plan and engagement letters to ensure the scope of each audit prior to the signing of the engagement letter to ensure those objectives are met. Each Party shall make available its facilities, personnel and records for examination or audit of operations, compliance and IT security when requested, with reasonable advance notice by the other Party, no more than one (1) time per year at the audited Partys expense. However, if the results of the audit finds a material deficiency in operations, compliance or IT security, a follow-up audit may be conducted within such year. Further, if it is inefficient to conduct one annual audit covering operations, compliance and IT security due to (i) auditors lack of expertise or (ii) the scope of the audit being too large, the annual audit may be split into multiple audits each covering a different subject area. Any such audit will be conducted at mutually agreed upon times, upon reasonable prior written notice (no less than twenty (20) business days), and in a manner designed to minimize any disruption of normal business activities; provided, that in agreeing to times for the audit, the audited Party shall be reasonable in scheduling and shall not delay any audit for more than ten (10) business days from the date first proposed by the auditing Party, unless agreed upon by the Auditing Party. The audited Party shall use commercially reasonable efforts to facilitate the auditing Partys audit or review, including making reasonably available such personnel and vendors to assist the auditing Party and its representatives as reasonably requested. The audited Party shall also permit the auditing Party and its representatives to review and have access to (during normal business hours), including for audit purposes, and obtain copies (to the extent
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applicable) of the books, records relating to the Aspiration Account Program. The audited Party shall deliver any document or instrument necessary for the auditing Party to obtain such records from any Person maintaining records for the audited party. For purposes of this provision, the audited Party also shall be required to provide records relating to the Aspiration Account Program held by Persons performing services in connection with the Aspiration Account Program at the auditing Partys request. The Parties agree that the audit rights hereunder will be exercised during normal business hours.
(b) In addition to the audit rights provided in Section 4.12(a), each Party shall provide the other Party with a copy of an any internal or third-party audit report and workpapers regarding operations, compliance (including, unless prohibited by Applicable Law, with respect to the Bank Secrecy Act and the USA PATRIOT Act) or IT as they relate to the Aspiration Account Program, in the case of Aspiration, or the Coastal Services, in the case of Coastal.
(c) The audit or examination rights of any Governmental Body or FINRA shall not be subject to the restrictions in Section 4.12(a), and the Parties agree to cooperate with the examinations or reviews of any Governmental Body or FINRA by using commercially reasonable efforts to facilitate the Governmental Bodys or FINRAs review or examination, including making reasonably available such Partys personnel and vendors to assist such Governmental Body or FINRA as reasonably requested, including access to (during normal business hours), and obtaining copies of the books, records and, if requested, systems relating to the Aspiration Account Program, whether held by Aspiration or any of its Service Providers.
Section 4.13 Standard of Care. Each Party shall perform its obligations under this Agreement in good faith and in a commercially reasonable manner.
Section 4.14 Disaster Preparedness. Each Party shall prepare and maintain disaster recovery, business resumption and contingency plans that comply with Applicable Law and that are appropriate for the nature and scope of the Aspiration Account Program, which plans shall be sufficient to enable the other Party to promptly resume the performance of its obligations hereunder in the event of a natural disaster, destruction of such Partys facilities or operations, utility or communication failures or similar interruption in the operations of such Party or the operations of a third party which in turn materially affect the operations of such Party. Each Party shall make available to the other Party copies of all such disaster recovery, business resumption and contingency plans and shall promptly provide to the other Party copies of any changes thereto. Each Party shall periodically test such disaster recovery, business resumption and contingency plans as may be appropriate and prudent in light of the nature and scope of the activities and operations of such Party and its obligations hereunder and shall promptly provide the other Party with results of any such tests.
Section 4.15 Information Security. Coastal acknowledges the importance of maintaining the security and integrity of Customer Information and agrees to take steps designed to prevent the unauthorized disclosure or use of the Customer Information, to prevent Customer Information from entering the public domain and to transmit, store and process Customer Information in accordance with Applicable Law. Coastal represents and warrants that it is familiar with the Interagency Guidelines Establishing Standards for Safeguarding Customer Information established by the federal regulators of depository institutions and agrees to
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implement and maintain appropriate security measures designed to meet the objectives of such Interagency Guidelines Establishing Standards for Safeguarding Customer Information. The Parties will cooperate to address any suspected fraud or security threat.
Section 4.16 Media Releases. All media releases, public announcements and public disclosures by either Party, or their Affiliates, representatives, employees or agents, that specifically mention the other Party, but not including (a) any disclosure required by Applicable Law or accounting requirements beyond the reasonable control of the releasing Party; or (b) mere reference to Coastal as Aspirations bank sponsor, shall be coordinated with and approved by the other Party in writing prior to the release thereof. Specifically, each Party shall provide the other Party with at least five (5) business days to review any media releases, public announcements or public disclosures specifically mentioning the other Party, unless a different timeframe is mutually agreed to. If the receiving Party does not respond within five (5) business days after receipt of such materials, the materials will be deemed to have been approved. Media releases, public announcements and public disclosures by Aspiration with regard to Aspiration or the Aspiration Account Program generally, without specifically referring to this Agreement or Coastal, shall not require coordination with or approval by Coastal, but Aspiration agrees, to the extent practical, to provide Coastal advance notice of all media releases, public announcements and public disclosures related to the Aspiration Account Program.
Section 4.17 Relationships. Aspiration maintains a relationship with each Customer, and such relationship with Aspiration is independent of any relationship created by Coastals provision of the Coastal Services to such Customer under this Agreement. To the extent permitted by Applicable Law and not otherwise prohibited hereunder, Aspiration may engage in additional transactions with Customers, offer other products or services to Customers or otherwise develop or modify Aspirations existing relationship with Customers.
Section 4.18 Program Team.
(a) No later than five business days after the Effective Date, the Parties shall establish a joint team (the Program Team) to coordinate the provision by Coastal of services to Aspiration pursuant to this Agreement, and to serve as a forum for regular communication between the Parties with regard to the Aspiration Account Program. Coastal and Aspiration shall endeavor to provide stability and continuity in the Program Team and each Partys other Aspiration Account Program personnel. The Program Team shall meet as agreed by the Parties, a minimum of at least bi-weekly, and additionally as the Parties deem necessary or appropriate.
(b) Aspiration shall designate at least one employee as its lead contact member of the Program Team (the Aspiration Designated Program Team Member). The initial Aspiration Designated Program Team Member shall be the individual set forth on Schedule 4.18(b). Aspiration shall have the right, at any time, to appoint a new Aspiration Designated Program Team Member in lieu of the foregoing Person.
(c) Coastal shall designate at least one employee as its lead contact member of the Program Team (the Coastal Designated Program Team Member). The initial Coastal Designated Program Team Member shall be the individual set forth on Schedule 4.18(c). Coastal shall have the right, at any time, to appoint a new Coastal Designated Program Team Member in lieu of the foregoing Person.
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Section 4.19 Dispute Resolution. In the event that any dispute arises with respect to this Agreement or the services to be provided by Aspiration and Coastal hereunder, the members of the Program Team shall cooperate in good faith to resolve the dispute within 30 days of the date on which the Program Team was first notified of such dispute. In the event such dispute is not resolved by members of the Program Team within such 30 day period, each Party shall refer such dispute for resolution to a Vice President or above, who shall in good faith use commercially reasonable efforts to resolve such dispute within 15 days following the date that each of such individuals are notified of such dispute. In the event such dispute is not resolved by the Parties within such 15 day period, such dispute shall be addressed pursuant to the provisions of Section 11.5 hereof; provided, that if such dispute involves changes to the Coastal Rules and the Operating Procedures to the extent required by Applicable Law or the Risk Management Considerations, then the final decision for such dispute shall rest with Coastal, unless such change would cause Aspiration to violate Applicable Law, then the provisions of Section 11.5 shall apply to such dispute. Each Party agrees to continue performing its obligations under this Agreement during the attempted resolution of any such dispute, unless this Agreement is otherwise terminated and such Party is relieved of any further obligation to perform.
Section 4.20 Systems.
(a) Aspiration and Coastal shall work together to develop a system for transmitting data and reports to each other in accordance with the requirements of this Agreement. The parties shall mutually agree upon the system that will be used and shall develop a plan to implement such system as soon as practicable following the Effective Date. Aspiration shall bear all out-of-pocket costs and expenses, including those of Coastal, associated with such data transmission system, including all network, interfacing, implementation, telecommunications, electronics, hardware (if used solely with the Aspiration Account Program) software and maintenance costs, both initially and ongoing throughout the Term; provided that Aspiration shall not be responsible for costs and expenses related to data transmission system, including all network, interfacing, implementation, telecommunications, electronics, hardware software and maintenance that would be incurred by Coastal absent the Aspiration Account Program.
(b) Immediately following the Effective Date, the parties shall identify the initial systems interfaces required to be sustained between Aspiration and Coastal, including the systems interfaces required to pass data between the Parties. The Parties shall maintain these initial interfaces, as well as any additional interfaces defined in the future, and cooperate in good faith with each other in connection with any modifications and enhancements to such interfaces as may be requested by either Party from time to time. The Parties shall maintain such systems interfaces so that the operation of Coastals existing systems are no less functional than prior to the Effective Date. Aspiration agrees to provide sufficient personnel to support the systems interfaces required to be sustained between Coastal and Aspiration. Aspiration shall pay all out-of-pocket costs and expenses, including those of Coastal, associated with providing, maintaining, modifying and enhancing the systems interfaces; provided that Aspiration shall not be responsible for costs and expenses related to systems interfaces that would be incurred by Coastal absent the Aspiration Account Program. At termination, the Parties, at their own
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expense, shall terminate applicable interfaces at a mutually agreed-upon time. All requests for new interfaces, modifications or enhancements to existing interfaces or termination of existing interfaces shall be approved by both Parties. Upon approval, the Parties shall work in good faith to establish the requested interfaces or modify, enhance or terminate the existing interfaces, as applicable, on a timely basis. Aspiration shall pay all out-of-pocket costs and expenses, including those of Coastal, associated with hardware (if used solely with the Aspiration Account Program), software, telecommunications and personnel associated with any new interface, interface modification, interface enhancement or interface termination.
(c) Coastal agrees that it will provide to Aspiration an accounting of its costs and expenses associated with the development, provision, maintenance, modification, or enhancement of the data transmission system and systems interface promptly upon Aspirations request. Aspiration may, upon reasonable, but not less than ten (10) days prior notice to Coastal, audit Coastals invoices to verify that Coastals accounting was conducted appropriately. The Parties agree that any errors identified in such audit will be promptly corrected and, where necessary, reimbursed. If, after an audit, Aspiration notifies Coastal that it believes Coastals costs and expenses are unreasonable, the Parties agree to cooperate and work together in good faith to determine a mutually agreeable solution.
Section 4.21 General Covenants of Aspiration. Aspiration makes the following covenants to Coastal, each and all of which shall survive the execution and delivery of this Agreement:
(a) Aspiration shall preserve and keep in full force and effect its corporate existence, other than in the event of a change in control, merger or consolidation in which Aspiration is not the surviving entity.
(b) Aspiration promptly shall notify Coastal in writing if it receives, during the Term, written notice of any litigation that, if adversely determined, would have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Aspirations ability to perform its obligations hereunder.
(c) Aspiration shall at all times maintain and preserve all of its assets and property necessary to perform its obligations hereunder and necessary for the conduct of its business, and keep such assets and property in good repair, working order and condition (ordinary wear and tear and damage by casualty excepted), as applicable.
(d) Except as otherwise specified herein, Aspiration shall enforce its rights against third parties to the extent that a failure to enforce such rights could reasonably be expected to materially and adversely affect the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Aspirations ability to perform its obligations hereunder. Aspiration shall not enter into any agreement which, at the time such agreement is executed, could reasonably be expected to have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Aspirations ability to perform its obligations hereunder, except that Aspiration may enter into an agreement to settle a potential enforcement or disciplinary action with a Government Body or FINRA. For the avoidance of doubt, Aspirations engagement with other financial institutions for similar services shall not be
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considered to have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Aspirations ability to perform its obligations hereunder.
(e) Aspiration will provide Coastal with a telephonic, telefacsimile or PDF e-mail notice specifying the nature of any Event of Default where Aspiration is the defaulting party or any event which, with the giving of notice or passage of time or both, would constitute an Event of Default by Aspiration or any development or other information which is likely to have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Aspirations ability to perform its obligations pursuant to this Agreement. Notices pursuant to this Section 4.21(e) relating to Events of Default by Aspiration shall be provided within two business days after the existence of such default. Notices relating to all other events or developments described in this Section 4.21(e) shall be provided (i) within five business days after Aspiration becomes aware of the existence of such event or development if such event or development has already occurred, and (ii) with respect to events or developments that have yet to occur, as early as reasonably practicable under the circumstances.
(f) Aspiration shall at all times during the Term (and the Transition Period) comply in all material respects with Applicable Law in connection with its performance under this Agreement, the operating policies and procedures set forth on Schedule 2.1(e), the Network Rules and the Coastal Rules.
(g) Aspiration shall keep adequate records and books of account with respect to the Aspiration Customer Accounts in which proper entries, reflecting all of Aspirations financial transactions relating to the Aspiration Account Program, are made in accordance with GAAP. Aspiration shall keep adequate records and books of account with respect to its activities, in which proper entries reflecting all of Aspirations financial transactions are made in accordance with GAAP. All of Aspirations records, files and books of account shall be in all material respects complete and correct and shall be maintained in accordance with good business practice and Applicable Law.
(h) Aspiration shall at all times during the Term (and the Transition Period) remain licensed and qualified in all jurisdictions necessary to service the Aspiration Customer Accounts in accordance with all Applicable Laws, except where the failure to be so qualified would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of Aspirations to perform its obligations under this Agreement or on the Aspiration Account Program.
(i) Aspiration shall not take any action that Coastal reasonably concludes intentionally materially adversely affects Coastals business.
(j) At all times during the Term (and the Transition Period), Aspiration will maintain in full force and in effect, with financially sound and reputable insurers, comprehensive general liability insurance, commercial crime insurance, electronic data processing errors and omissions insurance, cyber liability insurance, directors and officers liability insurance, and securities broker-dealer professional liability insurance, each with policy limits that are at or above the ABA benchmark survey for coverages at similar sized financial institutions. Policy limits can be
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below benchmark survey levels upon mutual agreement of both Parties. Upon Coastals request, Aspiration shall provide customary certificate(s) from the insurer(s) that evidence such insurance coverages.
Section 4.22 General Covenants of Coastal. Coastal makes the following covenants to Aspiration, each and all of which shall survive the execution and delivery of this Agreement:
(a) Coastal shall preserve and keep in full force and effect its corporate existence other than in the event of a change in control, merger or consolidation in which Coastal is not the surviving entity.
(b) Coastal promptly shall notify Aspiration in writing if it receives written notice of any litigation or investigation by a Government Body that, if adversely determined, would have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Coastals ability to perform its obligations hereunder.
(c) Coastal shall all times maintain and preserve all of its assets and property necessary to perform its obligations hereunder and necessary for the conduct of its business, and keep such assets and property in good repair, working order and condition (ordinary wear and tear and damage by casualty excepted), as applicable.
(d) Except as otherwise specified herein, Coastal shall enforce its rights against third parties to the extent that a failure to enforce such rights could reasonably be expected to materially and adversely affect the Aspiration Account Program or Coastals ability to perform its obligations hereunder. Coastal shall not enter into any agreement which, at the time such agreement is executed, could reasonably be expected to have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Coastals ability to perform its obligations hereunder.
(e) Coastal will provide Aspiration with a telephonic, telefacsimile or PDF e-mail notice specifying the nature of any Event of Default by Coastal or any event which, with the giving of notice or passage of time or both, would constitute an Event of Default by Coastal, or any development or other information which is likely to have a material and adverse effect on the Aspiration Account Program, the Aspiration Customer Accounts in the aggregate or Coastals ability to perform its obligations pursuant to this Agreement. Notice pursuant to this Section 4.22(e) relating to Events of Default by Coastal shall be provided within two business days after such default. Notices relating to all other events or developments described in this Section 4.22(e) shall be provided (i) within five business days after Coastal becomes aware of the existence of such event or development if such event or development has already occurred, and (ii) with respect to events or developments that have yet to occur, as early as reasonably practicable under the circumstances.
(f) Coastal shall at all times during the Term (and the Transition Period) comply in all material respects with Applicable Law and the Network Rules with respect to the Aspiration Account Program.
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(g) Upon Aspirations request, Coastal shall cooperate with Aspiration in a timely manner (but in no event less promptly than required by Applicable Law) to resolve all disputes with Customers.
(h) Coastal shall not take any action that Aspiration reasonably concludes is materially inconsistent with the objectives of the Aspiration Account Program or otherwise materially adversely affects the Aspiration Account Program or intentionally materially adversely affects Aspirations business.
(i) Coastal will maintain in full force and in effect, with financially sound and reputable insurers, liability insurance, including cyber insurance, with policy limits that are at or above the ABA benchmark survey for coverages at similar sized financial institutions. Policy limits can be below benchmark survey levels upon mutual agreement of both Parties. Upon Aspirations request, Coastal shall provide customary certificate(s) from the insurer(s) that evidence such insurance coverages.
Section 4.23 Charter of Affiliated Depository Institution. If Aspiration or an Affiliate thereof shall, during the Term, seek regulatory approval to charter or acquire a depository institution or non-depository banking entity, including without limitation a national bank charter for fintech companies, with a federal or state regulatory agency (the Aspiration Bank), Coastal shall reasonably cooperate with and support Aspiration or its Affiliate during the regulatory process to approve such charter application.
Section 4.24 Provision of Services under Agreement. If the Aspiration Bank is established and commences operations, the Parties agree that Aspiration may in its discretion assign to the Aspiration Bank some or all of the services required to be performed by Aspiration under this Agreement. In that event, the Parties shall negotiate in good faith to revise the economics of the Aspiration Account Program to provide Coastal a reasonable return for the services provided by Coastal.
ARTICLE 5
License Agreement
Section 5.1 Coastal Marks and Content. Coastal hereby grants to Aspiration a limited, non-exclusive, non-transferable, non-sub-licensable, royalty-free license to use, reproduce and display the trademarks, service marks, domain names, trade names, service names, brand names, trade dress rights, logos, corporate names, trade styles, logos and other source or business identifiers and general intangibles of a like nature, together with the goodwill associated with any of the foregoing, along with all applications, registrations, renewals and extensions thereof identified in Schedule 5.1 hereto (collectively, the Coastal Marks), telephone numbers and e-mail addresses (together with the Coastal Marks, the Coastal Content) solely in connection with the activities undertaken pursuant to this Agreement. Aspiration shall not use the Coastal Marks and Coastal Content in any way that might result in confusion as to the separate and distinct identities of Coastal and Aspiration. Aspiration acknowledges and agrees that all patent, copyright, trademark and other intellectual property and proprietary rights of Coastal, including the Coastal Content and any goodwill which accrues because of Aspirations use of the Coastal Content, are and shall remain the sole and exclusive property of Coastal. Upon the termination of
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this Agreement, the license granted to Aspiration in the Coastal Content shall immediately terminate and Aspiration shall immediately cease and desist all new use of the Coastal Content; provided, however, that any then-existing use of such Coastal Content in connection with any Aspiration Account Program-related materials, including plastics, shall be permitted until 90 days after the date of termination of this Agreement. Aspiration further agrees not to contest or take any action, whether during or following the Term, in opposition to any trademark, service mark, trade name, logo or other commercial symbol of Coastal or its Affiliates or to use, employ or attempt to register any mark or trade name which is similar to any mark or trade name of Coastal or its Affiliates.
ARTICLE 6
Fees, Revenues, Gains, Costs, Expenses and Losses
Section 6.1 Direct Operating Costs. Aspiration agrees to reimburse Coastals [* * *]. Aspiration also agrees to reimburse Coastal for [* * *]. Coastal shall provide Aspiration with an upfront estimate of charges from vendors for budgeting purposes and will update such estimates on a quarterly basis to reflect actual charges.
Section 6.2 Administrative Costs. Aspiration agrees to reimburse Coastal for [* * *]. Except as otherwise specifically provided herein, the Parties shall each be responsible for their own costs and expenses.
Section 6.3 [* * *].
Section 6.4 Coastal Fees. As compensation for the Coastal Services, Aspiration shall pay to Coastal the amounts shown on Schedule 6.4 hereof in accordance with the payment schedule set forth in Schedule 6.4 or as otherwise agreed to in writing between Aspiration and Coastal. Schedule 6.4 may be updated from time to time by written agreement of the Parties.
Section 6.5 Operating Account. Aspiration shall maintain an operating account at Coastal with an initial minimum balance of $[* * *], which may be adjusted upon mutual agreement of the Parties. The purpose of the operating account is to accumulate revenues to Aspiration and fund minimum fees, expenses or losses due to either Coastal or to the Omnibus Account. Following the end of each month, Coastal shall debit the operating account for the fees and reimbursable expenses owed to Coastal and shall submit to Aspiration appropriate documentation evidencing all reimbursable expenses incurred or paid in the prior month. Any dispute with respect to reimbursable amounts shall be resolved in accordance with the procedures set forth in Section 4.19. The operating account shall bear interest at the same rate as set forth in Section 6.6.
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Section 6.6 Settlements. Coastal will receive from Aspiration, and hold on behalf of Aspirations customers, cash balances in an Omnibus Account. The cash balances in the Omnibus Account will be used only for Aspirations Customers and to cover settlement-timing differences between real-time and batch processing cutoffs. The balance of the Omnibus Account will equal [* * *], unless modified by mutual consent of the Parties. Coastal will pay Aspiration interest on the funds in the Omnibus Account as follows:
(i) For an Omnibus Account balance below [* * *], Coastal will pay Aspiration [* * *].
(ii) For an Omnibus Account balance equal to or greater than [* * *], Coastal will pay Aspiration [* * *].
[* * *]
ARTICLE 7
Representations of Coastal
Coastal represents and warrants as follows:
Section 7.1 Organization, Good-Standing and Conduct of Business. Coastal is a bank, within the meaning of Section 3(a)(6) of the 1934 Act, duly organized, validly existing and in good standing under the laws of the state of Washington, and has full power and authority and all necessary and/or applicable governmental and regulatory authorization and licenses to own its properties and assets, to carry on as an insured depository institution, and to carry on its business as it is presently being conducted.
Section 7.2 Corporate Authority. The execution, delivery and performance of this Agreement have been duly authorized. No further corporate acts or proceedings on the part of Coastal are required or necessary to authorize this Agreement.
Section 7.3 Coastal Marks. Coastal is the owner or licensor of the Coastal Marks set forth on Schedule 5.1 and has right, power and authority to license or sub-license to Aspiration and authorized designees such Coastal Marks, email addresses and domain names, telephone numbers, as contemplated by this Agreement, and the use of such Coastal Marks by Aspiration and authorized designees as contemplated by this Agreement shall not (a) violate any Applicable Law or (b) infringe upon the rights of any Person.
Section 7.4 Binding Effect. When executed, this Agreement will constitute a valid and legally binding obligation of Coastal, enforceable against Coastal in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to rights of creditors of FDIC-insured institutions or the relief of debtors generally, (ii) Applicable Law relating to the safety and soundness of depository institutions and (iii) general principles of equity.
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Section 7.5 Non-Contravention and Defaults; No Liens. Neither the execution or delivery of this Agreement, nor the fulfillment of, or compliance with, the terms and provisions hereof, will (i) result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in a violation of, termination of or acceleration of the performance provided by the terms of, any agreement to which Coastal is a party or by which it may be bound, (ii) violate any provision of any Applicable Law or the Network Rules or (iii) violate any provisions of Coastals Articles of Incorporation or Bylaws.
Section 7.6 Necessary Approvals. Except for regulatory approvals applicable solely to financial institutions (which approvals, if any, are determined by Coastal to be required and will be obtained by Coastal prior to July 1, 2018), no consent, approval, authorization, registration or filing with or by any Governmental Body is required on the part of Coastal in connection with the execution and delivery of this Agreement.
Section 7.7 Liabilities and Litigation. There are no claims, actions, suits or proceedings pending or, to Coastals knowledge, threatened against Coastal, or to its knowledge affecting Coastal, at law or in equity, before or by any Governmental Body, an adverse determination of which could have a material adverse effect on the business of Coastal or the Aspiration Account Program, and Coastal knows of no basis for any of the foregoing. There is no Order of any Governmental Body affecting Coastal or to which Coastal is subject.
Section 7.8 Full Disclosure. Coastal has provided Aspiration with full access to all material aspects of its banking operation and all such information is accurate and complete as of the date provided. Coastal will make available a standard financial package that it offers select vendors from time to time.
Section 7.9 Continuing Accuracy. The representatives and warranties made by Coastal in this Agreement shall continue to be accurate and shall remain in full force and effect throughout the Term.
Section 7.10 Licenses. Coastal is the exclusive owner of, and has good and marketable title to, the Coastal Content.
Section 7.11 Good Standing. Neither Coastal nor any executive officer of Coastal has been subject to the following:
(a) Criminal conviction (except minor traffic offenses and other petty offenses) in the United States of America or in any foreign country;
(b) Federal or state tax lien or any foreign tax lien;
(c) An Order, not subsequently reversed, suspended or vacated, by the Securities and Exchange Commission, any state securities regulatory authority, Federal Trade Commission, federal or state bank regulatory or any other Governmental Body in the United States or in any other country relating to an alleged violation of any federal or state securities law or regulation or any law or regulation respecting financial institutions; or
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(d) Restraining Order in any proceeding or lawsuit, alleging fraud or deceptive practices on the part of Coastal or any such executive officer.
Section 7.12 Customer Funds. Funds held in the Omnibus Account(s) are insured by the FDIC, subject to the per depositor maximum deposit insurance amount limits for each Aspiration Customer. Coastal recognizes that all money deposited into the Omnibus Account(s) belongs to Aspirations Customers and will be kept separate from all other accounts maintained by Coastal for Aspiration; and Coastal will not subject the monies in the Omnibus Account(s) to any right, charge, security interest, lien or claim of any kind against Aspiration in favor of Coastal or any person claiming through Coastal.
ARTICLE 8
Representations Of Aspiration
Aspiration represents and warrants as follows as of the date hereof:
Section 8.1 Organization, Good-Standing and Conduct of Business. Aspiration is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power and authority to own its properties and assets and to carry on its business as it is presently being conducted. Aspiration is, or prior to enrolling any Customers in the Aspiration Account Program will be, (a) registered with the U.S. Securities and Exchange Commission as an investment advisor and broker-dealer, (b) a member of FINRA and the Securities Investor Protection Corporation and (c) registered as a broker-dealer in each state where the registration is required in order to offer the Aspiration Account Program to residents of such state.
Section 8.2 Aspiration Authority. The execution, delivery and performance of this Agreement have been duly authorized. No further corporate acts or proceedings on the part of Aspiration are required or necessary to authorize this Agreement.
Section 8.3 Binding Effect. When executed, this Agreement will constitute a valid and legally binding obligation of Aspiration, enforceable against Aspiration in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to rights of creditors or the relief of debtors generally and (b) general principles of equity.
Section 8.4 Good Standing. Neither Aspiration nor any executive officer of Aspiration has been subject to the following:
(a) Criminal conviction (except minor traffic offenses and other petty offenses) in the United States of America or in any foreign country;
(b) Federal or state tax lien or any foreign tax lien;
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(c) An Order, not subsequently reversed, suspended or vacated, by the Securities and Exchange Commission, FINRA, any state securities regulatory authority, Federal Trade Commission, federal or state bank regulatory or any other Governmental Body in the United States or in any other country relating to an alleged violation of any federal or state securities law or regulation or any law or regulation respecting financial institutions; or
(d) Restraining Order in any proceeding or lawsuit, alleging fraud or deceptive practices on the part of Aspiration or any such executive officer.
Section 8.5 Financial Statements. Aspiration has delivered to Coastal complete and correct copies of its balance sheets and related statements of income and cash flow. Aspirations financial statements, subject to any limitation stated therein, which have been or which hereafter will be furnished to Coastal to induce it to enter into and maintain this Agreement do or will fairly represent the financial condition of the Aspiration. The financial statements have been and will be prepared in accordance with GAAP, as consistently applied, and in accordance with all pronouncements of the Financial Accounting Standards Board, except that non-audited financials are without notes, and are subject to normal year-end adjustments. Prior to enrolling any Customers in an Aspiration Customer Account, Aspirations balance sheet shall reflect cash in an amount sufficient to fund any termination payment owed to Radius Bank plus $15million (or such lesser amount as Aspiration establishes to the satisfaction of Coastal is sufficient to fund the operations of Aspiration for a period of 12 months).
Section 8.6 Non-Contravention and Defaults; No Liens. Neither the execution or delivery of this Agreement, nor the fulfillment of, or compliance with, the terms and provisions hereof, will (a) result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in a violation of, termination of or acceleration of the performance provided by the terms of, any material agreement to which Aspiration is a party or by which it may be bound, (ii) violate any provision of any Applicable Law, (iii) result in the creation or imposition of any material lien, charge, restriction, security interest or encumbrance of any nature whatsoever on any asset of Aspiration or (iv) violate any provisions of Aspirations Certificate of Incorporation or Bylaws.
Section 8.7 Necessary Approvals. Except for obtaining membership in FINRA and the Securities Investor Protection Corporation and registration with the Securities and Exchange Commission and applicable states as a broker-dealer, no consent of any Person (including any stockholder or creditor of Aspiration) and no consent, license, permit or approval or authorization or exemption by notice or report to, or registration, filing or declaration with, any Governmental Body is required in connection with the execution or delivery of this Agreement by Aspiration, the validity or enforceability of this Agreement against Aspiration, the consummation of the transactions contemplated hereby or the performance by Aspiration of its obligations hereunder.
Section 8.8 Liabilities and Litigation. There are no claims, actions, suits or proceedings pending or, to Aspirations knowledge, threatened against Aspiration, or to its knowledge affecting Aspiration, at law or in equity, before or by any Governmental Body, an adverse determination of which would reasonably be expected to have a material adverse effect on the business of Aspiration or the Aspiration Account Program, and Aspiration knows of no basis for any of the foregoing. There is no Order of any Governmental Body affecting Aspiration or to which Aspiration is subject.
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Section 8.9 Continuing Accuracy. The representatives and warranties made by Aspiration in this Agreement shall continue to be accurate and shall remain in full force and effect throughout the Term.
ARTICLE 9
Regulatory Approvals
Section 9.1 Regulatory Approvals. Prior to enrolling any Customers in the Aspiration Account Program, the Parties shall have received all necessary regulatory and FINRA approvals. Notwithstanding anything to the contrary herein, in no event shall this Agreement be construed to require either Party to take, or impose any liability on either Party as a result of its failure to take, any action which is not permissible under Applicable Law or the Network Rules. The consummation of any transaction contemplated herein shall constitute a representation by each Party to the other that all regulatory approvals necessary for that particular transaction have been received.
Section 9.2 Expense of Regulatory Approvals; Cooperation. Each Party shall be responsible for obtaining and paying for any regulatory approvals related to its consummation of the activities contemplated herein. Each Party shall use its respective best efforts to obtain all regulatory approvals and shall cooperate with the other Party in order to facilitate the procurement of all regulatory approvals.
ARTICLE 10
Term and Termination
Section 10.1 Term. The initial term of this Agreement shall be a period that commences on the Effective Date and ends on three (3) years from the later of July 1, 2018, or the date on which Aspiration commences enrolling Customers in the Aspiration Account Program, and thereafter this Agreement shall renew automatically for up to two (2) additional twelve (12) month terms (collectively, the Term) unless terminated as provided herein.
Section 10.2 Termination. This Agreement may be terminated as follows:
(a) at any time upon the mutual written consent of the Parties;
(b) by either Party, with or without cause, at the end of the initial term or at the end of any subsequent renewal term, upon 180 days written notice to the other Party;
(c) by either Party, upon 30 days written notice to the other Party, in the event of an Event of Default by the other Party;
(d) by either Party, upon written notice to the other Party, upon (i) the direction of any Governmental Body or FINRA or the advice of legal counsel that continuation of the Aspiration Account Program violates, or would reasonably be expected to violate, Applicable Law or the Network Rules and (ii) the inability of the Parties to amend this Agreement to avoid the violation of Applicable Law or the Network Rules;
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(e) by Coastal, upon 60 days written notice to Aspiration if there is (i) a change in Control of Aspiration, (ii) merger or consolidation of Aspiration and Aspiration is not the surviving entity or Aspiration is the surviving entity but its pre-merger shareholders hold less than 50% of its voting interests after the merger; or (iii) a sale of all or substantially all of the assets of Aspiration;
(f) by Coastal, upon 30 days written notice to Aspiration, if a Governmental Body determines that the continued performance of Coastals obligations under this Agreement is not consistent with safe and sound banking practices; provided, that Coastal shall provide Aspiration as much advance notice of such termination as is reasonably practicable, consistent with safe and sound banking practices;
(g) by either Party upon 30 days written notice to the other Party upon the other Party (i) voluntarily commencing any proceeding or filing any petition seeking relief under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, liquidation or similar law, (ii) applying for or consenting to the appointment of a receiver, trustee, custodian, sequestrator or similar official for such Party or for a substantial part of its property or assets, (iii) making a general assignment for the benefit of creditors or (iv) taking formal action for the purpose of effecting any of the foregoing;
(h) by either Party upon 30 days written notice to the other Party upon the commencement of an involuntary proceeding or the filing of an involuntary proceeding or the filing of an involuntary petition in a court of competent jurisdiction seeking (i) relief in respect of the other Party or of a substantial part of its property or assets under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver (including the FDIC), trustee, custodian, sequestrator or similar official for the other Party or for a substantial part of its property or assets or (iii) the winding up or liquidation, of the other Party, in any case, if such proceeding or petition shall continue un-dismissed for thirty (30) days or an Order approving or ordering any of the foregoing shall be entered; or
(i) by Aspiration upon 30 days written notice to Coastal, if as condition precedent to Aspiration or another related entity becoming or acquiring a federally-insured depository institution, as set forth in a final order issued by the applicable federal banking agency or is mandated in any corresponding agreement, is required to terminate this Agreement, and such written notice shall attach a copy of such final order or agreement.
Section 10.3 Effect of Termination.
(a) In the event that this Agreement is validly terminated as provided herein, then, except as otherwise provided in this Agreement, subject to Section 10.4, each of the Parties shall be relieved of their duties and obligations arising under this Agreement after the date of such termination. Notwithstanding the foregoing, the terms of this Agreement that would by their nature survive the termination of this Agreement (including Section 4.12 (Program Audit and
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Examination Rights), this Section 10.3 (Effect of Termination), Section 10.4 (Post-Termination Transition and Wind-Down) and Article 12 (General Provisions)) shall survive the termination of this Agreement and be enforceable under this Agreement.
(b) Upon termination, each of Coastal and Aspiration shall retain all records and documentation related to all Customers, Aspiration Customer Accounts, and Debit Cards in a form that is reasonably retrievable for a period of seven (7) years after the termination of this Agreement or such longer time as required by Applicable Law. The Parties agree to cooperate with one another to make such records and documentation available as may be required to comply with Applicable Law or to respond to Customer inquiries, legal requests (such as a subpoena), audits or regulatory examination requests.
(c) In the event that this Agreement is terminated by Coastal pursuant to Section 10.2(c) or (e), or by Aspiration pursuant to Section 10.2(i), Aspiration shall pay Coastal a termination fee in a lump sum within five business days following termination of this Agreement in an amount equal to the minimum quarterly fee payable pursuant to Schedule 6.4 multiplied by the number of scheduled payments remaining in the Term.
Section 10.4 Post-Termination Transition and Wind-Down.
(a) In the event this Agreement is terminated, Aspiration may elect to (i) transition the Aspiration Account Program in accordance with Applicable Law to an alternative counterparty or (ii) wind down the Aspiration Account Program. In such event, Aspiration shall provide written notice to Coastal of its election to transition or wind down the Aspiration Customer Account Program no later than thirty (30) days after termination of this Agreement. Unless otherwise required by Applicable Law or any Government Body or FINRA, the Parties agree to cooperate in good faith to wind down or transition the Aspiration Account Program (in accordance with any notice of election provided by Aspiration) in a commercially reasonable manner as soon as reasonably possible to provide for a smooth and orderly transition or wind-down. The Parties will service the Aspiration Customer Accounts and Debit Cards in accordance with the terms of this Agreement that apply prior to its termination for a period up to 180 days after the effective date of termination, or as mutually agreed to in writing by authorized representatives of each Party, in order to smoothly transition or wind down all activities under this Agreement (Transition Period); in the event of a termination by either Party pursuant to Sections 10.2(c), (h) or (i), or in the event of a termination by Coastal pursuant to Sections 10.2(d) or (g), the Transition Period shall be reduced to ninety (90) days. Termination of this Agreement shall not relieve any obligations of the Parties, including the corresponding payment obligations, during the Transition Period.
(b) In the event Aspiration provides notice of its election to transition Aspiration Customer Accounts to another counterparty, Coastals obligations during the Transition Period will include, without limitation: (i) transferring all Deposits at Coastal to another federally-insured financial institution designated by Aspiration, which institution shall assume responsibility for all obligations and liabilities in connection with such Deposits which arise after transfer to such successor bank (such institution, a Successor Bank), including those with respect to payment of the Deposit funds to Customers and settlement of transactions with the appropriate Network(s), (ii) assigning all of Coastals rights, duties and obligations with respect
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to the Aspiration Account Program pursuant to this Agreement, and Coastals relationship with each Aspiration Customer to such Successor Bank, (iii) making any and all regulatory filings necessary to effect the transition of its undertakings in connection with this Agreement to such Successor Bank (excluding those filings and approvals required to be made by Successor Bank), (iv) making all filings and taking all other actions necessary for Coastal to transfer the related BINs to such Successor Bank, (v) executing and delivering, if necessary or appropriate, transfer agreement containing terms and conditions generally consistent with banking industry practice for the transfer of Deposits between institutions, and (vi) executing such other documents as may reasonably be requested by Aspiration, or necessary for Coastal to perform its obligations under this Section 10.4(b). Coastals obligations described above will be completed as soon as reasonably practicable after Aspiration provides notice of its election to transition the Deposits to a Successor Bank.
(c) In the event Aspiration provides notice of its election to wind down the Aspiration Account Program, the Parties agree to use the following process or such other similar processes that are mutually agreed by Coastal and Aspiration at such time:
(i) As soon as reasonably possible after delivery of Aspirations notice of election, Aspiration will provide to Coastal in writing a proposed wind down plan, including a proposed timeline, which shall designate a schedule of dates as of which the Aspiration Account Program will be wound down. Coastal and Aspiration shall meet promptly thereafter (which meeting may occur telephonically) to finalize a mutually-agreed wind down plan. Such plan shall be agreed and implemented to completion within the Transition Period; and
(ii) Coastal and Aspiration shall continue to be bound by, and comply with, the terms of this Agreement and perform all of their obligations hereunder during the Transition Period until (x) such time as all Aspiration Customer Accounts and Debit Cards expire or are canceled pursuant to, and consistent with, the Aspiration Account Documentation, or (y) such earlier date, as permitted by Applicable Law, as mutually agreed by Coastal and Aspiration in writing.
(d) In the event (i) Aspiration fails to provide timely and effective notice of its intention to terminate or wind down the Aspiration Account Program, or (ii) Aspiration fails to complete the assignment of the Deposits to a Successor Bank within the Transition Period, the Parties will work together to wind down the Aspiration Account Program in accordance with Applicable Law.
(e) In the event that Aspiration substantially ceases operations, Aspiration agrees to continue to cooperate with Coastal, any Governmental Body, and any other self-regulatory organization to ensure the orderly distribution of Customer funds.
(f) The Parties shall be responsible for their own costs and expenses with respect to the performance of their respective obligations hereunder in connection any transition or wind down.
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Section 10.5 Events of Default. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute an Event of Default hereunder:
(a) A Party shall fail to make a payment of any material amount due and payable pursuant to this Agreement, except for amounts disputed in good faith, and such failure shall remain unremedied for a period of ten days after the other Party shall have given written notice thereof, provided that for an amount to be excluded from the above as disputed in good faith, the Party disputing such amount must: (i) provide prompt (but in any event, within ten days after the amount becomes due) notice of such dispute; (ii) include in such notice, a reasonably detailed explanation of the reason(s) why such amount is disputed, (iii) work cooperatively, expeditiously, and always in good faith with the other Party to resolve any such dispute, and (iv) if such dispute is not resolved within 30 days of delivery of the notice required by (i) above, post a bond or deposit into an escrow account the disputed amount on terms reasonably satisfactory to the Parties.
(b) A Party shall fail to perform, satisfy or comply with any obligation, condition, covenant or other provision contained in this Agreement, and (i) such failure shall remain unremedied for a period of 30 days after the other Party shall have given written notice thereof, and (ii) such failure shall either have a material and adverse effect on the Aspiration Account Program or Coastals Marks licensed or sub-licensed hereunder, materially diminish the economic value of the Aspiration Account Program to the other Party, or otherwise have a material and adverse effect on the other Party;
(c) Any representation or warranty contained in this Agreement shall not be true and correct in any respect as of the date when made or reaffirmed, and (i) the Party making such representation or warranty shall fail to cure the event giving rise to such breach within 30 days after the other Party shall have given written notice thereof, and (ii) such failure shall either have a material and adverse effect on the Aspiration Account Program, materially diminish the economic value of the Aspiration Account Program to the other Party, or otherwise have a material and adverse effect on the other Party.
(d) Coastal fails to perform, satisfy or comply with any Applicable Law and such failure shall either have a material and adverse effect on the Aspiration Account Program, materially diminish the economic value of the Aspiration Account Program to Aspiration, or otherwise have a material and adverse effect on Aspiration.
(e) Aspiration fails to perform, satisfy or comply with any Applicable Law and such failure shall either have a material and adverse effect on the Aspiration Account Program or Coastals Marks licensed hereunder, or materially diminish the economic value of the Aspiration Account Program to Coastal, or otherwise have a material and adverse effect on Coastal.
ARTICLE 11
General Provisions
Section 11.1 Indemnification.
(a) Aspiration covenants and agrees to indemnify and hold harmless Coastal, its parent, subsidiaries or Affiliates, and their respective officers, directors, agents, employees and
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permitted assigns, against any and all Losses arising from or relating to: (i) any breach of representation or warranty made in this Agreement by Aspiration; (ii) failure to fulfill a covenant or obligation of this Agreement except to the extent such claim, loss or liability is the result of Coastals failure to perform its obligations in accordance with this Agreement; (iii) any act or omission of Aspiration or its Service Providers which violates or does not comply with any Network Rules or Applicable Law; (iv) or any claim relating to obligations owed to or by Aspiration or any third party retained by it (except to the extent that Coastal has agreed in writing to fulfill such obligation under this Agreement); (v) Aspirations negligence, recklessness or willful misconduct (including acts or omissions) relating to the Aspiration Account Program; (vi) Aspirations failure to perform, satisfy or comply with any Service Level standard set forth in Exhibit C; (vii) any actions or omissions by Coastal taken or not taken at Aspirations written request or direction pursuant to this Agreement except where Coastal would have been otherwise required to take such action (or refrain from acting) absent the request or direction of Aspiration; or (viii) any Customer claims, breach, losses, regulatory actions, violations or penalties arising from the action or operations of Aspiration, its Service Providers or previous activities related to Radius Bank; provided, that this provision shall not apply if such claim arises out of (x) an act of fraud, embezzlement or criminal activity by Coastal or its representatives, or (y) negligence or willful misconduct by Coastal or its representatives
(b) Coastal covenants and agrees to indemnify and hold harmless Aspiration and its parent, subsidiaries or Affiliates, and their respective officers, directors, agents, employees and permitted assigns, against any and all Losses arising from or relating to (i) any breach of representation or warranty made in this Agreement; (ii) any act or omission of Coastal or its service providers which materially violates any Network Rule or Applicable Law; (iii) failure to fulfill a covenant or obligation of this Agreement except to the extent such claim, loss or liability is the result of Aspirations failure to perform its obligations in accordance with this Agreement; (iv) Coastals negligence, recklessness or willful misconduct (including acts or omissions) relating to the Aspiration Account Program; (v) Coastals failure to perform, satisfy or comply with any Service Level standard set forth in Exhibit C; (vi) any claim that Coastal, or any third party retained by Coastal, materially breached the obligations owed to or by Coastal that directly relates to Coastal existing business offerings and banking services (such as ACH and regulatory reporting) offered under the Aspiration Account Program (except to the extent that Aspiration has agreed to fulfill such obligation under this Agreement); or (vii) allegations, claims or actions by any Person that the use of the Coastal Marks licensed by Coastal hereunder infringe on the rights of any Person; provided, that this provision shall not apply if such claim arises out of (x) an act of fraud, embezzlement or criminal activity by Aspiration or its representatives, (y) negligence, willful misconduct or bad faith by Aspiration or its representatives or (z) the failure of Aspiration or its representatives to comply with, or to perform its obligations under, this Agreement.
(c) If any claim or demand is asserted against any Person entitled to indemnification under this Section 11.1 (each, an Indemnified Party) by any Person who is not a Party in respect of which the Indemnified Party may be entitled to indemnification under the provisions of subsections (a) or (b) above, written notice of such claim or demand shall promptly be given to the Party (the Indemnifying Party) from whom indemnification may be sought. The Indemnifying Party shall have the right, by notifying the Indemnified Party within 10 days of its receipt of the notice of the claim or demand, to assume the entire control (subject to the
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following sentence and the right of the Indemnified Party to participate at the Indemnified Partys expense and with counsel of the Indemnified Partys choice, unless (i) the employment of such counsel has been authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has not employed counsel to take charge of the defense within 10 days after delivery of the applicable notice or, having elected to assume such defense, thereafter ceases its defense of such action, or (iii) the Indemnified Party has reasonably concluded that there may be defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), in any of which event attorneys fees and expenses shall be borne by the Indemnifying Party) of the defense, compromise or settlement of the matter, including, at the Indemnifying Partys expense, employment of counsel of the Indemnifying Partys choice and reasonably satisfactory to the Indemnified Party. The Indemnified Party or Indemnifying Party may at any time notify the other of its intention to settle or compromise any claim, suit or action against the Indemnified Party in respect of which payments may be sought by the Indemnified Party hereunder, and (x) the Indemnifying Party may settle or compromise any such claim, suit or action solely for the payment of money damages in which the Indemnified Party does not admit any liability with respect to such claim, but shall not agree to any other settlement or compromise without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld (it being agreed that any failure of an Indemnified Party to consent to any settlement or compromise involving relief other than monetary damages shall not be deemed to be unreasonably withheld), and (y) the Indemnified Party may settle or compromise any such claim, suit or action solely for an amount not exceeding One Thousand Dollars ($1,000) in which the Indemnified Party does not admit any liability with respect to such claim, but shall not settle or compromise any other matter without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld.
(d) If the Indemnifying Party gives notice to any Indemnified Party that the Indemnifying Party will assume control of the defense, compromise or settlement of the matter, the Indemnifying Party will be deemed to have waived all defenses to the claims for indemnification by the Indemnified Party with respect to that matter. The Indemnifying Party shall promptly notify the Indemnified Party if the Indemnifying Party desires not to assume, or participate in the defense of, any such claim, suit or action. Any damages to the assets or business of the Indemnified Party caused by a failure of the Indemnifying Party to defend, compromise or settle a claim or demand in a reasonable and expeditious manner, after the indemnifying Party has given notice that it will assume control of the defense, compromise or settlement of the matter, shall be included in the damages for which the Indemnifying Party shall be obligated to indemnify the Indemnified Party. If the Indemnifying Party makes any payment on any third-party claim, the Indemnifying Party shall be subrogated, to the extent of such payment, to all rights and remedies of the Indemnified Party to any insurance benefits or other claims of the Indemnified Party with respect to such third-party claim. Each Party agrees to provide reasonable access to the other Party to such documents and information as may reasonably by requested in connection with the defense, negotiation or settlement of any such third-party claim.
(e) If an Indemnified Party fails to give prompt notice of any claim being made or any suit or action being commenced in respect of which indemnification under this Section 11.1
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may be sought, such failure shall not limit the liability of the Indemnifying Party; provided, that this provision shall not be deemed to limit the Indemnifying Partys rights to recover for any Loss which it can establish resulted from such failure to give prompt notice.
(f) This Section 11.1 shall govern the obligations of the Parties with respect to the subject matter hereof but shall not be deemed to limit the rights which any party might otherwise have at law or in equity.
(g) The provisions of this Section 11.1 shall survive termination or expiration of this Agreement.
Section 11.2 No Special Damages. UNLESS OTHERWISE AGREED IN WRITING OR REQUIRED BY THIS AGREEMENT OR APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE, FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, INCLUDING LOST PROFITS, EVEN IF SUCH PARTY HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH DAMAGES ARISING FROM OR RELATED TO THIS AGREEMENT. EACH PARTYS CUMULATIVE LIABILITY UNDER THIS AGREEMENT WILL NOT IN ANY EVENT EXCEED THREE MILLION DOLLARS ($3,000,000); PROVIDED THAT THE LIMITATIONS SET FORTH IN THIS SECTION SHALL NOT APPLY TO OR IN ANY WAY LIMIT THE INDEMNITY OBLIGATIONS UNDER THIS AGREEMENT OR LIABILITY OF A PARTY FOR BREACH OF CONFIDENTIALITY OF THE OTHER PARTYS CONFIDENTIAL INFORMATION OR CUSTOMER INFORMATION.
Section 11.3 Disclaimers of Warranties. EXCEPT FOR THE WARRANTIES EXPRESSLY PROVIDED IN THIS AGREEMENT, THE PARTIES SPECIFICALLY DISCLAIM ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES.
Section 11.4 Confidentiality and No-Use.
(a) Each Party shall, and shall cause its controlled Affiliates, employees and agents to, hold in strict confidence, unless disclosure is compelled by judicial or administrative process, or in the opinion of its counsel, by Applicable Law, all Confidential Information of the other Party and not disclose the same to any Person, except as otherwise provided herein. Confidential Information shall be used only for the purpose of and in connection with the performance of obligations under this Agreement and not for any other purpose. Each Party shall protect Confidential Information from unauthorized use and disclosure with at least the same degree of care that it utilizes with respect to its own similar proprietary information, but in no event less than a reasonable standard of care. The term Confidential Information shall mean all information of any kind concerning a Party (or an Affiliate of a Party) including all Customer Information that is furnished by such Party or on its behalf in connection with this Agreement, as
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well as the terms and conditions of this Agreement, except information (i) ascertainable or obtained from public or published information, (ii) received from a third party not known to the recipient of Confidential Information to be under an obligation to keep such information confidential, (iii) which is or becomes known to the public (other than through a breach of an obligation of confidentiality), (iv) of which the recipient was in possession prior to disclosure thereof in connection herewith or (v) which was independently developed by the recipient without the benefit of Confidential Information. For purposes of this Agreement, Customer Information includes nonpublic personal information, as such term is defined in the Gramm Leach Bliley Act of 1999 (the GLB Act) and the applicable regulations promulgated by the federal regulators of financial institutions (the GLB Regulations) regarding Customers. Each Party hereby agrees that, in addition to, and without limiting the generality of the confidentiality provisions contained in this Agreement, it shall keep all such Customer Information confidential and shall maintain and use such information only for the purposes of this Agreement, or as otherwise permitted in accordance with all Applicable Laws, including but not limited to the GLB Act and the applicable GLB Regulations. Without limiting the generality of the foregoing, each Party agrees and acknowledges that it is familiar with, and shall fully comply with, the reuse and redisclosure limitations contained in the GLB Act and applicable GLB Regulations as they relate to the Aspiration Account Program. Nothing herein shall be interpreted as preventing or impairing either Party to disclose any information (i) pursuant to a subpoena or court order, (ii) pursuant to judicial or governmental process issued by a Governmental Body or request by FINRA or (iii) required by any Governmental Body or FINRA in connection with an examination of such Party; provided that, with respect to disclosure described in clause (i) or (ii), (a) such disclosure shall be limited to the minimum acceptable level of disclosure; (b) the disclosing Party, unless prohibited by Applicable Law, shall notify the other Party of the imminent disclosure as soon as is practicable; and (c) the disclosing Party shall cooperate, at the sole cost and expense of the other Party, with the other Partys efforts to minimize or prevent such disclosure.
(b) Each Party acknowledges that its breach of this Section 11.4 will cause the other Party irreparable injury for which monetary damages will not make the other Party whole. Accordingly, in addition to all other available remedies, each Party shall be entitled to seek equitable or injunctive relief as and where it deems fit in the event of an actual, attempted or threatened breach of any obligation of the other Party (including its contractors and agents) under this Section 11.4.
(c) Each Party shall: (i) limit access to the other Partys Confidential Information to those employees, authorized agents, vendors, consultants, service providers and subcontractors who have a reasonable need to access such Confidential Information in connection with the Aspiration Account Program; and (ii) ensure that any Person with access to the other Partys Confidential Information agrees to be bound by the provisions of this Section 11.4 and maintains the existence of this Agreement and the nature of their obligations hereunder strictly confidential.
Section 11.5 Arbitration. Any dispute arising under this Agreement that has not been resolved in good faith in accordance with the procedures in Section 4.19 hereof (a Dispute) shall be referred to and resolved by arbitration in accordance with the following guidelines:
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(a) Arbitration Rules. Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in Seattle, Washington before one to three arbitrators, as set forth below. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures, unless the Parties agree upon expedited or streamlined rules and/or procedures available through JAMS. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.
(b) Arbitrators. An arbitrator shall be selected by mutual agreement of the Parties. If the Parties are unable to agree upon an arbitrator, then either Party may request that JAMS select an arbitrator and such arbitrator shall hear the Dispute in accordance with the Rules.
(c) Panel. For Disputes amounting to $1,000,000 or more, a panel of three arbitrators shall be selected to hear the Dispute. In such case, each Party shall select one arbitrator who shall be independent and unaffiliated with such Party, and the two arbitrators shall then select the third arbitrator. If the two arbitrators are unable to agree upon the third arbitrator, the JAMS shall select the third arbitrator.
(d) Knowledge of Arbitrators. All arbitrators, whether a single arbitrator or a panel of arbitrators, shall be knowledgeable about financial services and/or information technology transactions.
(e) Seat. The seat of the arbitration shall be Seattle, Washington USA.
(f) Governing Law. The governing law to be applied by the arbitral tribunal shall be the law of the State of Washington, U.S.A.
(g) No Appeal. Any award rendered pursuant to arbitration under this Section shall be final, conclusive and binding upon the Parties (except for appeals solely to correct computation or clerical errors), and any judgment thereon may be entered and enforced in any court of competent jurisdiction.
(h) Costs. Each Party shall bear its own fees, costs and expenses of the arbitration, and its own legal expenses, attorneys fees, and costs of all experts and witnesses, provided, however, that the arbitrators may award arbitration costs, including legal, auditing and other fees to the prevailing party in the arbitration proceeding if the arbitrators determine that such an award is appropriate.
Section 11.6 Relationship of Parties. Except to the extent specifically provided herein or as hereafter agreed in writing by the Parties, nothing in this Agreement shall be construed to create any relationship between the Parties or their respective agents and employees other than one of independent contractors, and the Parties shall take such action as may be reasonably necessary to ensure such treatment.
Section 11.7 Entire Agreement. This Agreement contains the entire agreement of the Parties with respect to the subject matter contained herein.
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Section 11.8 Successors and Assigns; Subcontractors. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and assigns. This Agreement may not be assigned by either Party without the prior written consent of the other Party. Any assignment in contravention of this Section 11.8 shall be null and void. Notwithstanding the foregoing, but subject to Section 4.8, nothing in this Agreement shall prohibit either Party from engaging a subcontractor to perform certain of its obligations hereunder, provided that any subcontracting Party shall (a) remain liable for all activities of its subcontractor hereunder, and (b) remain subject to any other obligations imposed upon such subcontracting Party pursuant to this Agreement and Applicable Law.
Section 11.9 Governing Law; Jurisdiction; Venue. This Agreement shall be governed by the internal laws, and not by the laws regarding choice of laws, of the State of Washington applicable to contracts made and performed in such State. Any litigation or other proceeding commenced in respect of any matter, cause or thing with respect to this Agreement or the Parties dealings or relationship shall be commenced, if at all, in the United States District Court for the Western District of Washington. Both Parties irrevocably consent to jurisdiction in such court as the applicable, appropriate and convenient forums. Each of the Parties hereby irrevocably waives, to the fullest extent permitted by Applicable Law, any objection which it may now or hereafter have to the laying of venue of any such action brought in such courts or any defense of inconvenient forum for the maintenance of such action. Each of the Parties agrees that a judgment in any such action may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. EACH OF THE PARTIES WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY PROCEEDING OR LITIGATION BROUGHT AGAINST THE OTHER WITH RESPECT TO ITS RIGHTS OR THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT. Each Party represents to the other that this waiver is made knowingly and voluntarily after consultation with and upon advice of counsel and is a material part of this Agreement.
Section 11.10 Amendment and Waiver. This Agreement may not be amended except by an instrument in writing signed on behalf of all of the Parties. Any term, provision or condition of this Agreement (other than that required by law) may be waived in writing at any time by the Party which is entitled to the benefits thereof.
Section 11.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Any facsimile or PDF e-emailed version of an executed counterpart shall be deemed an original.
Section 11.12 Construction. The Parties acknowledge that representations, acknowledgements or covenants expressly made herein by one or more Parties to this Agreement are being made only by the Parties stated herein as making such representations, acknowledgements or covenants, and no other Party shall be deemed to guarantee accuracy or performance of such provisions, unless such is expressly stated. The headings and captions contained in this Agreement will not be considered to be a part for purposes of interpreting or applying this Agreement, but are for convenience only. References to Articles, Sections and Exhibits are to be construed as references to Articles or Sections of, or Exhibits to, this Agreement. Unless otherwise indicated, terms such as hereof, herein and hereunder shall refer to this entire Agreement. The words include, includes and including when used in this Agreement will be deemed in each case to be followed by the words without limitation.
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Section 11.13 Notice. Any notice to be given hereunder to the other party, including any notice of a change of address, shall be in writing and shall be deemed validly given if (a) delivered personally or (b) sent by express delivery service, registered or certified mail, postage prepaid, return receipt requested or (c) sent by facsimile or email, as follows:
If to Aspiration: | Mazi Bahadori | |||||||
Chief Compliance Officer | ||||||||
Aspiration Financial, LLC 4551 Glencoe Ave |
||||||||
Marina del Rey, CA 90292 | ||||||||
If to Coastal: | John Dickson | |||||||
EVP & COO | ||||||||
Coastal Community Bank 5415 Evergreen Way |
||||||||
Everett, WA 98203 | ||||||||
Fax: 425-349-2696 | ||||||||
Email: jdickson@coastalbank.com |
All such notices shall be deemed given on the date of actual receipt by the addressee if delivered personally, on the date of deposit with the express delivery service or the postal authorities if sent in either such manner, on the date the facsimile or email is sent if sent in such manner, and on the date of actual receipt by the addressee if delivered in any other manner.
Section 11.14 Severability. In the event that any part of this Agreement is deemed by a court, Governmental Body, or other public or private tribunal of competent jurisdiction to be invalid or unenforceable, such provision shall be deemed to have been omitted from this Agreement. The remainder of this Agreement shall remain in full force and effect, and shall be modified to any extent necessary to give such force and effect to the remaining provisions, but only to such extent.
Section 11.15 Force Majeure. Upon notice by the non-performing Party to the other Party, non-performance under this Agreement (other than the payment of money) shall not be considered in default to the extent the non-performing Party is unable to fulfill its obligations as a result of acts of God, civil disorder, fire, explosion, flood, war, riot, sabotage, accident, employee sickness or other cause (other than a change in Applicable Law, the Network Rules or the other Partys actions as permitted under this Agreement) beyond the non-performing partys control. Upon discontinuance of the force majeure event, the non-performing Party shall promptly cure any non-performance that would have been a default under this Agreement but for this Section 11.15.
Section 11.16 Specific Performance. The Parties acknowledge and agree that the remedy at law for any breach by either Party of its covenants and obligations in this Agreement is
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inadequate and that the non-breaching Party, in addition to any other relief available to it, will be entitled to specific performance by the breaching Party to the extent permitted by Applicable Law.
[End of Page Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
Coastal Community Bank | ||
By |
/s/ Eric Sprink | |
Its President & CEO | ||
Aspiration Financial, LLC | ||
By |
/s/ Mazi Bahadori | |
Its CEO |
Exhibit 21.1
Subsidiaries of Coastal Financial Corporation
Name of Entity |
Jurisdiction of Organization | |
Coastal Community Bank |
Washington | |
Coastal (WA) Statutory Trust I |
Delaware |
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the use in this Registration Statement on Form S-1 of Coastal Financial Corporation of our report dated April 27, 2018, except for Note 20, which is dated June 1, 2018, relating to the consolidated financial statements of Coastal Financial Corporation and Subsidiary, and to the reference to our firm under the heading Experts in the Prospectus, which is part of this Registration Statement.
/s/ Moss Adams LLP |
Everett, Washington |
June 19, 2018 |
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