The Bank Slate


How Lakeland juggled DoJ and M&A negotiations

Lakeland Bancorp in Oak Ridge, N.J., finalized an acquisition and negotiated the settlement of redlining claims by the Justice Department while discussing its pending merger with Provident Financial Services in Iselin, N.J.

The $13.6 billion-asset Provident agreed in late September to buy the $10.5 billion-asset Lakeland for $1.3 billion.

Lakeland juggled early stage talks with Provident while negotiating to buy 1st Constitution Bancorp, according to a regulatory filing. Lakeland agreed to buy 1st Constitution in July 2021 in a deal that closed last January.

The DoJ issue was resolved shortly after Provident and Lakeland announced their merger.

Conversations between Provident and Lakeland began on April 30, 2021, after Anthony Labozzetta, Provident’s president and CEO, invited Thomas Shara, his counterpart at Lakeland, to lunch. An all-stock merger was discussed “in general terms” with no mention of pricing, the filing said.

Shara had dinner with Christopher Martin, Provident’s executive chairman, a month later. Again, pricing didn’t come up.

By mid-2021, Lakeland was well into negotiations to buy 1st Constitution and the company decided to focus its efforts on completing the acquisition. Lakeland told Provident that it was looking at buying “another New Jersey-based bank.”

Shara continued to meet with Martin and Labozetta while looking to close on 1st Constitution.

At a September 2021 meeting, Lakeland’s board discussed “two hypothetical merger of equals transactions,” including one with Provident.

Shara and Labozzetta, during a November 2021 meeting, discussed a fixed exchange ratio, an “appropriate lever of ownership” for both companies and an “acceptable” earnback period for tangible book value dilution. Executive leadership possibilities were also covered.

Martin met with Lakeland’s board in late November 2021. Shara sat down with certain Provident directors the following month. Lakeland’s board also met with Labozzetta in January.

The companies entered into mutual confidentiality and exclusivity agreements on Jan. 24. The exclusivity period was set to run through April 24.

Shara informed Labozzetta in early February that the DoJ had begun a preliminary investigation into possible discriminatory lending by Lakeland. Shara advised Labozzetta that Lakeland “was cooperating fully with the DOJ” while noting that the bank had an “outstanding” CRA rating.

Lakeland resolved the DoJ’s redlining claims just days after announcing its sale to Provident, agreeing to invest $12 million into underserved markets.

At a Feb. 24, meeting, Provident’s board agreed to support ongoing talks, pending a reasonable resolution of the matter between the DoJ and Lakeland. A summary terms sheet was approved to sent to Lakeland.

The confidentiality agreement was extended to June 30 to give Lakeland more time to address the redlining claims.

Settlement talks between Lakeland and the DoJ began in June, prompting the companies to again extend the confidentiality agreement to expire on Sept. 30.

The companies set up pricing “guardrails” that covered Lakeland’s ownership (41.5% to 42.5%), the per share market premium (15% to 30%), earnings per share accretion (mid to upper teens in terms of percent with cost savings included), and TBV dilution (below 10% with three-year earnback). They agreed to the safeguards in July – before the Federal Reserve began to aggressively increase interest rates.

An initial draft of the merger agreement exchanged hands on Aug. 25.

The parties determined in September that, in light of higher interest rates and market volatility, the TBV dilution had exceeded the applicable pricing guardrail and that the earnback period would be longer than three years. The main culprit was the declining fair value of Lakeland’s securities and loan portfolios.

There was a tradeoff: The “resulting discount that Provident would record as a result of these marks would be accreted into net interest income,” increasing the projected EPS accretion to 24% in 2024, the filing said. A preliminary exchange ratio was agreed upon on Sept. 17.

Lakeland informed Provident in late September that it had reached a preliminary resolution with the DoJ.

The boards at Provident and Lakeland unanimously approved the merger on Sept. 26. The deal was announced the next day. The DoJ consent order was approved by the U.S. District Court for the District of New Jersey on Sept. 29.

The deal, which is expected to close in the second quarter, priced Lakeland at 154% of its tangible book value.

“The scale and profitability of the combined organization will enable us to invest in the future, better compete for market share, and better serve our customers and communities,” Labozzetta said in a press release announcing the merger.

The deal is expected to be 24% accretive to Provident’s 2024 earnings per share, inclusive of interest rate marks. It should take Provident less than four years to earn back any dilution to its tangible book value.

Provident plans to cut about 35% of Lakeland’s annual noninterest expense, or roughly $65 million. The company expects to incur $95 million of one-time merger-related charges.

Shara will become Provident’s executive vice chairman. He is set to receive a $1 million lump-sum cash bonus after the deal closes, the filing said. Shara is also set to receive a separate $1 million retention payment, with half to be paid in cash a year after the deal closes and the rest in the form of a restricted stock award.

Provident will also pay Shara $3.1 million in exchange for a two-year noncompete and nonsolication agreement.

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