The Bank Slate


Luther Burbank’s balance sheet turned off buyers, filing says

Washington Federal in Seattle saw an opportunity with a bank that a number of other banks had no interest in buying.

The $21.7 billion-asset Washington Federal agreed in November to buy Luther Burbank in Santa Rosa, Calif., for $654 million – a deal that valued the $8 billion-asset seller at just 97% of its tangible book value.

A number of bank executives told Simone Lagomarsino, Luther Burbank’s president and CEO, last year that they didn’t view her company as an attractive acquisition target, according to a regulatory filing tied to the proposed sale to Washington Federal.

The bankers pointed to Luther Burbank’s “relatively high-cost deposit base, liability-sensitive balance sheet and unique and limited loan and deposit product and service offerings,” the filing said.

Fortunately for Luther Burbank, Washington Federal wanted a way to meaningfully enter California. Luther Burbank has 11 branches and seven loan-production offices, and Washington Federal has experience shifting from a thrift model to a commercial bank model.

Lagomarsino was first introduced to Brent Beardall, her counterpart at Washington Federal, during a conference in Carlsbad, Calif., on March 8, 2022, the filing said.

Beardall presented Lagomarsino with a broad outline for a deal during a Sept. 23 meeting in Los Angeles. They discussed a few specific terms of a potential transaction, but did not talk about the consideration.

The companies entered into a non-disclosure agreement on Oct. 10. Three days later, Washington Federal sent a draft non-binding term sheet that proposed an all-stock deal with a 15% premium to Luther Burbank’s common stock trading price. The proposal suggested having two Luther Burbank directors join the Washington Federal board.

Luther Burbank sent the original draft of the merger agreement to Washington Federal on Oct. 31.

The premium proposed by Washington Federal fell from 15% of Luther Burbank’s stock price to 5% by the time the exchange ratio was discussed on Nov. 2, reflecting “Luther Burbank’s reduced earnings outlook in the prevailing interest rate environment.”

Both boards unanimously approved the merger during Nov. 13 meetings. The deal, which is expected to close as early as the second quarter, was announced later that day.

“One thing I have learned is that you do not find the right deal – the right deal finds you,” Beardall said in a press release announcing the acquisition.

“The near-term positive impact to our financial position and physical footprints are bonuses, not our objective,” Beardall added. “Our objective is long-term value creation, which only happens if there is a harmony of people, values and culture, which we believe to be the case in this strategic transaction.”

The deal is expected to be 7.9% accretive to Washington Federal’s 2024 earnings per share. It is expected to be immediately accretive to Washington Federal’s tangible book value. 

Washington Federal expects to incur $37 million of merger-related expenses and cut about a quarter of Luther Burbank’s 2023 noninterest expenses.

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