When Washington Federal CEO Brent Beardall looks at Luther Burbank Corp., it reminds him of WaFd 10 or 15 years ago — an efficient bank with above-average asset quality and a commercial lending operation that could expand to serve more industries.
Seattle-based WaFd's agreement to buy Luther Burbank for $654 million comes with the promise to transform the Santa Rosa, California, bank in a manner similar to WaFd's evolution over the past decade.
"We built a playbook that we think is working pretty well, and now we'll have the opportunity to use that playbook in a state that's a phenomenal opportunity for us," Beardall said on a call with analysts Monday.
The deal would mark the $20.8 billion-asset WaFd's entrance into California, which has the biggest state economy in the country. Setting up shop there is an attractive prospect for banks focused on commercial lending like WaFd, where about 80% of all new loan originations are to corporate clients. About 12% of visitors to the bank's website are from California, Beardall said, a potential indicator of customer appetite.
It would be WaFd's first acquisition since 2014, when it bought 23 Bank of America branches in Arizona and Nevada. That deal added $4 million in loans and $610 million in deposits.
Beardall said his bank's focus in recent years has been growing organically and not necessarily hunting for merger partners.
"It's not like we were out there kicking the bushes," Beardall said in an interview.
The $7.9 billion-asset Luther Burbank was one of the top 25 multifamily housing lenders in the U.S. in 2021, originating $1.3 in loans in the sector, according to an investor presentation that accompanied the deal announcement. The bank gets its name from a well-known botanist who worked in Santa Rosa in the late 19th and early 20th centuries.
Many of the big-dollar deals — much larger than WaFd's proposed merger — announced last year have taken longer to navigate the merger-approval process amid renewed merger scrutiny ordered by the Biden administration. For several months in 2021, regulators didn't approve any bank deals.
WaFd executives say the lack of overlap between new and current branches, Luther Burbank's outstanding CRA rating and the portfolio-lending model of both institutions put them in a good position to move through the merger-approval process.
"We are well aware of how long merger applications have been taking, but we are optimistic that we are strongly positioned with this merger," Beardall said on the call with analysts.
The combined entity would have about $29 billion of assets and $22 billion of deposits. Its network of more than 200 branches would stretch across nine states: Washington, Oregon, California, Idaho, Utah, Nevada, Arizona, New Mexico and Texas. Luther Burbank has 10 branches in California and one in Washington.
Luther Burbank shareholders would receive approximately 0.3353 shares of WaFd stock per Luther Burbank share. The California bank's chairman, Victor Trione, agreed not to sell more than one-third of his shares in each of the three years following the merger's completion.
Beardall would remain CEO of WaFd. The bank said it would add two seats on its board, both to be filled by Luther Burbank. WaFd would select a regional president, likely from Luther Burbank, to lead the California market, Beardall said.
WaFd said it expects the deal to close as early as the second quarter.
Mergers and acquisitions have declined this year from a post-crisis high in 2021 as executives brace for an economic downturn and watch valuations fall. The first nine months of 2022 produced about $18 billion of bank mergers, well below the $67 million recorded in full-year 2021.
But analysts expect the next wave of deals, while smaller,
Shares of WaFd closed down 6.2% Monday, while Luther Burbank shares lost 5%.
