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Washington Federal-Luther Burbank deal-close target date aggressive – attorneys

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According to Market Intelligence, December 2022

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Washington Federal-Luther Burbank deal-close target date aggressive – attorneys

Questions have emerged as to whether Washington Federal Inc. and Luther Burbank Corp.'s announced merger can close within the targeted time frame due to increased regulatory scrutiny and an unusual stipulation in the merger agreement, but a recently terminated consent order may help its chances.

Seattle-based Washington Federal expects its $654.4 million acquisition of Santa Rosa, Calif.-based Luther Burbank, which was announced Nov. 13, to close as early as the second quarter of 2023, according to the merger announcement, but some banking industry attorneys believe that time frame is too aggressive.

Among 25 U.S. bank deals announced since Jan. 1, 2020, with deal values between $250 million and $1 billion, the median days to close was 184. Washington Federal and Luther Burbank's second-quarter 2023 close estimate puts the anticipated days to close to between 139 if it were to close on the first day of the second quarter, or less than five months, and 229 if it were to close on the last day of the quarter, or less than eight months.

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Aggressive timeframe

"To me, four months would be aggressive," Craig Nazzaro, partner at Nelson Mullins Riley & Scarborough LLP, said in an interview. "Seven months would be doable depending on what their integration plan is, if there are going to be regulatory hurdles that are unknown or not publicly disclosed yet, and if any of the regulators ... have concerns with any nonpublic regulatory or compliance issues that may need to be addressed in the integration plans."

Timing also depends on the diligence completed internally, Nazzaro added.

Gary Bronstein, partner and a leader of Kilpatrick Townsend & Stockton LLP's financial services team, also said the timeline seems aggressive, and another attorney agreed.

"I don't think that's a reasonable time frame," James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group, said in an interview. "I think that the stated closing date is probably a little bit aggressive."

"It'd probably be more like six to 12 months to get approval, rather than four to seven," Stevens added.

Conversely, Jeff Rulis, senior research analyst at D.A. Davidson, thinks the closing timeline seems reasonable, Rulis said in an interview.

Washington Federal management also expressed confidence in its closing estimate.

"We are all well aware of how long bank merger applications have been taking recently, but we are optimistic that we are strongly positioned with this merger," President, CEO and Vice Chairman Brent Beardall said on the Nov. 14 deal call. "Our optimism stems from three factors: First, Luther Burbank's outstanding [Community Reinvestment Act] rating, which we mentioned, and proven track record in lending to low- and moderate-income areas; second, our portfolio lending models for both institutions; and third, the lack of overlap, meaning we do not believe we will be required to divest of any deposits or branches."

Unilateral extension

But a unique stipulation in the companies' merger agreement may suggest less confidence in their ability to close the deal without regulatory delays, according to one industry expert.

Washington Federal and Luther Burbank's merger agreement includes a provision that either party can unilaterally extend the deal close until Feb. 29, 2024, if the deal is delayed and has not closed by Nov. 30, 2023. While an outside date of about one year after announcing a deal is common, the ability for just one party to extend the deal close is unusual, according to Bronstein. Instead, an extension usually requires both parties' consent, and parties typically negotiate an extension based on circumstances near the expiration of the agreement, Bronstein said.

"Having a right unilaterally to extend for three more months beyond one year is unusual and suggests that they do not have a high level of confidence that they will close in the second quarter of 2023," Bronstein wrote in an email. "Otherwise, why the need for an atypical provision?"

The provision also gives regulators "breathing room," Bronstein said.

Consent order

One factor that could work in Washington Federal's favor as it seeks regulatory sign-off is its terminated consent order with the Office of the Comptroller of the Currency. The order, which was terminated in December 2021, related to deficiencies in the bank's Bank Secrecy Act/anti-money laundering compliance program., or BSA/AML program.

Lawyers saw a possibility for these circumstances to help the bank during the regulatory review of the deal because Washington Federal's BSA/AML controls are likely to already be in good shape and not raise any red flags.

"This is like flying a plane after a plane crash," Stevens said. "Everything is going to be the most safe for that period of time, and that's how I think it would be with respect to this bank with respect to BSA issues. ... Because they got that clean bill of health a year ago, I would be shocked if further issues that created the rationale for that enforcement action had an impact on this transaction."

Nazzaro agreed that a recent consent order sometimes creates a stronger acquirer.

"We've had a lot of clients that have been under consent orders that we've helped navigate out from under the consent order, and it puts them in a much better position to be the acquirer," Nazzaro said. "[It] also gives the entity itself a value within the merger because a lot of the effort, a lot of the value that was placed into the entity on getting out from underneath the consent order can really be showcased in front of the regulator."

Regulators, however, will likely still raise questions about which company's BSA/AML program will survive in the combined company and who will lead the program, Nazzaro added.

Ultimately, a clean bill of health with respect to the company's BSA/AML program will not stop regulators from scrutinizing other various aspects of the deal.

"It's good for the bank that they have a handle on these issues, but I don't think ... the deal will go quicker because of this, or the regulators will apply less scrutiny to the deal," Matthew Bisanz, partner in the Financial Services Regulatory and Enforcement practice at Mayer Brown LLP, said in an interview.

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