Thwarted bank buyer shows a gracious side

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Washington Federal in Settle believes in killing ‘em with kindness.

The $15.8 billion-asset company, which had to withdraw an application to buy Anchor Bancorp in Lacey, Wash., after being flagged for issues tied to the Bank Secrecy Act, was accommodating to its target. Washington Federal even gave the $480 million-asset Anchor permission to find another buyer with no financial penalty.

Anchor, as a result, agreed in July to sell itself to FS Bancorp in Mountlake Terrace, Wash., for $77 million in cash and stock.

The disclosures, made in a regulatory filing tied to Anchor’s pending sale to the $1 billion-asset FS Bancorp, help explain the cordial breakup between Anchor and Washington Federal, which had complimentary things to say about each other when they announced the termination of their merger agreement.

“We part with a great deal of respect and wish Washington Federal continued success,” Jared Shaw, Anchor’s CEO, said in a July press release announcing the termination of the companies’ planned merger.

Washington Federal, which is still working on its BSA issues, can only hope its treatment of Anchor will resonate with other banks it seeks deals once it has a clean bill of health.

As for Anchor, the company had spent several years looking to sell itself, the filing disclosed.

Anchor, finally freed from its own regulatory orders in early 2015, was under pressure from activist investors Joel Lawson and Joseph Stilwell to improve shareholder value. A representative for Lawson, who wanted Anchor to sell, won a board seat in October 2015. Stilwell would appoint a director in August 2016 after reaching a truce with Anchor.

Anchor first tried to find a buyer in March 2016 when it allowed its investment bank to talk to an unnamed institution. Talks fell through three months later for undisclosed reasons.

Anchor publicly put itself in play on July 25, 2016, when it issued a press release disclosing that it had hired an investment bank to evaluate strategic options, including a possible sale.

Brent Beardall, who was Washington Federal’s president and chief banking officer at the time, contacted the investment bank on July 28 to express an interest in Anchor. Beardall became Washington Federal’s CEO in April 2017.

By early August 2016, Anchor’s investment bank had identified five potential acquirers. Anchor also began to receive more calls, including an inquiry from an unnamed credit union. The company briefly mulled a chance to buy branches with about $32.5 million in deposits and a smaller bank before passing on both.

The list of potential buyers swelled to 13 banks by early September 2016. Eleven of those banks signed or requested non-disclosure agreements, the filing said. Eventually, four banks, including Washington Federal, were given access to Anchor’s electronic data room.

Three offers were submitted between October 2016 and February 2017.

One bank initially offered $28 a share in mid-October, but eventually lowered its bid to $27 over concerns about costs tied to Anchor’s phantom stock plan, a program that gives senior management the benefits of stock ownership without actually giving them the stock. Concerns also surfaced over the amount of construction loans on Anchor’s balance sheet.

Another bank pitched an all-stock deal that valued Anchor at 95% of its tangible common equity. Washington Federal first offered $57.1 million, though Anchor convinced Beardall and his team to increase the all-stock bid to $63.9 million, or $25.50 a share.

“Anchor elected to pursue a possible transaction with Washington Federal because it presented the most favorable opportunity since the proposal … with a higher implied value per share presented antitrust issues,” the filing said.

Washington Federal and Anchor signed a merger agreement on April 11, 2017. The deal was announced the next day.

The first sign of trouble came on June 29, 2017, when the Office of the Comptroller of the Currency told Washington Federal it would “use a longer time period” to evaluate the merger application, the filing said.

Washington Federal informed Anchor in late September 2017 that regulators had identified certain issued tied to its bank's BSA procedures, systems and processes. In response, Anchor requested changes to the merger agreement that, among other things, would allow it to buy back stock, reduce the termination fee and pay retention bonuses.

Washington Federal agreed to lower the termination fee from $2.6 million to about $960,000. The company raised no objection to bonus and retention payments for Anchor employees. Anchor was also able to authorize the repurchase of up to 40,000 shares of its common stock.

Entering 2018, Washington Federal was still struggling to address its BSA issues.

Anchor in early April requested a 120-day window to find another buyer without a breakup fee. Washington Federal acquiesced, giving Anchor until July 31 to line up another sale. The companies also extended the termination date for their deal to Aug. 31.

The new arrangement paved the way for Anchor’s investment bank to contact nine institutions. Five of those banks, including FS Bancorp, signed non-disclosure agreements. Anchor began meeting with the leaders of those banks while continuing to talk to Beardall about Washington Federal’s BSA-related efforts.

Anchor had four new offers to consider at the end of May; each was higher than what Washington Federal had agreed to pay.

The highest bid valued Anchor at $74.5 million, with an even split between cash and stock. An all-cash offer came in at $72.8 million. FS Bancorp offered $71 million, with 60% of the consideration involving stock. The fourth bank wanted to pay $64.7 million.

The banks were asked to revise and resubmit their offers by June 25. One bank walked away.

FS Bancorp’s $77.2 million offer was the second-highest, trailing the top bid by only 3%. FS Bancorp still offered 60% stock, while the consideration for the higher offer was evenly divided. The final bidder came in at $74.8 million in cash.

Anchor decided that FS Bancorp’s proposal “provided the best value,” the filing said. The board noted that FS Bancorp had “superior earnings and share performance” and, unlike the other contender, paid a dividend and did not require shareholder approval to complete the acquisition.

FS Bancorp reported to Anchor on June 29 that a discussion with its regulators indicated that there were no roadblocks to getting approval. Anchor informed Washington Federal in early July that it was moving forward with another deal.

Directors at Anchor and FS Bancorp approved their merger on July 17. That deal, along with the termination of Anchor’s proposed sale to Washington Federal, was announced later that day.

FS Bancorp said in the July press release that buying Anchor will allow it to enter several counties in western Washington. FS Bancorp said it expects the acquisition to be accretive to its 2019 earnings per share, excluding $7.3 million in merger-related expenses.

FS Bancorp plans to cut about a third of Anchor’s noninterest expenses. The deal is expected to close early next year.

“We are disappointed we will not be able to consummate the transaction with Washington Federal, but wish to thank the board … and management of Washington Federal for their professionalism as we have worked through this process,” Shaw said in the release.

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