WAFD to Acquire South Valley

Last week, Washington Federal Inc. (WAFD - Analyst Report) announced a deal to acquire Oregon-based South Valley Bancorp Inc. According to the deal, South Valley’s wholly owned subsidiary, South Valley Bank & Trust, will also merge with WAFD’s wholly owned subsidiary, Washington Federal, subsequent to the merger of both the parent companies.

The deal is anticipated to be closed by October end. Moreover, the agreement is still subject to customary closing conditions, along with the consent of South Valley shareholders and regulatory approvals.

Terms of the Deal

As per the agreement, each share of South Valley will be traded for 0.2962 shares of WAFD at the closure of the deal. The shares of South Valley were priced at $5.00 per share, representing 51% of South Valley’s tangible book value as of December 31, 2011.

Additionally, based on the collections made by South Valley on a specified group of its assets, WAFD will pay a maximum amount of about $39 million. Also, a supplementary cash payment will be made to South Valley’s shareholders considering the time period of such collections.

If the collection of specified assets of South Valley is completed before the closure of the deal, WAFD will disburse an extra amount of $5.81 per share to the shareholders of South Valley. On the other hand, if the specified assets are collected entirely within the first five years post-merger, the company will shell out a $2.97 per share.

Hence, for each share of South Valley, which is valued at $5 per share, the shareholders will receive a minimum of $7.98 per share to a maximum of $10.81 per share.

Benefits

WAFD further stated that the merger will result in the combined company having 190 offices in 8 western states. Total assets and total deposits of the combined company will sum up to $14.4 billion and $9.6 billion, respectively, based on financial results as of December 31, 2011.

Furthermore, the combined company will have access to a bigger branch network, higher liquidity and increased lending capacity, which will propel the profitability going forward. For WAFD, this merger will help strengthen its foothold in southern and central Oregon, which in turn will thrust its banking and commercial real estate businesses towards stronger growth. Also, the merger is expected to boost the earnings of the company.

Conclusion

WAFD has always been inclined towards mergers and acquisitions due to its strong capital base. In 2011, the company acquired Albuquerque, New Mexico-based Charter Bank and Phoenix, Arizona-based failed Western National Bank.

In 2010, WAFD acquired all of the deposits of Horizon Bank of Bellingham, Washington. Also, the company had acquired First Mutual Bancshares Inc. and First Federal Banc of the Southwest Inc. in 2008 and 2007, respectively.

These mergers and acquisitions have helped WAFD increase its assets, branch network and workforce, which has strengthened its market share substantially. Historically, the company has grown with the help of mergers and assumptions of deposits. Also, looking at the successful integration of the acquired companies by WAFD as well as its strong capital and liquidity position, we believe that the company is poised to grow further through acquisitions.

Currently, WAFD retains a Zacks #3 rank, which translates into a short-term Hold rating. However, one of its peers, Capitol Federal Financial Inc. (CFFN - Snapshot Report) retains a Zacks #2 Rank (a short-term Buy rating).