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VyStar CU strikes largest ever credit union-bank deal with undeniable offer

Heritage Southeast Bancorp. Inc. was not looking to sell, but it could not turn down VyStar CU's offer.

With Jonesboro, Ga.-based Heritage Southeast's almost $1.6 billion in total assets, the announced acquisition marks the largest ever bank purchase by a credit union. VyStar CU and Heritage Southeast believe the increased scale of the combined companies will help the credit union to better compete against large banks and financial technology companies. But banking industry groups hope the size of the deal will draw attention of regulators and Congress.

"We were not looking for a merger partner. We were looking to adjust our model," Heritage Southeast CEO Leonard Moreland said in an interview. "[But] obviously, the pricing side of it was hard to argue with."

Jacksonville, Fla.-based VyStar CU announced that it would acquire Heritage Southeast's assets and liabilities for $27 per share, an 80% premium from the March 31 closing price. The price values the bank at 184% of its tangible book value.

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During the second half of 2020, Heritage Southeast began thinking about how to adjust its business model to better compete amid the tough operating environment created by COVID-19, such as increased technology costs and the low interest rate environment. Around the same time, Heritage Southeast's Chairman, Kenneth Lehman, was introduced to VyStar CU. Lehman connected Moreland and VyStar CU.

When the deal closes, VyStar CU will have about $12.5 billion in total assets, making it the 13th-largest credit union in the U.S. by asset size, according to the press release. With that increased scale, VyStar CU will be able to better serve its members and compete with banks and fintechs, President and CEO Brian Wolfburg said in an interview.

"There's a lot of similarities between the credit union space and the community bank space, and the partnership here proves that," Wolfburg said. "We're behind the scenes working to create the best institution possible and remain relevant in this ever-changing world. I mean, not only do you have the large banks, but you have the fintechs."

Moreland agreed that the scale of the combined companies will help the credit union compete against the larger players dominating the Southeast.

"I can't go into Atlanta proper or Jacksonville proper and be able to compete with Truist Financial Corp. or Wells Fargo & Co. or Bank of America Corp. with a $1.5 billion balance sheet. With a $12 billion balance sheet, I think that could wreak a little havoc on them," Moreland said.

The Heritage Southeast acquisition marks VyStar's second bank acquisition. The credit union was eyeing an expansion into Georgia through purchasing land and branches when it was introduced to Heritage Southeast. As the credit union continues to modernize, it is open to more acquisitions with both bank or credit union partners, Wolfburg said.

"We will continue to look at opportunities that are presented in front of us," he said. "We are currently in touch with some credit union partnerships. And I think those will definitely continue to move forward, but we're in no rush to get the next deal to continue to grow."

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As credit union acquisitions of banks have increased over the years, banking industry groups have argued that credit unions' tax-exempt status create an unlevel playing field. VyStar CU was able to pay an 80% premium for Heritage Southeast because of its tax-exempt status, Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America, said in an interview. The ICBA hopes the size of this deal will catch the attention of Congress and regulators.

"It is very difficult [for potential bank acquirers to compete with this]," Cole said. "As acquisitions like these get larger and larger, I think it will bring more visibility to Congress. I think that we'll get some traction even from this acquisition. And I think it will mean that both Congress and the NCUA will look at it more closely."

Wolfburg said he believes VyStar CU paid a "very fair price" for Heritage Southeast.

The American Bankers Association is also hoping Congress will intervene. "When a $10 billion credit union can buy a $1.6 billion bank and effectively remove it from the tax rolls, it's time for policymakers to hit pause and rethink the rules for tax-exempt, large credit unions," an ABA spokesperson said in a statement. "Congress gave credit unions their tax exemption and lighter regulatory requirements so they could serve small groups of people of modest means and a common bond. This deal fails that test."

Bankers' critiques of credit union acquisitions go beyond tax exemption concerns. Georgia Bankers Association President and CEO Joe Brannen said in an statement that regulators should reconsider the credit union exemption from the Community Reinvestment Act and differences in credit unions' brokered deposits and capital regulations.

Heritage Southeast's Moreland said he is aware of industry pushback against credit union-bank deals and was "absolutely" hesitant to sell to a credit union.

"[But] the relationship formed very quickly. And you start forgetting about the label of who is a bank and who is a credit union," he said. "This becomes about the work that you're trying to accomplish and who you want to reward with the successes."

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