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Cash is king when it comes to credit unions buying banks

Higher prices are enticing some community banks to consider selling, but the small size of those institutions sometimes limits the number of interested bank buyers.

Enter the credit unions.

Marietta, Ga.-based LGE Community CU on March 22 said it plans to purchase Dallas, Ga.-based Georgia Heritage Bank, marking the fourth such deal announced in a five-week span. There were six credit union-buying-bank deals announced in 2017, although one of those was later terminated.

Michael Bell, a lawyer with Howard & Howard who has worked on several deals involving credit unions buying banks, said prices have gone up enough recently to entice fence-sitting sellers to jump off. Some of those banks have realized the benefits of including credit union bidders, he said.

Credit unions provide an additional buyer pool for small banks overlooked by larger financial institutions, said Kirk Hovde, managing director and head of investment banking at Hovde Group. "You have a lot of smaller banks that may not be as attractive to some of the larger banks, just given the consolidation in the industry," Hovde said in an interview. "The larger, serial bank acquirers are starting to get too big [so] that a $100 [million], $200 million bank that's for sale doesn't move the needle that much."

Hovde added that despite the "stigma" of teaming with a credit union — the two industries have long clashed over the credit union tax exemption — the cash nature of all such deals is attractive to bank sellers. He said credit unions can often afford to pay higher prices because they do not answer to shareholders.

"A credit union's cash is equal to a bank's cash," he added. "... For those banks that are wanting liquidity and just [want] to cash out now, it's becoming a viable option."

Bell expects the recent "intense" pace of such deals to continue throughout 2018. He added that there is no guarantee current talks will ultimately come to fruition, but said he is working on about five deals that are getting close to announcement. "I don't have one that is within the next two weeks but do expect one in the next 30 days for sure," he said. "And there could be more."

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Credit union buyers in such deals are often looking for something that would be hard to acquire organically or through a credit union merger. For LGE Community, that something was the expertise of Georgia Heritage's commercial lenders.

LGE Community President and CEO Chris Leggett said in an interview the credit union has been doing business lending for about six years and it reported $33.6 million in total member business loans at the end of 2017. Georgia Heritage had $46.1 million in total business loans at the most recent quarter — a 4.9% year-over-year increase. That represented 73.5% of the company's total loans and leases, down somewhat from the fourth quarter of 2016 when they accounted for 77.7%.

Matt Gordon, a director at investment firm The Burke Group, which advised Georgia Heritage on the deal, said after weathering the financial crisis, the bank's board and shareholders "were just at a point where it felt like a good time to transition." He said the deal was attractive because of the cash consideration, and, since credit unions tend to "value the people," Georgia Heritage may be able to retain more employees.

Georgia Heritage Bank's management did not respond to requests for comment.

LGE completed a combination with $3.7 million Atlanta-based MECU on Jan. 1, but it was the only merger the $1.24 billion institution has done in about 10 years. Leggett said credit union combinations can be more challenging that buying banks in some ways because boards can get "political" when it comes to what the resulting company will look like.

Leggett said the credit union was "curious but cautious" when the idea of buying a bank was first put forth. He added that it is too early to speculate if other bank acquisitions or credit union mergers are in the cards for LGE.

Hovde and Gordon both said more credit unions are considering bank acquisitions, and so the recent brisk pace of those transactions could continue. "We've had a number of clients that have had discussions or are currently having discussions with credit unions," Hovde said.

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