What banks, credit unions can learn from VyStar-Heritage merger's demise

Adobe Stock

The recent collapse of a record bank-credit union merger deal is a cautionary tale for executives in both industries, according to experts.

The $12.4 billion-asset VyStar Credit Union in Jacksonville, Florida, said last week it had called off its $195.7 million agreement to buy Heritage Southeast Bank in Jonesboro, Georgia. The $1.7 billion-asset Heritage would have been the largest bank sold to a credit union.

The closing had been delayed three times since the deal was announced in March 2021 as the companies sought to obtain approval from two federal and two state regulatory agencies. The boards for VyStar and Heritage said "all required regulatory approvals would not be obtained in a timely manner" in explaining their reason for throwing in the towel. The details of regulators' concerns are unclear.

Richard Garabedian, a lawyer at Hunton Andrews Kurth in Washington who represents credit unions and banks, said the longer the VyStar transaction took, the more likely it seemed it would ultimately fail.

“When coupled with the states that have objected to credit union acquisitions of banks due to the lack of statutory authority, it does raise a chilling effect on all types of credit union and bank deals,” he said.

To be sure, observers aren't predicting that bank-credit union deals will dry up. Such deals have accelerated in recent years as struggling small-bank sellers try to widen the field of potential buyers. Nine deals have been announced this year in which a credit union is buying a bank. Last year, 13 banks agreed to be sold to credit unions, approaching 2019's record of 16 such announcements.

But the VyStar-Heritage termination highlights the challenges facing credit unions' efforts to buy banks. Some bank buyers complain that the nonprofit credit unions have an upper hand in bidding; and regulators are still trying to formulate policies involving the combination of two very different types of financial institutions or decide if such deals are even legal in a given state.

Primary among the takeaways for other would-be sellers could be to conduct more stringent due diligence, said Kirk Hovde, head of investment banking for Hovde Group, which advised Heritage on the deal.

He declined to talk specifics about the cancellation but said he does not think it will cause banks to hesitate considering being sold to credit unions.

“But I do think you’ll see banks doing some more diligence on the ability to get the deal closed,” Hovde said.

Credit unions

Record year seen for credit union buyouts of banks

The economic and political conditions are in place for bank-credit union mergers to blow past last year's total of 13 despite the banking industry's strong opposition to them.

By Ken McCarthy

January 18

Garabedian said it is noteworthy that no termination fee was included in the agreement, which might point to the level of confidence the seller had in VyStar’s ability to get regulatory approval.
All things being equal, banks looking to sell are likely to choose a bank, Garabedian said. But credit unions often submit the best offer and can be more aggressive on bidding because they have no shareholders to answer to, and credit unions do not have to deduct any goodwill from their capital.

“In a sense, it is not a level playing field,” Garabedian said. “But a selling bank may decide to go with certainty even if the bank buyer does not have the highest offer.”

The delays in, and cancellation of, the VyStar-Heritage deal have made some banks concerned about their own plans to combine with a credit union, according to attorney Michael Bell with Honigman LLP in Michigan.

Bell said he's been busy urging clients not to be intimidated if they want to pursue credit union acquisitions of banks. “Credit unions have full powers and rights to enter into transactions like this," he said.

Yet only one other recent credit union deal for a bank — Elevations Credit Union’s proposed acquisition of Cache Bank & Trust in Colorado — was terminated, according to Bell, who has advised credit unions in the vast majority of bank acquisitions in recent years but was not involved in the VyStar-Heritage deal.

That transaction was canceled due to the bank’s state regulator’s position that peculiar and unique legislation in Colorado wouldn’t allow the bank to be sold to the credit unions, Bell said.

He said he's confident that nationally more bank-credit union deals will go through.

“We’re full speed ahead with the deals we currently have pending and with new deals in the works,” Bell said. “I’ve got all these pending deals with no problems, no speed bumps and I see no issues whatsoever.”

Dennis Holthaus, a managing director for Skyway Capital Markets in Tampa, Florida, said he also believes the VyStar cancellation will not deter future deals because the issues with the transaction were unique to the buyer.

“I don’t feel the end result has anything to do with the size of the buyer or seller,” he said. “Because I believe it’s a one-off situation, I don’t see it having a chilling effect at all.”