Heritage Southeast Bancorporation (HSBI) – Merger Arbitrage – 9% Upside

Current Price: $24.78

Offer Price: $27.00

Upside: 9%

Expected Closing: Q4 2021/early 2022

Press release

This idea was shared by Ilja.


This is a largest-ever credit union takeover of a bank. The transaction is similar to already covered BFFI, WEIN, and EGDW cases, where the acquirer is buying assets and liabilities of the target and then the target winds down by distributing the remaining proceeds to its shareholders.

On the 31st of March, Heritage Southeast Bancorporation signed an agreement whereby VyStar Credit Union will acquire all HSBI assets and liabilities in an all-cash transaction. After that, HSBI will distribute the proceeds to its shareholders and wind down its operations. The proceeds should amount to $27/share and are expected to distributed shortly after the asset sale.

The merger is subject to regulatory and HSBI shareholder consents. Given the size of this merger, regulatory consent should not be a problem.

The offer comes at 1.68x TBV, at a premium to historical trading levels and rather in line with peer acquisition multiples – southeast bank average merger multiple stands at 1.52x TBV (12 months ended Mar’21). Apparently, it is common for credit unions to offer a larger price to banks due to their favorable tax treatment.

The 9% spread is most likely explained by the small size of the transaction ($190m market cap) transaction, somewhat extended timeline, and at least to some extent due to unclearly worded distribution amount in the press release. PR states that the distributions to shareholders are estimated at $27/share but will be subject to adjustments based on various costs related to winding down of HSBI, treatment of the liquidation account, etc. The available information is still limited and more details will be included in the upcoming proxy. However, the disclosed details in the transaction summary show that all of the above-mentioned and other transaction costs are already accounted for and will be covered by the buyer:

VyStar’s overall purchase price will be an amount equal to $27.00 times the number of HSBI shares outstanding at closing (expected to be approximately 7 million shares) plus the amount needed to satisfy HSBI’s unconsolidated debt, including anticipated interest payments (approximately $50 million), plus HSBI’s expected tax liability associated with 2021 net income and the gain on sale associated with the transaction (approximately $19 million), plus the expected cost to liquidate and wind down Heritage Southeast Bank and HSBI following completion of the transaction (expected to be less than $1 million), less any remaining HSBI cash at the time of closing (also expected to be a de minimis amount).  In connection with the liquidation of Heritage Southeast Bank (and included in the purchase price adjustments), Heritage Southeast Bank will make distributions to certain long-standing depositors who hold an interest in Heritage Southeast Bank’s liquidation account formed in connection with its conversion from stock to mutual form in 1995.


In addition, HSBI is expected, prior to closing (and without affecting the distribution available to shareholders) to settle for cash all then remaining in-the-money stock options, unvested restricted shares of stock, and any stock-based SERP agreements (representing an aggregate value of approximately $7 million).


In connection with the transaction, HSBI is also expected, again, prior to closing (and without affecting the distribution available to shareholders) to satisfy for cash certain transaction expenses associated with the contemplated transaction, including the payment of professional fees, termination of employment contracts, and the settlement of certain cash-based SERPs (estimated to be an aggregate cost of approximately $15 million).


HSBI currently estimates that VyStar’s purchase price and cost to satisfy the equity compensation and transaction expenses will be approximately [$279] million, inclusive of approximately [$21] million in transaction expenses.

Overall, given that all of the expected costs are expected to be covered by the buyer without affecting the final consideration, it seems very likely that the eventual shareholder distributions will amount to $27/share or more. This is further supported by the condition that HSBI will have the right to terminate the merger if the final distribution amount to shareholders is less than $27/share. However, worth noting that the buyer has also reserved the right to cancel the merger if the total cost exceeds $284.5m.

The buyer seems credible, has already acquired a bank before (see below), and overall is unlikely to walk away from the transaction. Moreover, two similar transactions (BFFI and WEIN), which involved almost identical uncertainties successfully closed last year near the upper limit range of the consideration (more details below).

There is also additional upside if the timeline gets extended further – in case this transaction is not closed until the 1st of Nov’21, the total consideration paid by VyStar will increase:

In the event the transaction is not consummated prior to November 1, 2021, the purchase and assumption agreement provides that the aggregate purchase price paid by VyStar to HSBI will increase by an amount equal to HSBI’s consolidated net earnings from October 1 through the Closing Date. Any such increase would be anticipated to increase the amount of cash available for distribution to shareholders of HSBI.



  • Pre-announcement price stands at $15/share (39% downside).
  • Expected further earnings recovery in 2021 should also add some protection to the downside.
  • Despite the above explanations, some uncertainty regarding the transaction expenses and final distribution amount remains. Termination provisions also add some risk here.


Strategic rationale and the buyer

VyStar is the 16th largest credit union in the US with 63 branches, most of them in Jacksonville, North Florida. This acquisition will propel the buyer to 13th place ($12.5bn in assets and 85 branches). This is not the first bank acquisition of VyStar – in August’19 it took-over Citizens State Bank, a Florida state-chartered bank with $280m in assets and 4 branches. At that time VyStar CEO stated:

With the CSB acquisition and all future M&As for VyStar, the goal is simple: to grow into new markets and to bring the benefits of credit union membership to more people

HSBI fits this strategic goal as it will allow the buyer to expand in Georgia. A large part HSBI branches are in the coastal area of Georgia – i.e. in close geographical proximity of VyStar Jacksonville locations.

Not much information is available on VyStar’s loan portfolio, however, it seems that in 2018 most of it was residential mortgages and secured consumer loans.


Similar bank acquisitions by credit unions

This transaction type is completely standard among bank acquisitions by credit unions. Apparently, certain laws do not allow credit unions to merge with banks or even acquire bank stocks. Therefore, all such acquisitions happen in this form of purchasing assets and liabilities. In 2020 credit unions acquired 7 banks, 16 in 2019. Historical transactions:

hsbi 1

Strategic reasons for such acquisitions include expansion into other geographic areas, portfolio diversification, or acquiring new business lines.

Acquisition of an ex-mutual bank is a bit different and adds additional complication from the regulatory standpoint, e.g. treatment of a liquidation account, etc. These acquisitions were pioneered by WEIN and BFFI last year, both of which were the first credit union/ex-mutual bank mergers and had very similar uncertainties (and available information) to HSBI regarding the final merger consideration and treatment of the liquidation account. Due to these uncertainties, both of these cases had their expected shareholder distributions offered in a range. Both closed successfully last year – eventual shareholder distributions were set almost at the initially indicated upper limits:

  • West End Indiana Bancshares – announced in August’19 with consideration range of $34.91 to $36.81 per share. Shareholder approval was received and the merger closed successfully in 10 months. Final price was set at $36.69 (near the upper limit) and payment was distributed 4 months after the closing. The liquidation account was paid out to depositors.
  • Ben Franklin Bank – announced in July’19 with consideration ranging from $10.33 to $10.70 per share. Closed successfully in 9.5 months. The final price was set at $10.35 (3% below the upper limit) and paid out over the next 5.5 months.
  • Edgewater Bancorp – announced in October’20 with a price range of $39.47-$43.22/share. The transaction is still ongoing. EGDW currently trades close to the lower limit of the range.



HSBI was formed in Sep’19 as a result of a triangular merger of 3 Georgian community banks.

HSBI serves as a holding company for Heritage Southeast Bank, which operates under the names of Heritage Bank, Providence Bank, and The Heritage Bank in its various markets. HSBI has $1.5bn assets ($1.3bn deposits) and operates 22 branches in Georgia.

hsbi banks

67% of the loan portfolio is real estate mortgages (secured by real estate). Loan book:

  • Owner-occupied income producing commercial RE – 26%.
  • Commercial non RE (not secured by real estate) – 19%
  • Single-family mortgages – 17%
  • Construction & Land (both commercial and residential) – 15%
  • Consumer (not secured by real estate)- 2%
  • Multifamily – 1%

Historical financial performance of the most recent quarters (earlier financials are not that relevant due to the merger in Sep’19):

hsbi financials

The last 2 years reflect poorly on the company’s financial performance due to the triangular merger costs in 2019 (recognized in Q3, while Q4’19 results were quite good). In 2020 HSBI was impacted by the COVID-19 outbreak (in Q2 17% of the portfolio was granted deferrals), management changes, legacy problem assets cleaning, etc. However, in Q4’20 94% of the deferred loans returned to original terms and pre-tax core earnings almost recovered to pre-COVID levels. The company has written off some of if its legacy problem assets and the CEO noted earnings recovery expectations in 2021 (PR):

The fourth quarter reflected continued traction in the consolidation of our bank operations and clean up in our legacy portfolio. We believe the actions taken in the fourth quarter, including restructuring expenses and moving non-performing assets off the books, will translate to better earnings in 2021.



12 thoughts on “Heritage Southeast Bancorporation (HSBI) – Merger Arbitrage – 9% Upside”

  1. The wide spreads in other ongoing micro-cap banking deals (EDGW, SNNY, LDKB) can be explained by very low liquidity (which keeps any large arbitragers away) , in addition to prolonged timeline.

    I feel more comfortable because low trade volumes seem to me very reasonable an explanation for why I should earn this spread (I am compensated for taking illiquidity risk).

    HSBI is not trading much either, but it is surprisingly much more liquid than the other three. Limit buy orders got filled much easily for HSBI, which makes me curious who were selling to me, and whether they are more informed than me 🙂

    Are there any major differences between this deal and the other three?

  2. SNNY and LDKB buyers are not credit unions. See recent article below on this deal from S&P Global Market Intelligence:

    The Independent Community Bankers of America and the Community Bankers Association of Georgia sent a letter to the Federal Deposit Insurance Corp. stating their opposition to VyStar CU’s proposed acquisition of Heritage Southeast Bank from Heritage Southeast Bancorporation Inc., saying it will result in a “larger, less accountable financial institution that will be exempt from the Community Reinvestment Act.”

    The authors urged the FDIC to reject Jonesboro, Ga.-based Heritage Southeast’s CRA merger application “in the strongest possible terms.” Although this would be Jacksonville, Fla.-based VyStar’s second community bank acquisition — it acquired Perry, Fla.-based Citizens State Bank in August 2019 — Heritage Southeast Bank is the largest bank ever acquired by a credit union in a purchase and assumption transaction anywhere in the U.S., according to the letter.

    The associations said the merger will lead to a “substantial decrease” in the benefits for low- and moderate-income customers in Heritage Southeast’s footprint, as well as branch consolidation and limited access for low- and moderate-income customers.

    Furthermore, the authors said the proposed merger will “open the floodgates” to more credit unions acquiring community banks, creating more “tax exempt, less regulated financial institutions.”

  3. HSBI reported Q2 2021 earnings, that showed continued improved profitability and growth in book value.

    Management commented on the pending merger:
    “Our operating results remain strong as we continue normal operations through the approval process of our acquisition by VyStar Credit Union. While we have received shareholder approval, we await regulatory approvals from the FDIC, Georgia Department of Banking and Finance, the NCUA and Florida Office of Financial Regulation”


  4. HSBI reported Q3’21 results – rather in line with previous quarters in terms of net income (run-rate ROTE of 12%) and balance sheet composition. Tangible book value per share stands at $16.13 – 7% improvement from the one at the time of the merger announcement. Management also commented on the pending regulatory approvals for the merger:

    Earnings improved during the quarter, as we continue normal banking operations through the approval process of our acquisition by VyStar Credit Union,” said Leonard Moreland, Chief Executive Officer. “While we have received shareholder approval in July, we are still waiting for regulatory approvals from the FDIC, Georgia Department of Banking and Finance, the NCUA and Florida Office of Financial Regulation.


    As the remaining upside stands only at 3% (with a bit of uncertainty as the $27/share consideration is indicative only) and the timeline could potentially get extended due to still pending regulatory approvals, we are closing this arbitrage with 6% gain in half a year.

      • Starting from October, we will also get about $1.2 million (or $0.17 per share) each month in additional consideration. That’s another 7.9% (annualized) compensation for waiting.

        “In addition, pursuant to the terms of the purchase agreement, the aggregate purchase price paid by VyStar to HSBI will increase by an amount equal to HSBI’s consolidated net profit, after certain deductions, for each month from October 1, 2021, through the closing date. For the nine months ended September 30, 2021, HSBI’s monthly consolidated net profit, less certain deductions provided for in the purchase agreement, averaged approximately $1.2 million per month.”

      • Deal extended another month to 3-31-22 while awaiting regulatory approvals (seem like many deals are delayed due to this).

  5. Spread is >5%. Bid/ask down from 26-26.20 to 25.35-25.70 now, from 3 days ago before the merger extension news.

    11 months since deal started, and no approvals from any of the 4 regulatories: FDIC, NCUA, states of GA and FL. Maybe not FDIC, but are the other delays unusual?

    Decent spread, vs big downside of 40% off pre-merger price of 14.90.

    Anyone playing?

  6. Correctly, DT closed this arb from SSI 4 months ago, when spread is only 3% (price of 26.20 vs 27 merger price). The 27 is not certain, indicative only, as DT pointed out. On the other hand, snowball pointed out the 27 will be increased by HSBI earnings >9-30-21, which was 14c/month in 4Q2021, which is quite meaningful. (for 6 months, equal to 85c or another 3% spread)

  7. This new deal looks pretty good……at todays prices 5.5 to 6% spread…….1 to 2 quarters to close so 12-24% IRR…..


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