Community Savings Bancorp (CCSB) – Merger Arbitrage – 14% Upside

Current Price: $20.00

Offer Price: $22.76

Upside 14%

Expected Closing Date: Q4 2021

Press release

 

This is quite a strange and potentially interesting $9.5m bank acquisition. Liquidity used to be very limited, however, has increased materially since the transaction announcement. The available information is limited so far.

On the 9th of June, Community Savings Bancorp announced acquisition by Double Bottomline. Consideration stands at $22.76/share, subject to adjustments (PR):

CCSB currently estimates that, without any adjustments, this will result in approximately $22.76 per share to the current holders of CCSB common stock. However, the estimated per share consideration may be subject to significant adjustment based on a variety of factors, including, but not limited to, transaction costs and whether the organization obtains CDFI status, as defined below. As a result, CCSB shareholders should not assume they will receive $22.76 per share upon closing of the transaction.

One of the conditions is U.S. Department of the Treasury approval of CCSB application to become a community development financial institution (CDFI). CCSB shareholder's consent will also be required.

Only the press release is available so far and given that CCSB went dark last year, it is not clear if any more information will be announced publically.

Despite these nuances, I believe that it's worth keeping an eye on this deal - there is a good chance that final consideration could end up close to $22.76/share.

 

Positive aspects of this arbitrage

Persons involved have a good track record. Apparently, Double Bottomline is a vehicle of Evan M. Stone. Stone is a founder and ex-CEO of Pacific Union Financial, a national non-bank residential mortgage lender, which since its inception in 2004 grew to the top 25 lenders in the U.S. In Feb'19 Pacific Union was sold to its peer Mr. Cooper Group for $116m, (according to COOP 10-K). Since then he was busy managing his own family fund (EMS fund). Moreover, as part of the transaction, CCSB will be joined by John Gulas, who also has an interesting track record (PR):

Mr. Gulas has over 30 years of experience as a senior banking executive. Mr. Gulas is a current director on the board of directors of Quontic Bank, and a former President and Chief Executive Officer of Trinity Capital Corporation ("Trinity") in Los Alamos, New Mexico, where he turned Trinity's wholly-owned banking subsidiary, Los Alamos National Bank, around from under multiple SEC and OCC orders, ultimately selling the bank for more than twice its book value.

Apparently, their main goal here is to create a CDFI. CDFIs are private financial institutions, that provide lending for community businesses and focus on the betterment of the community in which it operates. An interesting aspect is that CDFIs are not supposed to focus on profit-maximization: "CDFIs are profitable but not profit-maximizing. They put community first, not the shareholder".

While the rationale for buyer's interest in CDFI is not clear it might be related to various community support programs that have been launched by U.S. government in response to COVID. Quite often funds in these programs are being distributed exclusively through CDFIs, which in turn collect generous fees. One of these was announced just a couple days ago providing $1.25bn for CDFIs. Another example is Paycheck Protection Program for small business that closed recently - this one also had a big part of funds allocated exclusively through CDFIs.

It's a bit puzzling why did the approval for CDFI was emphasized as a major condition for determining the final consideration. With my limited knowledge on CDFIs it doesn't look like CCSB should have any problems in this respect. Each CDFI applicant must meet these criteria:

  • Is a legal entity at the time of Certification application;
  • Has a primary mission of promoting community development;
  • Is a financing entity;
  • Primarily serves one or more target markets;
  • Provides development services in conjunction with its financing activities;
  • Maintains accountability to its defined target market; and
  • Is a non-government entity and not under the control of any government entity (Tribal governments excluded).

CCSB is a 1 branch community bank and at least from a broad perspective, it seems like CCSB should easily receive the certification.

The offer comes at a significant premium to CCSB historical trading levels (1.1x BV vs c. 0.7x BV), thus shareholder approval is very likely. As of Oct'19 management-owned around 10% of outstanding shares, with additional 8% held in employee stock-ownership plan. Given that the transaction will result in no job losses, all insiders are likely to vote in favor of the transaction.

Given the size of the transaction, transaction costs should be minimal.

 

CCSB

CCSB is a 1 branch community bank operating in Caldwell, Ohio. As of March 31, 2021, CCSB reported $59.58 million in total assets and total equity capital of $7.79 million. Historically, the bank used to trade at around 0.70x of its book value and was generating consistent losses. In the more recent quarters, the performance was lifted to small profits/breakeven, which is quite commendable for a 1 branch community bank.

Information on the loan portfolio is limited, however, as of the June'19, the bank was mostly focused on residential mortgages:

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