Heritage Southeast Bank, the banking subsidiary of Heritage Southeast Bancorp. Inc., is evaluating whether to pursue another M&A deal after the fallout of its now-terminated merger with VyStar CU.

After extending their purchase agreement three times, VyStar CU and Heritage Southeast nixed what was once the largest credit union-bank transaction ever announced. The companies attributed the termination decision to a lack of clear sight to receiving regulatory approval.

"It was just time. We did not see it closing in a reasonable period of time that we could even identify a finish line. So it was just fair to everyone involved," Heritage Southeast CEO Leonard Moreland said in an interview. "It was just a very drawn-out process."

For Heritage Southeast, keeping shareholders trying to make plans with their investments and employees trying to make career decisions in limbo for nearly 15 months was unfair, the chief executive said.

VyStar CU declined to comment for this story, referring to the companies' June 15 press release, in which they said they did not see "a clear path forward to obtaining the regulatory approvals needed for closing."

Regulatory hurdles

Despite announcing the transaction more than a year ago on March 31, 2021, regulatory approval from all involved agencies — the National Credit Union Administration, the Federal Deposit Insurance Corp., the Georgia Department of Banking and Finance and the Florida Office of Financial Regulation — remained outstanding. As a result, the companies had extended their merger agreement three times since November 2021 before ultimately abandoning it.

In an interview with S&P Global Market Intelligence, Moreland said he did not have any details on what was driving the lack of regulatory approval, but said Heritage Southeast kept in touch with the FDIC regularly. He also believes the NCUA and FDIC were in communication with each other regarding the deal.

"The NCUA probably had a direct communication line to at least the FDIC because the FDIC seemed to be aware every time we would update them," he said. "They seemed to be aware of what was going on."

Moreland declined to answer if the "lack of a clear path" was driven more by the NCUA or by the banking regulators, but said, "we seemed to be able to satisfy the questions of the banking regulators."

In the first quarter, VyStar CU raised $200 million in subordinated debt, the largest single raise by a credit union ever. The raise could have been related to the now terminated Heritage Southeast deal by helping to ensure the credit union's net worth ratio would have stayed well above regulatory standards had the $194.4 million deal closed.

VyStar CU issued the subordinated debt to "further enhance its already strong capital position" and fund organic growth initiatives to support its members and communities "without compromising financial stability or diluting net worth," President and CEO Brian Wolfburg wrote in a statement to S&P Global Market Intelligence in May.

VyStar CU declined to respond to a number of questions for this story, including one asking if the termination will impact what the credit union plans to use the capital on.

VyStar CU's tough month

VyStar CU has faced multiple headwinds over the past month between the deal termination and its system conversion, which had left customers without full access to both online and mobile banking functions for more than a month.

Heritage Southeast was "monitoring" the system conversion situation and "offered any assistance" the bank could provide, Moreland said. The chief executive did not explicitly say if the conversion played a role in the deal termination decision.

"We evaluated all factors to determine if we felt like we could get to a finish line in what we considered a reasonable period of time," he said. "The regulatory factors, the operational challenges, the employee impact, the customer impact. We evaluated all factors."

Looking to the future

Now, Heritage Southeast will pivot its efforts back to what the company was focused on when VyStar CU approached the bank: achieving the synergies of the three-way merger of equals that created Heritage Southeast in 2019. Shortly after the MOE between three Georgia-based community banks closed, VyStar CU approached the newly combined company with what Heritage Southeast regarded as an undeniable offer.

"Plan A was to combine three banks and create the premier community banking platform in the state of Georgia and North Florida," Moreland said. "Early into that process, we received the VyStar offer and it was an offer that we obviously needed to pay attention to and evaluate, and we decided to move forward with it. So a lot of our plans through our three-bank consolidation were put on hold."

Heritage Southeast engaged Piper Sandler to assist the bank in a strategic review to achieve better efficiency and boost earnings, and potentially help find another merger partner if that is the best route, Moreland said.

"They'll help us identify better opportunities ahead, whether that's as a stand-alone company or as a partner with someone else," he said. "It's the responsibility of the board to continue to create value for our shareholders, whether that's independent or in partnership with someone else. We just always feel like we should be evaluating and open to whatever the best alternatives are."

Hovde Group originally advised Heritage Southeast in the VyStar CU transaction. The decision to engage Piper Sandler for the strategic review was based solely on the firm's "well-rounded" offerings, Moreland said.

"When VyStar approached us, Hovde had a great deal of experience in the credit union and bank merger space so we felt like they were the best adviser for us at that time. We feel like the well-rounded offerings of Piper Sandler is the appropriate choice for us with our future choices," he said.