The regional bank space is witnessing a transition period. The market has a difficult time determining the valuation to give a well-performing bank. Consequently, investors are hesitant about picking bank shares. Despite this, I remain focused on Horizon Bancorp (NASDAQ:HBNC). And I also think the market should not overlook signs that its recent merger with SCB Bancorp could prove a sound move for the long-term. Horizon Bancorp's shares are worth as much as $23 today, and investors should note that this could be a promising stock as it gears up for the future. However, they should also be aware of some risks.
The Business of Horizon Bancorp
Horizon Bancorp offers a full range of banking services with branch locations serving the greater Lansing, Michigan area. It operates 29 full service facilities. It is the holding company for Horizon Bank, which provides banking services in Northwestern Indiana and Southwestern Michigan. The company offers money market deposits, and its portfolio comprises of different kinds of loans. The company also provides corporate and individual trust and agency services. The company was founded in 1873 and is headquartered in Michigan City, Indiana.
Penetrating new markets
Because Horizon Bancorp wants to expand its market presence in Michigan and beyond, the company is ready to pay the $18 million it needs for the acquisition of SCB Bancorp. Under the deal, Horizon will pay SCB's shareholders $5.15 in cash for every share of common stock and fixed consideration of about 0.49 shares of Horizon Common stock.
Horizon Bancorp's acquisition will widen its reach in Northern and Central Indiana as well as Southwestern Michigan. The merger is aimed at the acquisition of SCB's subsidiary Summit Community Bank. Horizon Bancorp hopes the acquisition of the bank will broaden its presence and augment its entry into Grand Rapids, Michigan. Grand Rapids and Lansing are large metropolitan areas. Summit Community Bank is known for creating banking solutions in the locality. Through the merger, Horizon can now penetrate the new market. The merger will bring in $161 million worth of assets at a cost of just $18.4 million.
Will Horizon Bancorp Rest on its Oars?
Along with the merger news, Horizon in its last quarterly report announced that it had made an offer to purchase land in Fishers, Indiana to complement its offices. The initiative is also to build its presence in the Indianapolis area. Horizon believes the upfront costs associated with the move are well worth the investment. For instance, the company achieved significant growth in Kalamazoo and Indianapolis. What this means is that Horizon now has the opportunity to build its presence in vibrant communities with tremendous prospects for the company. Horizon's initiative isn't just about opening offices, though, as the company's strategy also involves identifying and hiring exceptional lenders to build loan production teams.
Horizon Capitalizes on Existing Opportunities
Another key to Horizon's long-term future will also be the extent to which it capitalizes on strategic opportunities within its existing branch footprint. Horizon's strategy involves the hiring of seasoned commercial lenders in Northwest Indiana. This allows the company to strengthen its presence in Lake and Porter counties and give it the capacity to capitalize on business activities in these markets.
That said, there are still other initiatives that will be undertaken by the bank. In the third-quarter report, Craig Dwight, Chairman and CEO, announced that Horizon will continue to get results in a variety of financial situations. Horizon will grow business loans and purchase money originations when slowdowns in residential mortgage financings lead to less income from mortgage warehousing. The company was able to generate a meaningful core growth in the last quarter by this means.
The Valuation of Horizon Bancorp
Horizon operates in a tough financial environment. Within the company's primary market, unemployment rates rose in 2009 and have remained elevated till date. This increase is driven by slowdowns in the nation's economy. Horizon Bancorp's higher than historical level of non-performing loans can be attributed to the high local unemployment and bankruptcy levels. Despite these constrains, Horizon posted record results through the first nine months of 2013.
The company's net income for the period rose 9.7% to $15.8 million compared to the same period in 2012. It was the highest first nine months of net income in the company's history. However, the third quarter net income declined 1.3% compared to the same period in 2012. The decline was due to lower income from residential lending as demand for refinancing slowed.
Over the past year, Horizon Bancorp has delivered a 7% rally. Despite this, it is priced competitively when compared to its rivals in the industry. Horizon has a price to earnings ratio of 10.17x, compared to 13.89x for 1st Source Corporation (NASDAQ: SRCE) and 15.19x for First Merchants Corp. (NASDAQ: FRME). Apart from the fact that Horizon Bancorp's price to earnings is priced very cheaply when compared to its rivals, the same situation is replicated in the price to sales ratio.
I'll also mention that Horizon Bancorp's non-interest bearing deposits increased 6.8% to $223.4 million at September 30, 2013, compared with $209.2 million for the same period in the year prior. This indicates a growth in the amount of business relationships of small banking institutions. Additionally, interest bearing accounts rose 6.0% to $816.2 million at September 30, 2013, compared with $769.9 million at December 31, 2012.
However, investors should also note the company has an operating cash of around $48 million (as of September 30, 2013) and a debt of $279 million. I really don't like the debt, and I suspect that a serious downturn in its sector could very well make the company's debt load a real issue. However, this has not happened, and the stock has not been lagging behind in the last few quarters.
With all of the initiatives of Horizon Bancorp, it can be said the company will widen its presence and boost its growth potential. In the meantime, I think its earning yield is satisfactory, and its dynamics suggest future earnings could be higher. In September, it announced a dividend of $0.11 per share, a 10% increase over the $0.10 per share for the second quarter. The regular dividend payment equates to a $0.44-per-share annual dividend, yielding 1.9%. Also, the company trades below industry averages. Its latest merger will definitely affect income. Whether this is enough to make Horizon Bancorp worthwhile is up to each investor to decide for themselves, but the stock looks a promising one to me.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.