Horizon Bancorp: acquisition of a small community bank by a credit union

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I have been monitoring this situation for a while now, waiting for the spread to widen. Recent market volatility convinced me to write it, but not without additional risk. Rising interest rates will likely affect the company’s mortgage portfolio and marketable securities. The effect on short-term investments has already been reflected in the TBV as these investments are valued on a market-to-market basis.

It is a microcap bank acquisition (~$72 million) with liquidation by a credit union. In addition to the market environment, the 12% difference is mainly due to the lengthening of the closing period and the adjustment of the counterparty according to the bank’s performance. We’ve covered a number of these cases on SSI, including HWIS, EDGW, WEIN, and BFFI. All of these businesses had similar uncertainties but operated or progressed without major unexpected developments. It is likely that HRRB transactions will follow a similar path.

HRRB, a small, 6-branch community bank operating in Arizona, entered into a definitive agreement to be acquired by Arizona Federal Credit Union on March 10, 2022. Subject to the terms of the transaction, most of HRRB’s assets and liabilities would be transferred to Arizona Federal, after which cash consideration of $91.4 million would be transferred to shareholders of HRRB, subject to certain liquidation-related adjustments. The final payout is expected to be around or slightly below $18.91 per share given the magnitude of the current market impact on the company’s profitability.

The transaction is subject to regulatory and shareholder approvals and is expected to be completed by the end of 2022. Both conditions are likely to be met as it is a small Bancorp transaction and the offering represents a significant premium to historical valuations at 2.4xBV. HRRB’s trading volume is low but has increased since the merger announcement. HRRB’s shareholders’ meeting is set for June 15, 2022. The pre-announcement price drop is around 37%.

Details on the terms of adjustment have not been provided, but given the previous cases, we can expect these terms to include, but not be limited to:

  • The consideration changes depending on the amount of taxation at the company level of the transaction;

  • Target’s future operating results and whether it can achieve a minimum equity value upon closing of the transaction;

  • The amount of cash held by the target at closing;

  • Costs related to the dissolution of Horizon Community Bank and its parent company HRRB.

It is not clear what the final distribution would be, but we can reasonably assume that it would be around the final consideration declared by the acquirer given the performance of the previous cases. Additionally, we can expect the company to provide sufficiently stable results that will not affect the final payout as much, given HRRB’s capitalization and diversification. Historically, the company has been fairly stable and profitable over the years with a well-diversified loan portfolio.

Similar cases

  • West End Indiana Bancshares – announced in August 2019 with a consideration range of $34.91 to $36.81. Shareholder approval was received and the merger was successfully completed within 10 months. The final price was set at $36.69 (upper limit) and payment was distributed 4 months after closing. The liquidation account has been paid to the depositors.

  • Ben Franklin Bank – announced in July 2019 with consideration ranging from $10.33 to $10.70. Successfully closed in 9.5 months. The final price was set at $10.35 (lower range) and paid over the next 5.5 months.

  • Edgewater Bancorp – announced Oct. 21 with consideration ranging from $39.47 to $43.22. The net waiting time for receipt of the distribution was approximately one year. The final payout has been set at approximately $41/share with an additional payout potential of $2.44/share.

  • Home Bancorp Wisconsin – announced September 21 with consideration ranging from $26.47 to $27.32. The deal is still active at SSI, no change in the merger price is expected closing Q2 2021+180 days of broadcast.

Presentation of the HRRB activity:

Horizon Bancorp (OTCPK:HRRB) is a holding company of Horizon Community Bank operating in Arizona. Operations consist of six full-service branches, two loan origination offices, and a mortgage and operations center. As of December 31, 2021, Horizon Community reported total assets of $539.5 million, total loans of $259.9 million, and total deposits of $471.7 million.

Loan portfolio:

Most real estate assets are secure.

  • 52.2% – Business real estate

  • 25.7% – Residential real estate (including construction and land development)

  • 21.6% – Commercial and industrial loans (working capital requirements, equipment, expansions)

  • 0.5% – Consumer loans

Historical performance:

Historical performance of the HRRB

From annual reports

Note: EPS is calculated based on data for the last 12 months, it may change in the future if the bank is affected by rising interest rates.

Conclusion

Given how the previous deals have closed and are progressing, I think it’s also highly likely that this merger will close. Also, the fact that HRRB is a well capitalized and highly profitable bank gives me confidence that the distribution would not be materially affected by the current market environment, which makes the 12% spread quite attractive if you are ready to await closing and subsequent distributions. .