By:
James Hannack, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Home BancShares, Inc. (NASDAQ:HOMB) operates as a community bank
under the name Centennial Bank, where it provides commercial and retail banking
services. It currently has a loan portfolio dominated by real estate (82.1%),
with commercial real estate making up 59.1% of the entire loan portfolio. HOMB also
closed 2016 with a deposit base of $6.9 billion. HOMB has 142 branches located
in Florida, South Alabama, New York City, and its headquarter state of
Arkansas.
• In Q4 of 2016 HOMB
recorded its 23rd quarter of record income, with income increasing
from $37M in Q3 to $48.6M in Q4. For the entire year net income increased from
$138M to $177.1M.
• On March 27th
HOMB announced it was going to acquire Stonegate Bank (SGBK) for ~$778.4M. The
deal still needs approval, however it is expected the deal will go through.
Both banks, along with Street analysts believe this acquisition is smart and is
going to be accretive by ~8% to 2018 earnings. Earlier in March, HOMB announced
it completed its acquisition with The Bank of Commerce, but it still has to
complete its acquisition with Giant Holdings Inc. which is expected to be
finished in Q1 of ’17.
• Due to HOMB’s recent
acquisitions and organic growth, asset levels ($13B) have now surpassed the $10
billion level. Therefore, moving forward, HOMB is going to face greater regulation,
which in turn translates to increasing expenses. Right now HOMB is estimating
increases ranging from $6.5 million to $9 million.
Key
points: HOMB was originally pitched in February of 2016. At
the time the drivers were potential for interest rates to rise, entrance into
the New York City market, and effective use of M&A markets. In regards to
rates, a 200
basis-point increase would cause NII to increase by 8.74% and a 100 basis-point
increase would increase NII by 4.54%. As for NYC, thus far HOMB’s investment
has paid off. Last year NYC accounted for 53% of HOMB’s total loan growth.
Looking forward, management is expecting NYC to increase its deposits by 186%
in 2017.
In regards to effective
use of M&A markets, as mentioned above, HOMB has again used M&A for
strategic gains with its acquisition of SGBK. Although HOMB paid an expensive 2x
tangible book multiple for SGBK, I believe it is worth it. This is because SGBK
is a strong performing bank with very high asset quality, it is a good culture
fit with HOMB, and it also allows HOMB to gain 25 offices in the pristine
southern Florida market.
Lastly, in HOMB’s 2016 Q4
earnings call CEO Randall Sims stated, “…We are going to make core deposit
growth a very important thing for us in the coming year”. Mr. Sims stressed organic
growth of core deposits multiple times during the call, which is good because
it will allow HOMB to grant more loans.
What
has the stock done lately?
From January to the
beginning of March, HOMB’s stock rose and peaked at $29.45 due to positive
economic outlooks and the promise of an interest rate increase at the Fed’s
March meeting. However, due to Republican’s failed attempt at repealing
Obamacare, uncertainty has built on Trump’s abilities to follow through on his
promises. This uncertainty has caused shares of regional banks, such as HOMB,
to plummet.
Past
Year Performance: Even though the past month has been poor
for HOMB’s stock, it is still up 37.0% from when it was pitched last year. Much
of this growth can be attributed to the post-election surge banks experienced after
President Trump was elected. In the month after the election HOMB experienced a
26% increase in stock price.
Source:
FactSet
My
Takeaway
Due to HOMB’s quality
acquisition of SGBK, along with a continued positive outlook for rate increases
to occur during the next year or two, I believe HOMB is still a good stock to
own. This is because I think both the acquisition and rate hikes provide HOMB
with adequate room to grow. However, if the SGBK acquisition falls through,
and/or economic reports show the southeastern economy is starting to
significantly slow down, then I think selling our position in HOMB should be
considered.
Source:
FactSet
