Wednesday, April 26, 2017

A current AIM Fund holding: Home BancShares (HOMB) by James Hannack “A Southeast US Community Bank with Room to Grow"

Home BancShares, Inc. (HOMB, $25.09): “No Place Like Home”
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.

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

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