HOMB - Home Bancshares: Acquisition Benefits Appear Priced-In

• Apart from the acquired loans, Home Bancshares' loan growth will likely remain soft this year.
• Thanks to the acquisition of Happy Bancshares and the legacy portfolio’s high rate sensitivity, the margin will likely be much higher this year relative to last year.
• The management has achieved cost savings sooner than previously anticipated.
• The December 2022 target price suggests a small downside from the current market price. Further, HOMB is offering a low dividend yield.

Earnings of Home Bancshares, Inc. (Conway, AR) ( HOMB ), adjusted for merger-related expenses, will likely be flattish this year. The acquisition of Happy Bancshares will likely be the biggest catalyst for the net interest income this year. On the other hand, higher operating expenses and provisioning for loan losses will likely limit earnings growth. Overall, I'm expecting Home Bancshares to report adjusted earnings of $1.93 per share for 2022, almost unchanged from last year. On a GAAP basis, I'm expecting the company to report earnings of $1.55 per share for 2022. Compared to my last report on the company, I've barely changed my earnings estimate. The year-end target price suggests a small downside from the current market price. Therefore, I'm maintaining a hold rating on Home Bancshares.

Organic Loan Growth to be Subdued

Home Bancshares completed the acquisition of Happy Bancshares on April 1, 2022, which boosted the loan book size by a hefty 36%, according to details given in a press release . These acquired loans will keep the net interest income for 2022 much higher than 2021. Apart from the acquisition, organic loan growth was also quite strong during the quarter. This growth will slow down in the remainder of the year partly due to high interest rates that will discourage borrowing.

Further, loan payoffs will most probably accelerate in the third and fourth quarters of 2022. As mentioned in the conference call , Home Bancshares has already received $200 million worth of payoffs in July alone. In comparison, the payoffs and pay downs in all of the second quarter were $190 million. The wavelike trend of payoffs is a feature of Home Bancshares’ portfolio.

On the other hand, strong labor markets will likely support loan growth. Home Bancshares now operates mostly in Arkansas, Florida, and Texas. It also has some presence in southern Alabama and New York City. The economies of these states are quite varied; therefore, to gauge credit demand, it's best to consider national averages. As shown below, the unemployment rate for the country is near multi-decade lows.

The coincident index also suggests that the current economic activity is quite strong, which bodes well for loan growth in the near term.

Overall, I'm expecting the loan portfolio to grow by only 1% in the second half of 2022, taking full-year loan growth to 43%. In my last report on Home Bancshares, I estimated a lower loan growth rate for 2022. I've revised upwards my growth estimate mostly because of the second quarter's good performance. Meanwhile, deposits and other balance sheet items will likely slightly outpace loan growth in the year ahead. The following table shows my balance sheet estimates.

In my last report on Home Bancshares, I estimated earnings of $1.54 per share for 2022. My updated earnings estimate is barely changed because the upward revision in loan and margin estimates cancel out the upward revision in operating and provision expense estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation. The new Omicron subvariant also bears monitoring.

Current Market Price is Close to the Year-End Target Price

Home Bancshares is offering a dividend yield of 2.9% at the current quarterly dividend rate of $0.165 per share. The earnings and dividend estimates suggest a payout ratio of 43% for 2022, which is higher than the five-year average of 34% but easily sustainable. Therefore, I’m not expecting any change in the dividend level.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Home Bancshares. The stock has traded at an average P/TB ratio of 2.23 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.3x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $21.3 , which implies a 6.1% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 3.1%. Hence, I’m maintaining a hold rating on Home Bancshares.

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