HOMB - Home Bancshares: Low LTD Ratio May Be A Key Factor For 2024

2024-01-22 02:15:52 ET

Summary

• Home Bancshares Q4 2023 results beat expectations in terms of revenue and EPS.
• Average balances of interest-earning assets decreased, but loans and securities portfolio grew.
• Management is positive about growth prospects in 2024, with opportunities to issue new loans and improve NIM.

It has not been an easy 2023 for any regional bank, but Home Bancshares ( HOMB ) has proven quite resilient. The banking crisis triggered by SVB's bankruptcy caused no small amount of concern for management; however, the worst seems to be behind us and 2024 may hold new opportunities for growth.

Q4 2023 results beat analysts' expectations , both in terms of revenue and EPS:

• Q4 Non-GAAP EPS of $0.48 beats by $0.02.
• Revenue of $245.6M beats by $3.07M.

Overall, it was a good quarterly result, but one should not get too excited: 2024 may also hold some unpleasant surprises.

FY 2023 vs. FY2022

First, let's take a look at how average balances have changed since last year.

Total interest-earning assets amounted to $19.57 billion, down 2.86% from last year. This decrease was mainly driven by interest-bearing balances due from banks, down $2.12 billion.

Loans and the securities portfolio both grew by 10.60% and 2.03%, respectively, over last year. This is quite good growth, especially in loans since demand for credit is gradually declining due to high rates. Also increasing was the yield on the two portfolios: +129 basis points in the case of loans and +122 basis points in the case of securities. In total, the yield on interest-earning assets increased by 163 basis points from last year. So, with fewer assets on hand, HOMB earns more than before.

Of course, a similar point must be made on the liability side as well: just as the return on assets increased, so did the cost of deposits/loans.

In particular, the cost of interest-bearing deposits reached 2.38%, up 170 basis points from last year. In addition, loans increased by $224 million and non-interest-bearing deposits decreased by $779 million. All of this obviously led to a worsening in terms of the cost of bank funding, but the increase in asset yields managed to more than offset the damage. In fact, the net interest margin increased by 44 basis points and reached 4.25%. At the same time, net interest income also improved and reached $832 million, +8.50%.

Beyond an improvement on the income side, there is also good news on the equity side. Both BV and TBV per share achieved steady improvement throughout 2023, particularly in the last quarter. The increase in equity is mainly due to the $101.50 million improvement in AOCI and the $49.90 million increase in retained earnings, partially offset by $17.80 million in share repurchases.

Finally, all capital ratios improved from last year. CET1 reached 14.20%, a signal that the bank is well capitalized.

Outlook for growth

Growth prospects were one of the most discussed topics of the Q4 2023 conference call . Management repeatedly reiterated its positivity about 2024, referring several times to its low loan-to-deposit ratio.

We're seeing payoffs slow somewhat in different markets because they can't get it financed. We're blessed with the fact that we didn't make the mistakes that 95% of the banks did and we have money to loan. So, we're in a position to loan money. As a result of that, that's where you saw the loan growth come in, in the quarter was because the fact, we had money to loan and not many banks in the country had money to loan. So, they came to us and we made some good relationships.

John Allison, Chairman

In other words, while many other banks have gone overboard with loan issuance over the past few years, HOMB has resisted the temptation to immediately immobilize new incoming deposits. The result is that many banks today find themselves with a loan-to-deposit ratio above 100%, while HOMB is still at 85.90%. So, it still has ample room to continue issuing new loans at current market rates. Overall yield on originations continues to improve with an average coupon of 9.18% in the fourth quarter.

Lending at such an average yield means giving a major boost to NIM growth, which is why it is expected to rise in 2024. According to CLO Kevin Hester, there are still several markets to tap where demand for credit is still alive. In particular, opportunities reside in Texas and South Florida, places where people are moving to. In addition, not all banks operating in these territories have the liquidity to issue new loans, which makes it even easier for HOMB to work. All in all, the biggest challenge is not so much about competition but about convincing people to take on debt at current rates.

Some negative aspects

As already anticipated, the quarterly results were positive, as was the entire FY2023 despite numerous difficulties. However, there are a number of less positive aspects that deserve to be highlighted.

The first concerns the FDIC's expenses to recover losses from failed banks. These expenses amounted to $13 million and resulted in a reduction in EPS of $0.05. This unforeseen expense obviously did not like it at all:

I don't know about other banks paying their fair share, but we certainly did then and we are now. We are having to pay $13 million because of the stupidity of other management teams. I don't like that, but it is the best way for banks to repay the Fed. After all, the Fed did front the money to save many, many, many banks. I think the failures would have been enormous.

John Allison, Chairman

The second downside concerns potential legal problems in part of its West Texas operation. This issue generated by the unethical and potentially criminal actions of some individuals has resulted in a loss of revenue. On this issue the court will consider what to do, so far not much is known about it.

Finally, the last concern is how many rate cuts the Fed will make this year. Currently, HOMB estimates at most four cuts for the NIM to improve in 2024, but if there are more cuts the situation could change.

If we have six rate cuts this year, we're going to be in lots of trouble. I hope that's not correct, because I hope it's not politically motivated behind it. But if we have six rate cuts, it's a sign that we're in trouble. So, the country is in trouble, not HOMB. The country is in trouble. So that's pretty scary to think that we could have six rate cuts. And I understand they're pricing those six rate cuts in. I'm still a higher-for-long-growth guy.

John Allison, Chairman

The word recession has been mentioned several times, but management seems ready to operate in that scenario as well. HOMB's greatest advantage is the flexibility of its financial structure.

Conclusion

Q4 2023 was positive overall, as was FY2023. The bank achieved improvement in terms of NIM and NII and potentially this trend can continue given the low LTD ratio. In addition, competition in Texas and South Florida is limited since the other banks have LTD close to or above 100%. In any case, FDIC and especially the problems in West Texas are the negative notes. The TBV per share continues to increase despite the buyback and the unrealized losses in the securities portfolio are gradually shrinking. At least for the time being, there is a basis for 2024 to be a good year for HOMB.

For further details see: