Home BancShares

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Home BancShares is a regional bank holding company that provides a full range of banking services to small- and medium-sized businesses, as well as individuals, with a focus on lending and deposit services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Home BancShares, Inc., based in Conway, Arkansas, operates as a regional bank holding company with a network of branches in Arkansas, Florida, South Alabama, Texas, and New York City. They compete with other financial institutions, including national and regional banks, credit unions, and non-bank financial service providers, all under a myriad of regulations. Their core business revolves around attracting deposits, and then utilizing the funds for their main bread and butter: lending.

  • Revenue Distribution: Home BancShares generates income primarily from interest income on loans and investment securities, as well as fees from service charges, and other non-interest income sources. The interest income is dependent on prevailing interest rates as well as the mix of loans (residential vs commercial) and investment securities (government vs agency backed). Net interest income is their most significant source of revenue.

  • Trends in the Industry: The banking industry is susceptible to external economic conditions, including inflation, interest rate changes, and recessionary risks. Increased focus on digital banking is occurring within the sector, pushing for increased investment in technology. Further consolidation in the sector is also a continuous theme.

  • Margins: Home BancShares maintains an efficiency ratio around 40-50% (with most recent numbers around 43%). The net interest margin (NIM) for the 3 months ended September 30, 2023 was 3.86% compared to 3.77% in the previous quarter and 3.99% for the three months ended September 30, 2022. Noninterest expenses and income are also important elements in profitability.

  • Competitive Landscape: Competition in the banking industry is intense. Home BancShares competes with national, regional and community banks in each market they operate in. Competition for deposits and loans, in particular, is very strong. Banks compete based on interest rates offered for deposits, interest charged on loans, the number of branches, services offered and brand reputation.

  • What Makes Home BancShares Different?: Home BancShares stands out with its expertise in managing credit risks, particularly in real estate lending. This is the primary factor for its profitability and has allowed to stay competitive even if the bank does not have the best interest rates on deposits or the lowest on loans. They also pride themselves in a community approach, with a focus on relationships. They are also a very acquisitive bank.

Financials In-Depth

The company’s financials have to be looked at through several layers. There is both the general picture to be had, but also the way the company presents things which should be scrutinized.

  • Balance Sheet Health: In general, the bank has a solid balance sheet, having a good level of liquidity and enough capital to keep going should the world economy downturn. The company seems well managed as they haven’t taken on excessive risks. The main risk lies within their loan book and exposure to specific segments of the market. The total assets at the end of September 2023 is 22.8B$ and they have $14B on loans and $4.3B on investment securities. The debt consists of $1.6B of long-term debt and short term borrowing obligations of $4.9B. Their equity is $5.7B. Therefore, this is a levered institution. Their loan to deposit ratio is 95%

    • The company is rated BBB by S&P, which is below AA grade, suggesting there are some risks.
    • Tier 1 Capital ratio is 10.1% vs 7% regulatory minimum.
    • Total nonperforming assets to total assets is 0.42%. Nonperforming assets are a decent measure of asset quality.
    • Coverage ratio of allowance for loan and lease losses to nonperforming loans is 401% . This coverage shows management is acting conservatively as they are accounting for potential losses.

Recent Financials and Earnings Call Highlights

  • Strong loan growth and asset quality The company’s continued strong loan growth, primarily in commercial real estate lending, and their focus on maintaining credit quality, which is reflected in low nonperforming loans and a high allowance for credit losses.
  • Net Interest Income: Their net interest income has increased slightly over the last few quarters. Management mentions that they expect this trend to continue, as loan volumes and rates have been increasing.
  • Profitability: Although the company is doing well, their earnings per share (EPS) were 0.49$ in Q3 2023 compared to 0.95$ in 2022. This decrease in profitability is mainly attributable to higher expenses and higher cost of funding that have happened during the year. Their efficiency ratio has also increased from 40-45% to the high 40s. Management stated they expect this trend to revert to normal levels during 2024 and 2025.
  • Acquisitions: Management has been talking about making more acquisitions. They are actively looking to expand their footprint and gain market share. This strategy, however, can introduce execution risks and can be a drain of company resources and managerial focus.
  • Non-interest Expense: Non-interest expense has risen sharply, mostly due to staffing and acquisition related items. This has caused a decrease in earnings and has to be monitored closely.
  • Interest rate volatility: They have shown some level of hedging against interest rate volatility, which can influence income and costs of funding. Given how difficult it is to accurately forecast interest rates, the ability of their hedging program could be critical for the stability of the firm. * Credit Quality: This bank has a diversified loan portfolio, across different real estate, commercial, construction, agricultural and individual loans. However, a lot of their portfolio consists of construction and commercial real estate. Their loans are mainly in Florida, Arkansas, and Alabama, with a new focus on New York and Texas. Credit risk has to be monitored carefully, considering the nature of their main lending segments.

Risks

  • Interest Rate Risk: The company is exposed to interest rate changes because the rates of their loans and the cost of their deposits might not be in tandem, thereby impacting net interest income. Moreover, rising rates have a tendency of causing a recession, where loan defaults and nonperforming loans would likely increase, affecting the company’s profitability. The decrease in interest rates might lower their profitability and affect the net interest margin.
  • Credit Risk: Given their heavy exposure to commercial and real estate loans, there is an intrinsic risk that their loan portfolio may sour should these markets experience difficulty. Given that the company is acquiring and expanding operations, they need a good due diligence process to ensure quality loans. They will also need to closely monitor and manage the risk within their loan portfolio.
  • Regulatory Risk: Banks face substantial regulatory oversight, such as compliance with capital requirements, asset valuation guidelines, and fair-lending regulations. The ever changing regulatory landscape might be a headwind for the bank.
  • Management execution: The company’s expansion and acquisition strategy depends on managerial ability to correctly allocate resources and integrate those acquisitions, all while not overpaying, which is a major risk.
  • Economic and Market Risk: Like all banks, the company is exposed to the general economic environment. Given how their loans are mostly within the US, the national economic conditions are paramount to their performance and survival. The company’s stock is publicly traded and also depends on the sentiment of the stock market. Any unforeseen market downturn may impact their perceived value and market capitalization.

Moat

Home BancShares has a narrow moat. While the company has some competitive advantages and are a solid bank, these are not completely insurmountable. A strong regional brand and a history of excellent management and performance may help retain customers. However, the competitive landscape of the banking sector does not really allow any moat, as interest rates and service charges tend to be commoditized. However, the firm has a good understanding of the local economy and has good relationships with their customers, which might make them very resilient for some time.

Understandability

The company is a bit difficult to understand due to the many moving parts within their businesses. On top of all, understanding finance is complex and understanding banking is harder. Moreover, the different ways they present data for earnings, makes understanding and projecting them rather hard. Their financial data is reported through a variety of statements, and also has to be read alongside their footnotes which takes time to get a complete picture of how their financial performance is shaping up. Thus, understanding this company is not straight forward.

Balance Sheet Health

The balance sheet health is quite healthy with a good level of equity to assets, and a diversified loan portfolio. The high non-performing loans coverage ratio also means that the company is well positioned to weather potential losses, which makes this bank well managed. However, they are quite levered. Their liquidity position is good and they have diverse funding sources, with an emphasis on core deposits, which they believe will help weather financial difficulties. The leverage does not seem to be too high, and the ratios are not out of the normal for their sector. This leads me to assign them a higher rating in balance sheet health than most.