Conway, Ark.-basedHome BancShares (
), parent of Centennial Bank, is a community banker at heart.
But it has been morphing into a small regional bank on the
heels of a string of acquisitions, many of them failed banks in
Like most community banks, Centennial Bank offers a range of
commercial and retail banking services to businesses, real estate
developers, individuals and municipalities.
At year-end it operated 88 branches in Arkansas, 53 in Florida
and seven in Alabama. After buying 10 failed or failing banks in
Florida between 2010 and 2012, its latest and biggest merger, in
late October, was closer to home: Jonesboro, Ark.-based Liberty
Bancshares, parent of Liberty Bank of Arkansas.
The deal brought $2.8 billion in assets and 46 branch
locations, not to mention naming rights to the Arkansas State
Home BancShares called the acquisition a "game-changing
milestone," making it the second-largest bank holding company in
the state. At the end of 2013 it boasted $6.8 billion in assets,
deposits of $5.4 billion and loans of $4.2 billion.
By Dec. 9, management had converted Liberty's core operating
system to Centennial's system less than six months after the
original agreement to merge was signed.
Had it not completed the conversion so quickly, CEO Randall
Sims told analysts in a Jan. 16 conference call, "We would have
continued to run two backroom operations; customer service would
have suffered and it would have cost us several million dollars
in savings we now can enjoy in the first quarter."
Home BancShares said it realized $8 million in merger-related
savings from the conversion. It closed or merged four of
Liberty's 46 branches in an efficiency effort.
"It has been a great acquisition for them and the best is yet
to come in terms of consolidation potential," said analyst Jon
Arfstrom of RBC Capital Markets.
"We'll see cost savings from the acquisition and also revenue
benefits from the loan portfolio they acquired," said Brian
Zabora of Keefe, Bruyette & Woods.
Zabora says the company's profitability is "well above peers"
in the community banking sector, though he adds that one rival in
Arkansas,Bank of the Ozarks (
), is also highly profitable and acquisitive.
Home BancShares is the eighth biggest firm by market cap of 95
in IBD's Banks-Southeast industry group. The largest in the group
areSynovus Financial (
) andHancock Holding Co. (
Zabora sees Home BancShares' return on assets this year coming
in at 1.6% vs. less than 1% for most other small banks. "They do
a good job of controlling expenses," he said.
In Q4 Home BancShares' efficiency ratio, expenses as a
percentage of revenue, was 45% vs. mid-60s for peers, Zabora
says. He thinks the company can reach the low-40% range by this
fourth quarter. Management's goal is to get below 40%.
"The larger you get, the more you can spread costs over a
wider asset base," Zabora said.
Liberty, though, generated lower returns on assets than
Centennial. And since Liberty, with lower net margin, was partly
included in Q4, Home BancShares' net interest margin fell from
5.41% in Q3 to 5.09% in Q4. Analyst Brian Martin of FIG Partners
expects "modest additional" margin compression as the
full-quarter impact of Liberty's lower-yielding loan book is
realized in Q1.
Home BancShares is "making good progress" on cost savings at
Liberty, Martin wrote, "setting the stage for a better first
quarter and even stronger performance over the balance of the
Q1 results are due out April 17. Analysts polled by Thomson
Reuters expect earnings of 42 cents a share, up 35% from a year
ago. They see 2014 EPS rising 33% to $1.77. In Q4, including more
than two months of Liberty, Home BancShares had EPS of 37 cents,
excluding $17.3 million in acquisition costs, up 23% year over
year after other adjustments.
Martin estimated it would take $18 million to $20 million in
cost savings for Liberty to achieve Home BancShares' minimum
hurdle of a 1.5% return on assets. He figures the $8 million
initial savings correlated to a 1.25% return.
Liberty likely won't be Home BancShares' last acquisition.
"Once Liberty is fixed, (Home BancShares) will move on to the
next deal," Chairman John Allison said in the January conference
call. "Deals are everywhere -- more in Florida than there are in
Arkansas. ... We're definitely going to do some deals in 2014,
unless something crazy happens out there."
Allison noted that the company's return on assets from the
failed Florida banks has improved, averaging 1.4%, though its
banks in the Florida Keys are doing better at nearly 2%. Most of
its other banks in Florida are in the Panhandle.
"Florida has more growth potential than the rest of the
franchise," Arfstrom said, with Arkansas "more about generating
higher profitability" and Florida more about growth.