Conway, Ark.-basedHome BancShares ( HOMB ), 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 Florida.
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 University stadium.
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 ( OZRK ), 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 ( SNV ),Popular ( BPOP ) andHancock Holding Co. ( HBHC )
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 year."
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.