Asset Quality Cleanup In Texas Will Position For Stronger Performance In 2025

Key Takeaways

• Significant asset quality improvements and robust loan yields position the company for stronger margins and sustained growth despite interest rate fluctuations.
  
• Record revenue achievements and strategic market positions support future loan origination and revenue growth, enhancing liquidity and competitive funding flexibility.
  
• Significant charge-offs and competitive pressure on deposits could impact earnings, while regulatory scrutiny and high rates may create credit and compliance risks.

Catalysts

Operates as the bank holding company for Centennial Bank that provides commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals, and municipalities.

• The company's significant asset quality cleanup in Texas, with expected recoveries in the $30 million range, positions Home Bancshares for a stronger 2025 and should positively impact net margins as asset quality improves.
  
• Strong loan yields and reduced interest expense are expected to maintain peer-leading net interest margins, with management expressing confidence in sustaining growth despite potential interest rate fluctuations, likely impacting earnings positively.
  
• Record revenue and profits in 2024, with over $1 billion in revenue for the first time, set a solid foundation for future performance, suggesting potential for continued revenue growth.
  
• Strategic geographic position in strong markets like Texas and Florida, along with ongoing loan origination prospects, supports future loan growth, which should bolster revenue.
  
• Robust deposit growth and maintenance of a healthy loan-to-deposit ratio allow for liquidity flexibility and competitive funding strategies that could contribute to increased earnings.

Home Bancshares (Conway AR) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Home Bancshares (Conway AR)'s revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.5% today to 42.9% in 3 years time.
• Analysts expect earnings to reach $462.7 million (and earnings per share of $2.38) by about March 2028, up from $402.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 14.0x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Home Bancshares (Conway AR) Future Earnings Per Share Growth

Risks

• The Texas cleanup involved a significant charge-off of $53 million in loans, primarily from Texas. Such sizable charge-offs could indicate further risks in other regions, potentially impacting future earnings and asset quality.
  
• The company faces a high level of competition for deposits, with some competitors offering high deposit rates (up to 4.8% for a 6-month CD), which could pressure funding costs if Home BancShares needs to match these rates, impacting net interest margins.
  
• Although there are expectations for recoveries from charged-off loans, there is uncertainty regarding the timing and amount of these recoveries, which could lead to variability in earnings projections.
  
• The commentary suggests ongoing regulatory scrutiny and disagreements, as evidenced by the Texas C&I credit issue, pointing to potential risks in regulatory costs or interventions impacting net margins and compliance expenses.
  
• There is an acknowledgment that higher rates may not help loan underwriting, which could slow loan growth or create risks of future credit losses if rates remain high, affecting revenue from interest income.

Valuation

• The analysts have a consensus price target of $32.833 for Home Bancshares (Conway AR) based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $462.7 million, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $28.36, the analyst price target of $32.83 is 13.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.