The upcoming acquisition of Happy Bancshares will benefit Home Bancshares, Inc. (NYSE: HOMB) in two main ways. First, the acquisition will provide a much-needed boost to the loan portfolio, which has shrunk for six consecutive quarters. In addition, the acquisition will result in significant cost savings, even though Home Bancshares and Happy Bancshares have very different markets. On the other hand, the normalization of provision charges and merger-related costs will likely weigh on earnings this year. Overall, I expect Home Bancshares to post earnings of $1.54 per share in 2022, down 20.5% year-over-year. The year-end target price suggests a modest upside from the current market price. Accordingly, I adopt a holding rating on Home Bancshares.

Acquisitions to provide respite to the loan portfolio

Home Bancshares’ loan portfolio has declined in each of the past six quarters. The upcoming acquisition of Happy Bancshares will likely provide a much-needed boost to the total size of the loan portfolio. According to a recent press release, the transaction is expected to close in April 2022. The acquisition will add loans totaling $3.5 billion to Home Bancshares’ loan portfolio, resulting in a 34% increase. Additionally, the acquisition will add a new market to Home Bancshares’ portfolio. Home currently operates primarily in Florida and Arkansas, with limited exposure in New York and Alabama. The acquisition will add exposure to the State of Texas, according to details given in the merger presentation. Texas’ economic recovery is slower than that of other states, as evidenced by the unemployment rate. Nevertheless, Texas is a good market due to its population.

Additionally, the recent acquisition of yacht loans has provided a much-needed boost to the size of the loan portfolio. According to details given in a press release, Home Bancshares completed the acquisition of yacht loans totaling $238 million from LendingClub Bank in February 2022.

On the other hand, repayments and repayments will likely limit loan growth. Management said on the conference call that it expects gains to accelerate as some borrowers may seek to lock in low rates in anticipation of higher rates in the future. This comment gives the impression that Home Bancshares is not enthusiastic about retaining these customers and prefers to let them go to other financial institutions instead of matching lower returns.

Given these factors, I expect the loan book to grow by 39.8% in 2022. Deposits and other balance sheet items will likely grow along with loans. The following table shows my balance sheet estimates.

	EX18	FY19	FY20	FY21	FY22E
Financial situation
Net loans	10,963	10,768	10,975	9,599	13,416
Net loan growth	7.3%	(1.8)%	1.9%	(12.5)%	39.8%
Other productive assets	2,462	2,406	3,495	6,650	9,455
Deposits	10,900	11,278	12,726	14,261	20,570
Loans and sub-debts	1,985	1,140	939	912	1,278
Common Equity	2,350	2,512	2,606	2,766	3,857
Book value per share ($)	13.5	15.0	15.8	16.8	18.5
Tangible BVPS ($)	7.7	9.0	9.7	10.8	13.7
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

In addition to acquired loan growth, revenue will also benefit from margin expansion. I expect the fed funds rate to rise 75 basis points this year, which will boost the portfolio’s average yield. Additionally, Home Bancshares has a large amount of cash on its books that it can easily and quickly deploy into higher yielding assets. Cash and cash equivalents jumped to $3.65 billion at the end of December 2021 from $1.26 billion at the end of December 2020. Meanwhile, the acquisition of Happy Bancshares is unlikely to have a significant impact on the margin because Home and Happy have similar margins. The following table summarizes the loan yields and deposit costs of the two companies, as mentioned in the presentation of the merger.

	Average loan yield	Average deposit cost
Home Bancshares	5.40%	0.19%
Happy Bancshares	5.80%	0.15%
Source: Presentation of the merger

Cost savings are the biggest benefit

There is no network overlap between Home Bancshares and Happy Bancshares; therefore, Home is unlikely to look to branch consolidation after the merger. Nevertheless, management has identified several savings opportunities. As mentioned in the presentation, management expects to save 33% of Happy Bancshares expenses. In other words, the combined company expects to save $53 million per year. About 75% of the cost savings are expected to materialize this year. As it will take some time to materialize, non-interest charges will likely increase initially.

Additionally, management estimates merger costs will total $55 million, which will increase non-interest expenses in the second and third quarters. As a result, I expect the efficiency ratio to deteriorate to 77% in the second quarter of 2022 from 45% in the last quarter of 2021. Thereafter, I expect the efficiency ratio to efficiency improves to 42% by last quarter. of 2022.

Supply to drag revenue

After a year of net provision reversals, the net charge to provisions will probably increase towards a normal level this year. Moreover, the acquisitions of Happy Bancshares and LendingClub are quite risky. Yacht loans are riskier than average because consumer loans inherently carry higher risk than property-backed loans. Additionally, Happy Bancshares had significant exposure to the oil industry. As mentioned in the presentation, loans to the energy sector represented around 2.2% of Happy Bancshares’ total loans. Additionally, Happy’s loan portfolio also has indirect exposure to the oil industry as it is based in Texas.

Overall, I expect provision charges to represent approximately 0.24% of total loans in 2022. By comparison, provision charges have averaged 0.29% of total loans over the course of over the past five years and 0.16% from 2017 to 2019.

Earnings expected to fall to $1.54 per share

The higher provision charge and temporarily elevated non-interest expense will likely weigh on earnings this year. In addition, the acquisition of Happy Bancshares will have a dilutive effect on earnings per share. According to my calculations, Home Bancshares will have to issue approximately 44 million new shares at the time of the closing of the transaction. On the other hand, cost savings and revenue growth will help support the bottom line. Overall, I expect Home Bancshares to post earnings of $1.54 per share in 2022, down 20.5% year-over-year. The following table shows my income statement estimates.

	EX18	FY19	FY20	FY21	FY22E
income statement
Net interest income	561	563	583	573	725
Allowance for loan losses	4	1	112	(5)	32
Non-interest income	103	100	112	138	148
Non-interest charges	264	276	304	299	449
Net income – Common Sh.	300	290	214	319	302
BPA – Diluted ($)	1.73	1.73	1h30	1.94	1.54
Source: SEC filings, earnings releases, author’s estimates (In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic and the timing of an interest rate hike. The Ukraine-Russia war is also indirectly relevant to Home Bancshares because of its implications for oil prices.

The advantages of the acquisition appear mainly included in the price

Home Bancshares offers a dividend yield of 2.9% at the current quarterly dividend rate of $0.165 per share. Earnings and dividend estimates suggest a payout ratio of 43% for 2022, which is above the five-year average of 34% but easily sustainable. Therefore, the earnings outlook poses no threat to the dividend payout.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Home Banc shares. The stock has traded at an average P/TB ratio of 2.23 in the past, as shown below.

	EX18	FY19	FY20	FY21	Average
T. Book value per share ($)	7.7	9.0	9.7	10.8
Average market price ($)	22.3	18.7	16.4	24.5
Historical P/TB	2.89x	2.07x	1.69x	2.27x	2.23x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $13.7 yields a target price of $30.6 for the end of 2022. This price target implies an upside of 34.3% compared to the closing price on March 10. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB	2.03x	2.13x	2.23x	2.33x	2.43x
TBVPS – Dec 2022 ($)	13.7	13.7	13.7	13.7	13.7
Target price ($)	27.9	29.3	30.6	32.0	33.4
Market price ($)	22.8	22.8	22.8	22.8	22.8
Up/(down)	22.3%	28.3%	34.3%	40.4%	46.4%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 12.3x in the past, as shown below.

	EX18	FY19	FY20	FY21	Average
Earnings per share ($)	1.73	1.73	1h30	1.94
Average market price ($)	22.3	18.7	16.4	24.5
Historical PER	13.0x	10.8x	12.6x	12.6x	12.3x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.54 yields a price target of $18.9 for the end of 2022. This price target implies a decline of 17.2% from at the closing price on March 10. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E	10.3x	11.3x	12.3x	13.3x	14.3x
EPS – 2022 ($)	1.54	1.54	1.54	1.54	1.54
Target price ($)	15.8	17.3	18.9	20.4	22.0
Market price ($)	22.8	22.8	22.8	22.8	22.8
Up/(down)	(30.7)%	(24.0)%	(17.2)%	(10.5)%	(3.8)%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $24.8, which implies an increase of 8.5% compared to the current market price. Adding the forward dividend yield gives an expected total return of 11.4%. Therefore, I am adopting a hold rating on Home Bancshares. I would consider investing in the stock if its price drops more than 5% from the current level.