Better to crawl before running when it comes to hitting $10 billion in assets.
That mindset has led Home BancShares in Conway, Ark., a serial acquirer post-crisis, to shy away from deals this year. The $9.8 billion-asset company has also become more conservative with lending as part of a plan to stay under an approaching regulatory threshold that includes mandatory stress testing and caps on interchange fees.
While Home, along with Chairman John W. Allison, expects to rev up the acquisition machine next year, it doesn't plan to loosen its lending standards anytime soon.
"We didn't want to go over the $10 billion," Allison said during a Thursday conference call to discuss third-quarter results. "I think you'll see our foot go back on the accelerator in 2017 and 2018. You'll see things pick up."
Allison, named one of American Banker's 2013 community bankers of the year in large part due to his deal making prowess, said he once considered following the lead of others by landing a big deal to catapult over $10 billion in assets. "I have watched some of our friends leap over the mark and … we were totally in agreement with that strategy," he said.
The veteran banker eventually changed his mind. Management, he explained, has already "cooked in" the costs of stress testing — which totaled nearly $500,000 in the second and third quarters — and there is a fairly good idea of what Home will lose in interchange fees. At the same time, the company isn't going to reach for a deal simply to build scale.
Home, meanwhile, hasn't closed a bank acquisition since buying Florida Business BancGroup in October 2015.
"We still do smart transactions," Allison said. "We will not do a dumb transaction. You see what happens to people who pay too much for deals and it's obvious when they [lose] their pants. … We're not going to do that."
Management's commentary led Stephen Scouten, an analyst at Sandler O'Neill, to predict in a note to clients that Home could announce one to two smaller deals "in the coming months."
Home is also tapping the brakes when it comes to loan growth.
Total loans rose by just 5% during the third quarter — Keefe, Bruyette & Woods analyst Brady Gailey had expected 14% growth — and management indicated that they would increase loans slowly over the rest of this year. Commercial real estate loans rose by just 2% from June 30 and 16% from a year earlier, equating to slower rates compared to what Home had reported in prior periods.
Another factor could be increased regulatory scrutiny of CRE, which Home is monitoring. At Sept. 30, CRE loans equaled roughly 360% of total risk-based capital, while construction loans are at 115%, or enough exposure to warrant added regulatory scrutiny.
Home is comfortable with that level rising, said Kevin Hester, the company's chief lending officer. The company is generating enough capital through retained earnings to help offset any potential increase in CRE levels. "And we're watching the markets, looking at our underwriting and continuing to be conservative — even more conservative — as we go along," he said.
Management is paying close attention to the hospitality industry, where supply and demand are being watched, and the office market, where delinquencies are slightly increasing. In the case of loans for office projects, Home is insisting on more equity being included in the deal. Disciplined loan pricing is also important.
To be sure, Home has been slowly increasing loansin the national CRE group it bought last year after the collapse of Doral Financial. The group's book reached $900 million in the third quarter — consisting of 17 loans — and should hit $1 billion by yearend. Still, management said they would likely cap the size of the portfolio at $1.5 billion.
Home is also making more commercial-and-industrial loans, which rose 64% from a year earlier, to a still-modest $1.2 billion. Home booked $72 million in loans during the third quarter — mostly C&I — in New York, where it opened a loan-production office last year.
Allison, who enjoys talking about deals as they progress, was quick to tell analysts that he still has an itch for M&A. He said Home had ironed out some issues with a unnamed target in Florida, adding that "hopefully we'll have something for you here before long."
Allison and his team are also having more discussions with potential targets.
"We visited with a $2 billion bank and a $7 billion bank recently, so we're more active," Allison said. "Nobody has better opportunities in this entire market than Home BancShares with the power of [our] stock."