Home BancShares(HOMB) - 2021 Q4 - Annual Report

Part I Business Home BancShares, Inc. operates as a bank holding company through Centennial Bank, focusing on commercial real estate lending and growth through acquisitions and national platforms, subject to extensive banking regulations Key Financial Data (2019-2021) | | 2021 | 2020 | 2019 | |---|---|---|---| | | (In thousands) | | | | Total assets | $18,052,138 | $16,398,804 | $15,032,047 | | Total deposits | $14,260,570 | $12,725,790 | $11,278,383 | | Total revenue | $710,540 | $694,341 | $662,733 | | Net income | $319,021 | $214,448 | $289,539 | - The company operates through its wholly-owned community bank subsidiary, Centennial Bank, with branches in Arkansas, Florida, South Alabama, and New York City[14] - Commercial real estate loans represented 59.7% of gross loans as of December 31, 2021[14] - Growth strategy includes strategic acquisitions, with the proposed acquisition of Happy Bancshares, Inc. expected to close in Q1 2022, and organic growth through national lending platforms[37] Lending Activities The company's lending is heavily concentrated in real estate, particularly commercial real estate at 59.7% of gross loans, and includes significant past participation in the PPP, with tiered loan approval processes in place Loan Portfolio Composition as of December 31, 2021 | Loan Category | Amount (in thousands) | Percentage of Portfolio | |---|---|---| | Real estate: | | | | Commercial real estate (Non-farm/non-residential) | $3,889,284 | 39.5% | | Construction/land development | $1,850,050 | 18.8% | | Residential 1-4 family | $1,274,953 | 13.0% | | Multifamily residential | $280,837 | 2.9% | | Agricultural (Real Estate) | $130,674 | 1.3% | | Total real estate | $7,425,798 | 75.5% | | Consumer | $825,519 | 8.4% | | Commercial and industrial | $1,386,747 | 14.1% | | Agricultural (Non-Real Estate) | $43,920 | 0.4% | | Other | $154,105 | 1.6% | | Total | $9,836,089 | 100.0% | - The company participated in the Paycheck Protection Program (PPP), generating 12,971 loans totaling $1.23 billion. As of December 31, 2021, the outstanding PPP loan balance was $112.8 million[49] - Loan approval authority is tiered, with regional Directors' Loan Committees having authority up to $6.0 million and the Executive Loan Committee having authority up to the bank's legal lending limit[53] Supervision and Regulation The company and its subsidiary are subject to extensive state and federal banking regulations, including heightened supervision by the CFPB due to exceeding $10 billion in assets, and must comply with Basel III capital requirements and the Durbin Amendment - As a bank holding company with over $10 billion in assets, the company is subject to additional supervision and regulation, including by the Consumer Financial Protection Bureau (CFPB)[68][118] - The company is subject to Basel III capital rules. As its total assets were less than $15 billion on Dec 31, 2009, its trust preferred securities are grandfathered as Tier 1 capital. However, this treatment will be phased out upon the completion of the Happy Bancshares acquisition[84][474] - The company participated in COVID-19 relief programs under the CARES Act, including the Paycheck Protection Program (PPP) and providing loan modifications, which were subject to specific regulatory guidance and accounting relief[138][139][141] Risk Factors The company faces significant industry, operational, and strategic risks, including extensive regulation, economic downturns, high concentration in commercial real estate loans (59.7%), geographic concentration, reliance on key personnel, and acquisition-related challenges - A high concentration of real estate loans, particularly commercial real estate at 59.7% of the total loan portfolio, exposes the company to increased lending risk from downturns in the real estate market[171][172] - Exceeding $10 billion in total assets subjects the company to heightened regulatory requirements, including supervision by the CFPB and lower debit card interchange fees under the Durbin Amendment, which increases compliance costs and reduces certain revenues[152][153] - The pending acquisition of Happy Bancshares presents risks related to successful integration, realization of anticipated benefits, potential loss of key employees or customers, and incurring substantial merger-related expenses[208][209][211] - The company's success depends significantly on key executives, including Chairman John W. Allison. The loss of their services could materially and adversely affect the business[179] Unresolved Staff Comments The company reports no unresolved comments from the SEC staff received more than 180 days prior to the fiscal year-end - There are no unresolved Commission staff comments as of the report date[216] Properties The company's main office is in Conway, Arkansas, and its subsidiary, Centennial Bank, operated 160 branches across Arkansas, Florida, Alabama, and New York City as of December 31, 2021 - As of December 31, 2021, Centennial Bank operated 76 branches in Arkansas, 78 in Florida, five in Alabama, and one in New York City[217] Legal Proceedings The company is involved in ordinary course legal proceedings, but management believes none will have a material adverse effect on its business or financial condition - Management believes there are no pending or threatened legal proceedings that will have a material adverse effect on the company's financial condition[218] Mine Safety Disclosure This disclosure item is not applicable to the company's operations - Not applicable[219] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (HOMB) trades on the NYSE, with 1,233 stockholders as of February 2022, and the company repurchased 311,500 shares in Q4 2021, though its stock underperformed key indices over the past five years Issuer Purchases of Equity Securities (Q4 2021) | Period | Number of Shares Purchased | Average Price Paid Per Share | Total Shares Purchased as Part of Publicly Announced Plans | |---|---|---|---| | Oct 1 - Oct 31, 2021 | 161,500 | $23.98 | 161,500 | | Nov 1 - Nov 30, 2021 | — | — | — | | Dec 1 - Dec 31, 2021 | 150,000 | $23.97 | 150,000 | | Total | 311,500 | | 311,500 | - The company's stock performance from Dec 31, 2016 to Dec 31, 2021, with a starting value of $100, ended at $98.87, underperforming the Russell 2000 Index ($176.39) and the SNL Bank and Thrift Index ($160.89)[228] Selected Financial Data The company's 2021 selected financial data shows significant profitability growth, with net income reaching $319.0 million and diluted EPS at $1.94, driven by a negative provision for credit losses, alongside improved asset quality and strong performance ratios Selected Financial Data (2019-2021) | (Dollars in thousands, except per share data) | 2021 | 2020 | 2019 | |---|---|---|---| | Net interest income | $572,971 | $582,555 | $563,217 | | Provision for credit losses | $(4,752) | $129,253 | $1,325 | | Net income | $319,021 | $214,448 | $289,539 | | Diluted earnings per common share | $1.94 | $1.30 | $1.73 | | Total assets (period end) | $18,052,138 | $16,398,804 | $15,032,047 | | Loans receivable (period end) | $9,836,089 | $11,220,721 | $10,869,710 | | Total deposits (period end) | $14,260,570 | $12,725,790 | $11,278,383 | | Return on average assets | 1.83% | 1.33% | 1.93% | | Non-performing assets to total assets | 0.29% | 0.48% | 0.43% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A details the company's 2021 financial performance, highlighting a 48.8% increase in net income to $319.0 million due to reduced credit loss expense, a decline in net interest margin, a $1.38 billion decrease in loans, and significant improvements in asset quality - Net income for 2021 increased by $104.6 million (48.8%) to $319.0 million, largely due to a negative provision for credit losses of $4.8 million in 2021 versus a $129.3 million expense in 2020[246][301] - Net interest margin decreased to 3.66% in 2021 from 4.06% in 2020. This was primarily driven by a 46 basis point dilutive impact from excess liquidity held in low-yielding cash balances[248][305] - Total loans decreased by $1.38 billion (12.3%) to $9.84 billion, mainly due to $910.1 million in PPP loan forgiveness and an organic loan decline of $822.2 million[350][352][355] - Asset quality improved, with non-performing loans decreasing by $23.9 million to $50.2 million, or 0.51% of total loans, down from 0.66% at year-end 2020[252][383] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates, notably the Allowance for Credit Losses (ACL) under the CECL methodology, which resulted in a $44.0 million increase upon adoption, and the annual impairment testing of goodwill - The company adopted the CECL (Current Expected Credit Loss) methodology on January 1, 2020, which replaced the incurred loss model. This resulted in a one-time cumulative-effect adjustment increasing the allowance for credit losses by $44.0 million[268][269] - The allowance for credit losses is estimated using a discounted cash flow method for various loan segments, incorporating historical loss experience adjusted for current conditions and reasonable forecasts of economic indicators like unemployment and GDP[275][276] - Goodwill and other intangible assets, which totaled $998.1 million at year-end 2021, are tested for impairment at least annually. No impairment was recorded in 2021[193][285] Allowance for Credit Losses (ACL) The Allowance for Credit Losses (ACL) decreased to $236.7 million (2.41% of loans) at year-end 2021, primarily due to $8.8 million in net charge-offs and no provision for credit losses, reflecting improved asset quality with ACL coverage of non-performing loans increasing to 471.61% Analysis of Allowance for Credit Losses (in thousands) | | 2021 | 2020 | |---|---|---| | Balance, beginning of year | $245,473 | $102,122 | | Impact of adopting ASC 326 | — | 43,988 | | Allowance on acquired loans | — | 357 | | Total loans charged off | (11,661) | (14,486) | | Total recoveries | 2,902 | 2,070 | | Net loans charged off | (8,759) | (12,416) | | Provision for credit loss - loans | — | 102,113 | | Provision for credit loss - acquired loans | — | 9,309 | | Balance, end of year | $236,714 | $245,473 | - The allowance for credit losses as a percentage of total loans was 2.41% at year-end 2021, compared to 2.19% at year-end 2020[429] - The increase in collateral-dependent impaired loans to $331.5 million in 2021 from $112.7 million in 2020 was primarily due to changing the valuation method for lodging and assisted living loans to a market price methodology, which involved assigning a 15% discount to par[420][666] Liquidity and Capital Adequacy Requirements The company maintains strong liquidity and capital, with the parent holding $291.6 million in cash, and both the company and Centennial Bank exceeding Basel III "well-capitalized" requirements, including a 19.77% Total risk-based capital ratio at year-end 2021 Risk-Based Capital Ratios (Home BancShares, Inc.) | Ratio | Dec 31, 2021 | Dec 31, 2020 | Minimum to be Well-Capitalized | |---|---|---|---| | Common equity Tier 1 capital | 15.37% | 13.42% | 6.50% | | Tier 1 risk-based capital | 15.98% | 14.01% | 8.00% | | Total risk-based capital | 19.77% | 17.75% | 10.00% | | Leverage ratio | 11.11% | 10.85% | 5.00% | - The company has elected to adopt the interim final rule allowing a five-year transition period (2-year delay, 3-year phase-in) for the regulatory capital impact of CECL adoption[479] Quantitative and Qualitative Disclosures About Market Risk The company primarily manages interest rate risk through NII simulation and economic value of equity analysis, projecting an 11.67% increase in NII from a 200 basis point rate hike and a 3.18% decrease from a 100 basis point rate cut as of December 31, 2021 Sensitivity of Net Interest Income (as of Dec 31, 2021) | Interest Rate Scenario | Percentage Change from Base | |---|---| | Up 200 basis points | 11.67% | | Up 100 basis points | 5.42% | | Down 100 basis points | (3.18)% | | Down 200 basis points | (5.26)% | - The company's primary methods for analyzing and managing interest rate risk are net interest income simulation modeling and economic value of equity[519] Consolidated Financial Statements and Supplementary Data This section presents the company's 2021 consolidated financial statements, with management asserting effective internal controls and BKD, LLP issuing an unqualified opinion, while identifying the Allowance for Credit Losses as a Critical Audit Matter due to its subjective estimation - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[530] - The independent auditor, BKD, LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[534][535] - The auditor identified the Allowance for Credit Losses as a Critical Audit Matter due to the high degree of subjectivity and complexity in the models and qualitative adjustments used in the estimate[539][541] Notes to Consolidated Financial Statements The notes to the financial statements detail key accounting policies, including the 2020 CECL adoption, business combinations like the pending Happy Bancshares acquisition, and significant subsequent events such as a $300 million subordinated note issuance and a $238 million marine loan portfolio purchase in early 2022 - The company is set to acquire Happy Bancshares, Inc. in a stock transaction expected to close in Q1 2022. Happy shareholders will receive 2.17 shares of HOMB common stock for each share of Happy common stock[619][621] - On February 4, 2022, the company purchased a performing marine loan portfolio of approximately $238 million from LendingClub Bank[776] - On January 18, 2022, the company issued $300 million of 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032[773] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - No items are reportable under this item[777] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes identified during Q4 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[778] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, the company's internal controls[780] Other Information No items were reportable under this section for the period - No items are reportable[781] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 proxy statement - This section is incorporated by reference from the company's 2022 proxy statement[784] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 proxy statement - This section is incorporated by reference from the company's 2022 proxy statement[785] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated from the 2022 proxy statement, with 3,015,016 securities issuable from outstanding options and 1,625,136 available for future issuance under equity plans as of December 31, 2021 Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | |---|---|---|---| | Equity compensation plans approved by stockholders | 3,015,016 | $20.06 | 1,625,136 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 proxy statement - This section is incorporated by reference from the company's 2022 proxy statement[788] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2022 proxy statement - This section is incorporated by reference from the company's 2022 proxy statement[789] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including merger agreements, corporate governance documents, and required certifications - The financial statements and schedules listed in the index are filed as part of this report[792] - A comprehensive list of exhibits is provided, including merger agreements, corporate governance documents, and required certifications[793][794] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[795]