The banking sector is intriguing right now, as the combination of recent corporate tax cuts, rising interest rates, and the prospect of reduced regulation makes them look increasingly like growth plays. That gives investors all the more reason to pay attention to Forbes magazine's list of "America's Best Banks" for 2018. Forbes bases its rankings on 10 metrics, including growth, profitability, and credit quality.
The winner? A mid-cap bank you may not have heard of: Home BancShares (NASDAQ:HOMB). What makes this $4.2 billion southern bank so special? Let's find out.
Home BancShares was founded in 1999 by an investment group led by current chairman John "Johnny" Allison and vice chairman Robert "Bunny" Adcock. While their names may sound like characters from a John Ford western, Allison and Adcock have proved themselves to be savvy stewards of shareholder capital.
Allison manages the company largely from the perspective of a value investor, using the M&A market to his advantage. Over the course of 20 years, the company has bought more than 20 banks and loan pools. In 2009, it merged several of its charters into one, and it now operates all branches under the Centennial Bank brand, an institution Home acquired in the early 2000s.
The company has since grown to 76 branches in Arkansas, 89 in Florida, five in Alabama, one in New York City (acquired in a 2015 acquisition), and two loan production offices in Los Angeles. Home BancShares makes several types of loans, with an emphasis on commercial real estate and development/construction loans, though residential mortgages and commercial and industrial loans play lesser parts in Home's loan mix.
A serial acquirer
"I'm not a banker, I'm a businessman," Allison told Bank Director magazine last year. "I run it like a business. I don't run it like a bank."
This comes through in several ways. One is Allison's knack for making great acquisitions at fair (or better) prices. In fact, after the financial crisis, Home purchased more banks from the FDIC (i.e., out of bankruptcy) than any other institution between 2010 and 2012, according to COO John Tipton. But the company is not only a deep-value hunter; it also acquires quality banks at reasonable prices. A prime example is Home's $820 million acquisition of Florida-based Stonegate Bank in September 2017, which was the company's third acquisition last year.
Allison has a significant amount of his net worth in Home BancShares common stock, with over 6 million shares amounting to over $130 million. In the aforementioned Bank Director interview, Allison said: "They're buying the fact that I'm the largest shareholder and 85 percent of my net worth is tied up in this stock. They know that I'm not going to go out there and do something stupid."
And that, ladies and gentlemen, is why we love owner-operators here at The Motley Fool.
Local and efficient
The other ingredients in Home BancShares' "secret sauce" include a ruthless focus on costs and a decentralized, community-bank structure. Even though Home BancShares buys other banks and rebrands them under the Centennial Bank name, local bank boards are empowered to make up to $6 million in loans, and local branches are encouraged to participate in local charities and organizations.
This decentralized structure and focus on stripping out costs make Home BancShares extremely efficient. In the fourth quarter of 2017, the company reported a stellar 37.35% efficiency ratio (this metric measures noninterest expenses divided by net revenue, so lower is better). That's one of the lowest ratios among all banks -- even lower than that of internet-only bank and Fool favorite Bank of the Internet (NASDAQ:BOFI), and far below the 56.4% average among U.S. banks.
Home BancShares just reported its full-year results. With its recent Stonegate acquisition, the company just crossed $10 billion in assets. Excluding the impact of hurricanes and merger-related expenses, Home's 2017 non-GAAP earnings per share grew 7.14% to $1.35 from the prior-year period, while the company maintained a conservative equity-to-assets ratio of over 15%. Return on equity (ROE) decreased in the past two quarters due to deferred tax asset writedowns in the fourth quarter and hurricanes in the third quarter, but earlier in the year, the bank achieved an ROE between 13% and 15%, which is excellent compared with the industry average of 9.58%.
Currently, Home BancShares trades at a forward price-to-earnings ratio of just 12.4 and a price-to-book ratio of 1.88. Given Home BancShares' winning culture, savvy management, and high-return model, that price seems more than fair, and Foolish investors may wish to give this high-performing bank a close look for their portfolios.