Anthony Speciale Stock Market Analyst

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Switching Our Small Bank Focus for Even More Gains

It’s sad to say that once again, it looks like the federal government is coming directly for you and your cash. In the latest version of the “save the world and buy some votes” legislation currently working its way through Congress, there is a provision where banks have to notify Congress of activity in an account.

Originally, it was any account with over $600 in total activity — withdrawals and deposits — over the course of the year, which means even my three-year-old granddaughter would qualify. But now, they very “generously” moved that limit up to $10,000 in activity, which they say will help them catch only “rich” tax cheats.

It’s clear that the actual goal of the legislation is to see each and every transaction that you make in your account. The American Bankers Association, the Independent Community Bankers of America and many business organizations have come out vehemently against this federal intrusion into your financial life.

But it’s a major problem for another group as well, and that is small community banks. It’s not like the banking industry isn’t having serious issues from the current administration. Regulatory costs are already breaking the backs of small banks, and this is going to drive merger and acquisition activity even more.

Small banks are going to throw in the towel and merge with a larger bank that can handle the increased costs of such regulation.

Now, I’ve given you plenty of small bank stock picks that I think are going to be great takeover targets and make us a lot of money down the road, and we’re going to keep talking about those. However, there’s another way to look at this and use this most recent round of federal intrusion to make a lot of money.

The Best Bank Buyer

Rather than buying the targets, let’s switch our focus a bit and buy the bank that is the single-best acquirer of banks in the country. That is Home Bancshares, Inc. (Conway, AR) (HOMB), which does about one deal a year.

CEO John Allison and the management are very bright, and they still approach banking as a business. They’ve got on of the lowest efficiency ratios, which measures expenses and spending in a bank, in the whole industry. This is an incredibly well-run bank, with one of the highest returns on assets and returns on equity in the business.

As a leading businessman in the Conway, Arkansas area, the CEO was also on the board of Little Rock’s First Commercial Bank, which was sold to Regions Financial Corporation (RF), and was Chairman of the Board of Directors at First National Bank of Conway, which was also eventually sold.

Now, right around that time, he and his then partner bought a very small bank that had about $20 million in deposits. Today, that bank is Home Bancshares, which currently stretches from the Louisiana border all the way across the southeast, and they’re one of the dominant banking franchises in my home state of Florida.

They’ve done this largely by making incredibly intelligent acquisitions. The CEO is a businessman first, and every deal he does adds to earnings and book value from day one, with no accretion or earn-back in any of his takeovers. He’s of the opinion that he wants the acquired bankers to know they’re staying on in their jobs at the banks he’s buying, and he wants them to understand that value of doing the deal right so everyone benefits, and the stock prices continues to go up.

They’re now at $17 billion of assets and are in the process of closing on a deal with Happy Bancshares, Inc. of Lubbock, Texas. They also have branches in key markets like Dallas and Austin. This is going to be the CEO’s first entry into the Texas markets, which is one of the most exciting and vibrant banking markets in the United States.

Both of these banks come into this earning above average returns on assets with outstanding management, cost controls and loan underwriting. When you put that together, the loan to deposit ratio is going to be only 71%, so there’s a lot of room for this newly formed bank to put money to work.

Putting New Money to Work

So, the best acquiring bank in the US is going to see a lot of opportunities to buy smaller banks thanks to this latest round of foolishness from the federal government.

I’ve had several opportunities to speak with the CEO, and I’ve learned that he likes to do exactly what I do with small banks. That is, he finds smaller banks with higher expense ratios and lower returns on assets, buying them and then fixing them up. We were targeting the exact same banks in the exact same way, and I’ve come to consider him a friend and a fantastic banker.

His goal is to get the stock price up to $50 a share. As the largest single shareholder, it’s in his best interest. He’s already made a ton of millionaires in the Conway, Arkansas area just because the bank stock has done so well, and it’s going to continue to do well as it benefits from all the changes the federal government is making that make it incredibly difficult for small banks to survive and thrive.

Wall Street is starting to figure out exactly how powerful this bank could be, and they’ve already started to push up the stock price. It’s starting to show some of that smooth-up-and-to-the-right momentum that we like to see.

So, Home Bancshares is one of the best growth stories and one of the best acquirers of small banks in the US. The CEO is determined to get the stock to $50, which will double our money, and I think he’s going to accomplish that task within the next year.