I ran a series of screens across the banking industry on Monday afternoon. Second quarter earnings are all in as are the call reports filed with the Federal Deposit Insurance Corp. The picture remains very much one of improving credit conditions, weak loan demand and compressed net interest margins.
There is no such thing as organic growth across most of the United States right now for the banking industry, and this will be one of the many factors that touches off a long term wave of consolidation across the industry.
I also checked the latest 13d and insider filings across the industry and found some interesting names being accumulated in the past few months. Insiders seem to believe that the conditions will continue to get better across the industry -- or perhaps that they will be able to sell at higher prices in a few years.
I found it interesting that many are willing to pay higher prices than I would pay for banks, and in many cases will pay a premium to book value. This tells me they believe they can grow the earnings and book value faster than investors and analysts think they can.
Not surprisingly the most optimistic bank insiders hail from my wife's hone state of Texas. The Texas economy has been on a roll while the rest of the country foundered. A lot of that has to do with oil and gas, but the business-friendly state also has strong financial, technology, defense and agricultural industries. Texas is one of the few states in the U.S. where the total jobs number is now higher than pre-crisis levels. The state's GDP is growing at about a 50% higher rate than the rest of the country.
Hilltop Holdings (HTH) is an old favorite stock that is seeing strong executive and director buying in recent weeks. I have owned this stock for about five years now, originally buying it when it was just a pile of cash and a small insurance back in 2008 and when it was a net-net stock. With Gerald Ford, the noted bank investor and turnaround artist controlling the company, there was little doubt in my mind that the cash would eventually be spent to buy a bank or two. And there was no doubt that money would be made over time. It has played out exactly that way and the shares have doubled during the time I have owned it.
Hilltop owns an insurance company and mortgage business in addition to the bank. They also own a significant stake in SWS Group (SWS), the Texas based financial services and brokerage firm located in Texas. Insiders apparently like the picture and have been heavy buyers of the stock in the past month, reaching into their pockets to buy $1.1 million worth of shares. The stock trades a pretty good premium to tangible book value. But the folks running the bank seem to believe that the book value and stock price will continue to rise in value for several years, at least.
Independent Bank (IBTX) just had its IPO back in April of this year. It is one of the few banks that has been able to come to the public markets in the past few years. The bank has 30 branches, located in the Dallas Fort Worth and Austin areas, and has been growing nicely. They just announced an acquisition of a smaller, competing institution that will enlarge its presence in the Dallas marketplace. That is the second announced acquisition by the bank since the IPO was completed.
The bank has focused on achieving growth while maintaining asset quality and it seem to be working. Nonperforming assets to total assets ratio is just 1.35% and a nonperforming loans to total loans ratio is only 0.40%. Total assets are growing at a 25% annualized rate awhile earnings have jumped by an average of 38% a year since 2010.
This performance is unfortunately reflected in the valuation as the shares trade at more than 2x tangible book value. While that might deter me, it has not stopped insiders as they started buying during the April IPO and haven't stopped since. In the past few months three insiders have opened their checkbooks and purchased more than $1.6 million worth of stock.
The odds are high that this bank will be able to continue to grow for some time due to the strong local economy in their two markets and to the smart acquisitions. Growth investors looking for bank exposure would be smart to look at this stock and consider joining the insiders. We value-type investors will just have to hope they have a short-term stumble, or that there is a market collapse that brings the stock down to our levels.
Texas has been doing well and it looks like it will prosper for some time to come. Its bankers certainly believe so.