We might as well close out the year with the sector we talked about the most during 2016. Yesterday I looked at those banks that have rewarded shareholders with consistent dividends and buybacks. Today I will feature the banks that have grown their book value at a high rate over the last few years. That is the best measure of growth, especially for banks, in my opinion.
At the end of the day, the bottom line is: did you grow earnings and were you able to reinvest those profits in a manner that added value to the bank? The banks I will talk about today have done these things very successfully as the sector began to emerge from the credit crisis.
First Internet Bank (INBK) has used a combination of organic growth and capital raises to grow the total equity value at over 30% annually over the past five years. It uses a different model than most banks and operates as a national bank. It has one physical location, but through its online presence it has deposit relationships in all 50 states. On the loan side, it offers mortgages and consumer loans online.
It also has a strong single tenant lease financing business. Most of that business is conducted in Indiana, Florida, Georgia, Texas and North Carolina. Tenants include national companies with strong credit profiles like Walgreens (WAG) , Rite Aid (RAD) and Wendy's (WEN) . In spite of rapid growth in deposits, assets and loans, loan quality has remained high, as nonperforming assets are just 0.37% of total assets.
Insiders own more than 10% of the bank, so they have some skin in the game. First Internet doesn't look like most community banks, but it has proven that its model can produce a high rate of growth and I expect it to continue to do well. The stock is reasonably priced at just 1.2x book value and 13.5x earnings right now.
Bank of the Ozarks (OZRK) has taken a more traditional path to growth. It is one of, if not the, leading serial acquirer of smaller banks. In the last five years it has closed eight deals that added something on the order of $9 billion in assets to its franchise. It has an equity to assets ratio of over 16, so it would appear to have plenty of capital to continue to pursue an acquisition-based growth strategy for an extended period of time.
The bank currently has 262 branches, with over $18 billion in assets. Book value growth has averaged 27% annually for the past five years. The stock is not cheap on the metrics I usually use, at over 3x tangible book, but it has risen by a factor of five since 2011, so the market likes its approach to growing the bank. The best way to get involved in this bank for a value type like myself is to hope it acquires one of my banks and hold the stock that I receive.
Independent Bancorp (IBTX) in McKinney, Texas, has also used an acquisition-based strategy to grow. It has made five deals since its 2013 IPO, adding about $2.5 billion in assets. Currently, the bank has 41 branches in the Austin, Dallas and Houston -- markets with about $5.5 billion in assets. Last month it announced it was buying Carlisle Bancshares, adding $2.3 billion in assets, $1.5 billion in loans, $1.9 billion in deposits and 42 branches to its franchise.
This deal strengthens its Dallas market presence and also allows the bank to expand into Denver and Colorado Springs. The deal appears to be accretive to earnings and book value from day one, and with a 25% cost takeout percentage, the bank estimates it will realize a 20% internal rate of return on the deal. At 3.1x book value, the stock is not cheap on traditional metrics, but it has rewarded shareholders by more than doubling since the offering in 2013.
For most of my career, I have been a cheap bank buyer and, while that will not change in a big way, my discussions with John Allison and his team at Home Bancshares (HOMB) have changed the way I look at the high-growth banks. Owning a bank that grows the book value at a high rate, whether organically or by deal-making, can pay huge rewards to shareholders, so these banks are worthy of consideration by growth and value investors alike.