IBTX - An Investment in Texas

Independent Bank Group, Inc. (NASDAQ:IBTX) is a recently ipo'd regional bank with branches in the Austin and Dallas-Fort Worth areas of Texas. This is not cheap company on a past basis, trading at ~2x book and nearly 20 times ttm earnings. It is instead a growing, incentive-aligned financial company in an economically vibrant area at a fair price.

Consistent, profitably insider provides the catalyst. Many investors consider insider buying to be a strong signal to buy. Unlike selling, buyers typically have one goal in mind - to make money. By its very nature, it has potential to be a durable signal, as if future gains are already priced in there would not be a reason to buy.

There are some important caveats, however. Weak shares, especially in deteriorating companies (such as Dell in the last few years) often see insider buying as officers attempt to boost confidence. In Dell's case, a billionaire's token buys are far more likely a way to boost confidence and push up shares (versus just participating in the gains of the business).

The opposite has been the case here - a recent ipo (where by definition the company is selling) combined with buying as the shares move up and remain near 52 week highs. Among the numerous insider buyers (no sellers) is William E Fair, who has been at IBTX for 9 years, and Brian Hobart, the Chief Lending Officer who has spent 9+ years at IBTX as well.

It is reasonable to say that incentives are aligned at IBTX. But what about the underlying business?

Decent, though levered, operating metrics show an aggressive but efficient operation. I've typically approached financial institutions with a negative-bias- too many seem to be essentially put sellers of liquidity (lending long, borrowing short) and ultimately have weak returns on capital (that is, preleverage).

For a bank, IBTX has a decent financial showing, posting 1%+ roa for the last 3-4 years. The lack of data previous to 2010 is price of buying a new company, and is definitely worth investigating. It is fairly aggressive, levering equity to assets 9-10 times equity. That is a bit high in general, but compared to other regionals (HBAN) and even the top 4 (WFC/BAC), it is on the side. It does not quite have the same moat-like characteristics of WFC, but is a bit better than the rest.

Going forward though, what distinguishes IBTX for HBAN and the rest of the TARP-exiting regionals and indeed the huge money-center banks?

Economic opportunity. Bottom-line, a booming energy and now technology industry (1, 2) in TX will allow it to growth and reap better returns on capital than much of the country. Whereas many states are struggling with debt, Texas's conservative fiscal position combined with luck (oil & gas) will allow it to continue to grow.

Disclosure: long IBTX since the low 30s, but believe it is a good business to hold/buy in small size even at 38.