Virginia National Bancshares: An Undervalued Regional Bank With Strong Fundamentals

Jun.21.14 | About: Virginia National (VABK)


Virginia National Bankshares Corporation represents a great value.

One of the new "Founding Banks" listed on the OTCQX.

A very robust earnings, great location for business (and life), and trading close to book value represents a safe growth prospect with a Beta close to the T-bill.

Last month, the OTC Markets Group presented a new marketplace with a new qualification process for U.S. community and regional banks. As per their website, the announcement expands the OTCQX marketplace for U.S. and international companies and distinguishes publicly-traded community and regional banks that are strongly-capitalized, transparent in their news and disclosure and committed to enhancing value for their shareholders.

As such, we have decided to cover at least some of these high quality undiscovered and basically unknown banks that exist in this new marketplace. The rules to qualify for this marketplace are not easy and being small community and regional banks there is a general comfort to investing, whether for growth or dividend. The requirements according to OTC markets are U.S. banks, bank holding companies and savings and loan institutions traded on the OTCQX marketplace must meet quantitative and qualitative financial standards. Companies must be current in their reporting requirements to their banking regulator(s), and if applicable, to the SEC. The bank must appoint a Corporate Broker to serve as their OTCQX advisor. The corporate brokers function in an advisory role. This gives me again, a high degree of comfort when Keefe, Bruyette and Woods, Inc, (as an example) are one of the corporate brokers listed for this group. In addition, due to the transparency (at least on this level) of the banks we believe these are undiscovered small caps that merit a serious addition to a portfolio or even a trading opportunity. We see this in spite of the negatives involved in this group (which we shall clearly state).

We begin our coverage with Virginia National Bancshares Corporation (OTCQX:VABK). The bank is based in Charlottesville, Va and calls itself VNB. Charlottesville is located in Albemarle County and has a population of 203,882 in the MSA or metropolitan statistical area as of 2011. Charlottesville is home to the University of Virginia (UVA) and Monticello, the mountain-top home of Thomas Jefferson. The current unemployment rate (April 2014) for the MSA is 4.80% versus the state of Virginia at 4.90% against the national average (May 2014) of 6.30%. The MSA has shown a population growth of 25.76% from 2000-2010 versus 14.4% for the state. The largest employers continue to be the University along with medical care and services. The per capita income for the MSA is just below the state average of $48,773, above the national average of $44,543. In addition, 46.6% of the population have a bachelors degree or higher. In terms of accolades from the press, the city (or MSA) was ranked #1 city in the country to live according to Yahoo RE/Sperling's Best Places 2011, #1 city for retirees for retirement by Kiplinger Magazine 2010 and the "Locavore" Capital of the World by Forbes in 2011. Really, "Locavore" capital by Forbes?

Now, that the key demographics, and facts of the region are out of the way, let's take a look at this interesting bank. As per the company's website, "Virginia National Bankshares Corporation (Company), headquartered in Charlottesville, Virginia, became a bank holding company in 2013 following reorganization of Virginia National Bank into a holding company form of ownership. When the reorganization became effective on December 16, 2013, the Bank became the wholly-owned subsidiary of the Company. The Bank has one subsidiary, VNBTrust, National Association.

Virginia National Bank offers a full range of banking and related financial services to locally owned businesses and individual through its seven banking offices located in Central Virginia and online. Four of the offices are located in Charlottesville/Albemarle County, one is located in Orange, and two are located in Winchester. The Bank received its federal banking charter from the Office of the Comptroller of the Currency on July 29, 1998. Virginia National Bank is a member of the Federal Reserve System and is an Equal Housing Lender whose deposits are insured by the Federal Deposit Insurance Corporation."

The company with 102 employees has now been in business for 16 years. This is nice, but is not what sets the bank apart from many others. What is noteworthy about the bank is their performance in the local loan market, little non performing assets or NPAs and the present return on equity along with a very strong balance sheet. The bank earned 6.86M for the quarter ending March 31 or $2.55 per share on revenue of 32.36M. This is based upon 2.7M shares outstanding. While this is quite attractive, what is even more impressive is that the bank's ttm (trailing 12 month) profit margin stands at 21.21% with an operating margin of 30.78%. I looked this over and I had trouble rationalizing the numbers. I dug further and saw that the bank had a total cash on their balance sheet of 76.85M for the mrq (most recent quarter) or a whopping total cash per share of $28.50. With a total debt of 13.45 for the most recent quarter, the book value is only $21.90. The stock closed at only $22.30 or 8.7x earnings per share on June 16. It still seemed to be reasonable to me.

I then went to look at the all important NPA or nonperforming assets. There had to be issues here. I could not find any in this area. The bank has NPA/assets of only .77%. This is defined as Nonperforming assets (nonaccrual loans and leases, renegotiated loans and leases, and real estate owned) as a percent of assets. Based upon my industry analysis, this is quite low. As a comparison, New Bridge Bancorp, NBBC, a North Carolina bank recently downgraded to neutral by Keefe, Bruyette and Woods has an NPA/assets of .97. NBBC, also has a high loans/deposits ratio (Loans held for investment, before reserves, as a percent of total deposits) of 91.17% while VABK is lower at 63.47%. While it is difficult to compare two regional banks my comparison is not based solely upon the two banks' models and performance, it is based upon the lack of coverage of one of the banks. There are other asset quality percentages but they are all within bounds and are on the low side. One minor item to note here is the bank's efficiency ratio. It is on the high side. A bank efficiency ratio is a measure of a bank's overhead as a percentage of its revenue. It is usually a quick tool to measure a bank's ability to turn resources into revenue. In general, the lower the ratio the better, with a level of 50% generally regarded as the maximum optimal ratio. An increase in the ratio usually indicates either increasing costs or decreasing revenues. VABK is at 87.61%, while NBBC as a comparison is at 74.98%. At first I thought this was too high at VABK but I believe the bank's focus on cost control here is resulting in a higher efficiency ratio. In addition, as a bank becomes more scalable it is able to leverage its fixed costs and in general become more efficient.

Returning to the share value of VABK, the share price has performed well over the past year (52 week), with a return of 35.15%, versus 19.22% for the S&P 500. What sets the shares apart from others is a low beta of .06, while paying a dividend of approximately 1%, an LTM dividend payout ratio of 7.84%. We look for the bank and its branches to continue their loan and depositor growth while maintaining and growing profitability with low loan losses going forward. As the Charlottesville MSA grows and business improves and grows in the region, the bank will naturally benefit. We see this growth resulting from more graduates staying in the community after graduation and retirees moving there. We also feel the close ties to the University community and to the local business community will create additional "organic" growth for the bank going forward.

Now, let's cover some of the negatives. With only 2.69M shares outstanding and institutions owning 13.06%, there are no fund ownership at this time. The market cap is also very low at only 60.26M and the average daily volume for the past 10 days is an abysmal 5,371. Finally, it is on a marketplace that used to be called the "pink sheets" and had a history of companies with either non-existent earnings or non-transparency. So the key question is, why would any investor buy this regional bank?

The answers are:

1) Extremely undervalued based upon current and futures earnings. Based upon the current earnings of $2.55, our forecast is that earnings will climb to $2.70 per share or approximately 34.0M ttm. We see the share trading at a reasonable multiple or 12x earnings due to negative bias on the sector and lack of coverage. Based upon this figure we look for 12 month target of $32.40 and a six month target of $27.50. Including the approximately 1.0% dividend, this represents a return of 46% for one year and 23.5% for six months.

2) An extremely attractive defensive stock. With a book value of only $21.90 a low beta stock and a bank usually haven't correlated (or used in the same sentence) for quite some time. We believe the limited exposure (very low real estate loan exposure for one example) and the prudence of management will assure an uncorrelated asset with an attractive "store of value" going forward.

3) A well managed community bank that will either continue growing or possibly be acquired in the near future. As the larger tier or larger regional banks also see the opportunities for growth and profitability in the Charlottesville MSA and offer an attractive premium that management and shareholders must answer to. My forecast would be an approximately $30.00 per share offer at the least.

4) With a book value of only $21.90, it is not inconceivable for the bank to trade at a conservative 1.50x book or $32.85 or higher.

5) As a regulated entity, I have little doubt in the earnings numbers and have little doubt in the quality of the balance sheet and other financials, especially after the financial crisis. I have extreme confidence in a regional bank's financials in terms of accuracy and transparency regardless of where they trade.

Based upon all of these arguments and data provided, we feel the shares represent a very attractive opportunity as stated with significant upside. Now, about that "Locavore" comment from Forbes...

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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