The last time I was in Virginia was when I was a kid exploring all of the old historic grounds with my family. Back then, I could have cared less about the community banking industry and really only cared about reading books on the Civil War and playing the original Pokémon Red.
With that being said the last bank I looked into was a community bank in Virginia - Pinnacle Bankshares (OTCQX:PPBN). The bank is trading under P/TBV and has attractive growth rates. I am not sure if it's a coincidence or not but Bay Bank of Virginia (OTCQB:BAYK) popped up on my screener this morning. The bank reminds me a lot of Pinnacle Bankshares and not to my surprise, it seems as if the market has completely forgotten about this growing company.
Bay Bank of Virginia is the holding company for Bank of Lancaster. The bank opened its doors in 1930 and since then has grown into an eleven branch holding company.
The bank is headquartered in Kilmarnock, Virginia and has the leading deposit market share in the Northern Neck Market. The Northern Neck Market is characterized as a retired demographic with high per capita income. It's a good niche market for the bank and allows the company strong predictable cash flows for expansion.
As for loan composition, the bank is mainly focused on Consumer RE: 54.5% of loans. However, their C&I and CRE (8.4% and 34.1%, respectively), has helped to contribute to the banks margin spread - average yield on loans of 4.59%.
Like Pinnacle Bankshares, the company is focused on growth. The plan for the company is to get a strong foothold in the Richmond market, Virginia's capital. Thus, to kick-start the plan, the bank opened its first Loan Production Office in Richmond back in 2014. Following the LPO, the bank opened its first retail branch in November of the same year, then to open a second branch in March of 2015.
This is a good market for the company to operate in given the economic development…
Source: Richmond Economic Data
The success the company is having in the Richmond market is translating into earnings accretion. In fact, in the most recent quarter, Richmond loans are pushing $50 million and represent 15% of the banks total loans.
What is even better, earnings for the first half grew from $675,000 to a remarkable $1.1 million. And for the record, the last three months' earnings grew from $294,000 to a high of $586,000.
Earnings growth isn't new to the company. In fact, in the past five years' net income has grown 217%. Driving the bottom line has been an impressive growth in assets, loans and deposits. And at the same time, the efficiency ratio has fallen from 88.96% to 81.00%.
The company has also experienced an impressive ROAA and ROAE expansion.
With the recent growth and expansion into a new market, you would think the bank would trade for a premium. Comically, the opposite has transpired. With a market cap around $30 million the bank has a P/TBV of 78% and a P/E of 6.64x.
That doesn't seem right does it? I guess when you are thinly traded, don't have any analyst coverage and have a community bank status, the market tends to discount you. On the flipside, the company has a higher efficiency ratio and it appears as if loans past 90 days due has jumped up a smidge.
But overall, the total percentage of problem loans really isn't that high and has trended downward since 2010. Curiously, the bank did relatively well during the past economic downturn with NPA's to total assets only hitting 3.00% or so.
In regards to the efficiency ratio, the ratio continues to trend lower. What's more, if they continue to decrease noninterest expenses to revenues, the market may pick up on the improved efficiency and price the company closer to book value.
Bay Banks of Virginia will should continue to do well going into years'-end. Moreover, further earnings growth will translate into retained earnings - pushing the value of the tangible book value up further. Furthermore, as the company continues to get more of a foothold in the Richmond market, the bottom line should continue to grow. If the market doesn't recognize the bottom line expansion, the P/E multiple will contract, making the bank even more attractive.
The risks should be clear with the company. If there is rapid expansion, noninterest expenses may shoot up - giving a rise to the efficiency ratio. Likewise, the lower-end liquidity spectrum, combined with the micro-cap status is a risk in itself. Finally, the concentration of assets won't bode well if the Virginia market goes into a tailspin.
On the other hand, the risks/reward are skewed in the investor's favor. The bank is cheap and its growing. Eventually, the bank should trade closer to P/TBV. If not, it could be a great buyout target for a larger player looking for a bolt-on acquisition.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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