Fauquier Bankshares, Inc (NASDAQ:FBSS) is the bank holding company for The Fauquier Bank and is a probably a company you have never heard of. However, I think it has upside after analyzing the company and evaluating its strength and weaknesses based on its recent performance and key metrics. This bank is a regional bank. Many of my readers are aware that I believe regional banks still offer substantial upside relative to their global banking peers as a whole.
Fauquier, like other regional banks provides various consumer and commercial banking services to individuals, businesses, and industries. The company is small, but growing. It operates 10 banking offices in communities in Virginia. It has staying power as the company was founded in 1902. The company offers its customers many of the usual products like deposit accounts, money market deposit accounts and time deposits. It has a standard loan portfolio that includes secured and unsecured commercial and real estate loans, unsecured and secured personal loans, residential mortgages, home equity loans and credit cards, among other financing services. Success has been had in its investment management, trust, estate settlement, retirement, insurance, and brokerage services. How, just how is the company performing?
Q3 2014 showed substantial improvement
Fauquier reported Q3 2014 net income of $1.42 million compared with $1.16 million for the third quarter of 2013, growing 22% year-over-year. Earnings per share grew 22% as well to $0.38 up from $0.31 last year. Net income for the first nine months of 2014 is up 25% year-over-year coming in at $3.65 million compared with $2.93 million for the same period of 2013, while earnings per share were $0.98 compared with $0.79 for the same period in 2013.
Fauquier had some decent returns in the quarter and showed year-over-year improvement in this important metrics. Return on average assets was 0.95% and return on average equity was 10.43% for the third quarter of 2014 compared with 0.78% and 9.51%, respectively, for the third quarter of 2013. These metrics are up for the first 9 months of 2014 as well compared to the same time period in 2013. For the nine-month ending September 30, 2014, Fauquier Banks' return on average assets was 0.82% and return on average equity was 9.21%, compared with 0.66% and 8.10%, respectively, for the nine-months ending September 30, 2013.
Margins-a critical measure
Beyond income and returns on assets, a banks' margins are critical to ensuring profits. Net interest margin was 3.58% in the third quarter of 2014 compared with 3.76% for the same period in 2013. The decrease in net interest margin was attributable to lower loan demand and excess liquidity. In other words while this is disappointing, the bank is holding cash above that which is required and seeking ways to invest it to generate real returns. As a result of the margins declining, net interest income decreased $261,000 or 5.1% to $4.89 million when compared with $5.15 million for the same period in 2013. The trend has impacted the first nine months of 2014's numbers as well. Net interest margin was 3.58% for the first nine months of 2014 compared with 3.65% for the same period in 2013. Net interest income for the first nine months of 2014 was $14.57 million compared with $14.92 million for the same period in 2013. Noninterest income increased $241,000 to $1.93 million in the third quarter 2014 compared with $1.69 million in the same quarter in 2013. This is a gain of 14%.
Here is one of the strongest points regarding this small bank relative to its competition. The bank's non-performing assets are at its lowest since the height of the Great Recession in 2009. Non-performing assets decreased 45% to $3.64 million, or 0.62% of total assets at the end of Q3 2014. This compares with $6.59 million, or 1.11% of total assets at the end of Q3 2013. The bulk of these assets that are non-performing were made up of $2.2 million of nonperforming direct loans and $1.4 million of non-performing real estate owned by the bank. Nonaccrual loans declined $2.8 million compared with a year earlier. It should be noted that there were no provisions for loan losses recorded for the third quarter and first nine months of 2014, compared with $333,000 and $1.30 million for the same periods in 2013 due to improved credit quality.
Total assets actually dipped very slightly year-over-year. They were $588.2 million compared with $595.4 million at the end of Q3 2013. Total loans were $431.3 million compared with $448.5 million at the end of Q3 2013. Total deposits were $507.8 million at September 30, 2014 compared with $522.8 million at the end of Q3 2013. Transaction deposits declined $5.1 million to $290.6 million compared with $295.7 million at the end of Q3 2013, representing 57.2% of total deposits.
Average investment security balances increased $8.7 million from $50.0 million to $58.8 million. Simultaneously, the tax-equivalent average yield on investments decreased very slightly from 2.75% to 2.72%. However, interest and dividend income on security investments increased $54,000 or 17.3%, from $313,000 to $367,000.
A well-capitalized bank
Shareholders' equity was a large bright spot here. It increased to $54.6 million at the end of Q4 2014 compared with $48.9 million at the end of Q3 2013. Book value came in at $14.62 per common share. Capital ratios are strong. The bank's regulatory capital ratios continue to be deemed "Well Capitalized." Its leverage ratio was 9.91%, compared with 9.31% one year earlier. The bank's tier 1 and total risk-based ratios were 14.08% and 15.34%, respectively, compared with 12.93% and 14.18% at the end of Q3 2013. Currently, the minimum capital ratios to be considered "Well Capitalized" by the Federal Reserve are 5.00% for the leverage ratio, 6.00% for the tier 1 risk-based ratio, and 10.00% for the total risk-based ratio.
The Board of Directors of recently announced a quarterly dividend of $0.12 per share. This dividend was declared for shareholders of record as of the close of business on December 12, 2014 and will be payable on January 2, 2015. The $0.12 per share dividend represents a $0.48 dividend on an annualized basis, yielding 2.6% based on the current share price of $18.66.
After doing some investigation regarding the bank, it has some strengths. According to the bank's management in the 10-Q:
The bank is the primary independent community bank in its immediate market area as measured by deposit market share. It seeks to be the primary financial service provider for its market area by providing the right mix of consistently high quality customer service, efficient technological support, value-added products, and a strong commitment to the community."
This is a good thing as this suggests competition, while present, is not a huge impediment. The growth income is staggering. Net income of $1.42 million was a 22.2% increase from the net income for the third quarter of 2013 of $1.16 million. With the earnings per share growth, compared to the regional banks I have covered, the stock is pretty cheap. Again the bank is "Well Capitalized" and is in no danger of closure. Its slow and steady growth has resulted in the lowest amount of non-performing assets since the Great Recession. Further, it pays an affordable 12 cents per share dividend and yields 2.6%.
There were some notable weaknesses. One of the things I look for in regional banks is loan and deposit growth. Despite the stellar income growth, loans and deposits were essentially stagnant. This is a negative as any bank heavily relies on these assets to invest. That said, investments did perform well. Like many in the industry margins dipped year-over-year as a result of interest rate movements. However, the margins did not decline terribly. Perhaps the biggest issue and risk with the stock is that it is thinly traded. Thinly-traded securities in the financial markets are exchanged in low volumes and often have a limited number of interested buyers and sellers, which can often lead to volatile changes in price when a transaction does occur. The lack of buyers and sellers generally leads to large discrepancies between the asking price and the bidding price. Thinly-traded securities are usually more risky than liquid assets because a small number of market participants can have such a large impact on the price. So please keep this in mind when considering an investment of this otherwise rather attractive regional bank.
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