First Bank, The Best Bank In Virginia

Fred Campbell profile picture
Fred Campbell
199 Followers

Summary

  • First National Corporation, holding company for First Bank of Virginia, is rated as one of the top banks in the state.
  • It is reasonably priced at this time, but the continued performance gains and dividend increases indicate it may be a good buy.
  • As I am selling Auburn Bank, First National Corporation is a good replacement in my Regional Bank portfolio.

As my last article presented the performance of the Regional Bank Portfolio, I will not address that again, and instead, will begin with my projected values of each bank based on P/E Value, Book Value, and Buyout Value.

Table 1: Researched Banks Expected Values and Buyout Value

Symbol

Current Price

Low Value

High Value

Buyout Value

AUBN

$45.00

$31.47

$32.40

$43.46

OTCQX:KTHN

$18.80

$21.71

$24.07

$29.12

OTC:NASB

$44.00

$40.86

$49.17

$53.82

OTCPK:ORBN

$26.74

$17.29

$46.31

$26.97

PBBI

$11.60

$7.40

$13.49

$18.10

PKBK

$22.75

$18.84

$30.78

$25.28

OTCQX:UNIF

$8.55

$10.54

$11.84

$11.21

A cursory review would indicate that Katahdin Bankshares (KTHN) and U & I Financial Corp. (UNIF) are undervalued, while Auburn National Bancorp. (AUBN) is overvalued. The rest are within their expected range. As AUBN is trading higher than my expected buyout value, I am selling this stock and will use the closing price of the day this article is published, if it is still over $43.46. If not, I will continue to hold until it reaches that price again.

Unfortunately, in these days of a highly valued stock market, great bargains, even in the thinly followed regional bank market, are low. Thus, my latest choice is a bank with steady growth and solid, though unspectacular, returns. My eighth recommendation for the portfolio is First National Corporation (NASDAQ:FXNC), the holding company for First Bank (FRBA), located in Strasburg, Virginia. I have a couple of reasons for this: a Southern bank is needed to replace AUBN, and my last couple of recommendations have exceeded my usual risk tolerance (Oregon Bancorp (ORBN) and UNIF), so I would like a steadier performer.

How did I happen to come upon this stock? While doing research, I came across a presentation from Banks Street Partners that ranked all of the southern banks, by performance, for a 1-year period ending with the 2nd quarter of 2019. Many of the higher-rated banks are privately owned, but FXNC is publicly traded and rated the best-performing bank in the state of Virginia. I did my research and ran the metrics on the bank, and found it fits what I want in my portfolio.

First Bank has been around since 1907 and has corporate offices in Strasburg and Winchester, Virginia. It has 14 branches along the I-81, I-66, and I-64 corridors, with the largest city it serves being Richmond. From the company's investor presentation, its goal is to reach $1 billion in assets (currently at $780 million). There are several other interesting tidbits from the presentation; one is that the bank intends to grow through acquisitions, which could be a positive if it chooses to merge with a larger bank. Another is the healthy environment of the region; area population has grown 20% in the last ten years, and the unemployment rate is one of the lowest in the nation. Finally, the bank has several charts comparing its performance to that of its peers (banks in Virginia with assets from $500 million to $1 billion). I have adapted the charts to the table below.

Table 2: FXNC Compared to Peers

Ratio

FXNC

Peer Group

Return on Assets (ROA)

1.21%

.59%

Return on Equity (ROE)

14.02%

9.07%

Efficiency Ratio

63%

72.7%

Net Interest Margin (NIM)

4.05%

3.55%

Loans/Deposits

81%

89%

Non Performing Assets (NPA)/Assets

.42%

1.27%

So, the bank's performance is statistically better than that of its peer group (fairly substantially), other than the Loans/Deposits ratio, which the company is striving to raise. As you may notice, my calculations below don’t exactly match these numbers, and I’m not sure what time period the company is using.

Another positive they stress is that, as of April 18, 2019, the company began trading on the Nasdaq Capital Market stock exchange as opposed to the Pink Sheets. This should provide for increased liquidity and better bid and ask prices for investors.

Table 3 shows the capitalization. As one can see, the bank is well-capitalized.

Table 3: FXNC Capitalization

Capital Ratios

Required

2018

2017

2016

Common Equity Tier 1

7.00%

12.71%

12.09%

12.38%

Tier 1 Risk-Based Assets

8.50%

12.71%

12.09%

12.38%

Total Capital Ratio

10.50%

13.62%

13.12%

13.47%

Table 4 shows results and ratios for FXNC for the past few years taken from the company annual reports. The ratio calculations are my own and may not exactly match its figures. These are usually rounding errors with no meaningful difference.

Table 4: FXNC Performance

FXNC (Thousands)

2019 (Half)

2018

2017

2016

2015

2014

Assets

$778,384

$752,969

$739,110

$716,000

$692,321

$518,165

Liabilities

$705,575

$686,295

$680,956

$663,849

$646,368

$458,601

Intangible Assets

$302

$472

$930

$1,551

$2,322

$55

Shareholder Equity (Total)

$72,809

$66,674

$58,154

$52,151

$45,953

$59,564

Shareholder Equity (Tangible)

$72,507

$66,202

$57,224

$50,600

$43,631

$59,509

Total Loans Outstanding

$569,959

$537,847

$516,875

$480,746

$433,475

$371,692

Provision for Loan Losses

$200

$600

$100

$0

-$100

-$3,850

NPA

$1,790

$3,200

$1,300

$1,800

$6,500

$9,897

Deposits

$689,815

$670,566

$664,980

$645,570

$627,116

$444,338

Shares

4,962,000

4,956,000

4,944,000

4,928,000

4,913,000

4,902,000

Net Interest Income

$13,864

$27,626

$25,266

$23,255

$20,724

$18,621

Non Interest Expense

$12,328

$23,761

$23,284

$23,488

$25,555

$18,785

Total Noninterest Income

$4,020

$9,157

$8,292

$8,493

$8,342

$7,444

Income Taxes

$1,009

$2,287

$3,726

$2,353

$956

$3,499

Preferred Stock Dividends

$0

$0

$0

$0

$1,113

$1,139

Net Income (Total)

$4,347

$10,135

$6,448

$5,907

$1,542

$6,492

Earnings/Share

$0.88

$2.04

$1.30

$1.20

$0.31

$1.32

Dividends/ Share

$0.18

$0.20

$0.14

$0.12

$0.10

$0.08

Share Price

$20.35

$19.00

$18.00

$12.85

$8.95

$8.60

Yield

1.77%

1.05%

0.78%

0.93%

1.12%

0.87%

Financial Ratios

Shareholder Equity/ Assets

9.35%

8.85%

7.87%

7.28%

6.64%

11.50%

Book Value

$14.67

$13.45

$11.76

$10.58

$9.35

$12.15

Tangible Book Value

$14.61

$13.36

$11.57

$10.27

$8.88

$12.14

Efficiency Ratio

69%

65%

69%

74%

88%

72%

NIM

3.65%

3.70%

3.47%

3.30%

3.42%

7.19%

Price/Earnings

11.61

9.29

13.80

10.72

28.52

6.49

Price/Book

1.39

1.42

1.56

1.25

1.01

0.71

Dividend Payout

20.55%

9.78%

10.73%

10.01%

31.86%

5.66%

ROE

13.28%

16.24%

11.69%

12.04%

2.92%

13.49%

ROA

1.15%

1.36%

0.89%

0.84%

0.25%

1.45%

% of NPA/Total Assets

0.23%

0.42%

0.18%

0.25%

0.94%

1.91%

Stock Valuation

P/B

$17.97

$16.43

$14.24

$12.63

$10.92

$14.93

P/E

$20.38

$23.78

$15.17

$13.94

$3.65

$15.40

Buyout Valuation

P/B

$24.11

$22.04

$19.10

$16.94

$14.65

$20.03

All the numbers have been increasing since 2015. In that year, the bank used $14 million of Shareholder Equity to retire its Preferred Stock and, in a separate transaction, acquired six branches from another bank. This is the primary reason the numbers are lower. Since then, the bank's performance has been steady.

As far as the metrics go, I always want ROE and ROA to be greater than 10% and 1%, respectively, and the bank has accomplished this in the past two years. The two primary drivers of my valuation, the Tangible Book Value and Earnings, have been increasing. TBV has increased 65% in the last four years, and the Earnings have risen substantially from 2015 through 2018, although they are down a little in the first half of the year (but remember, my figures are annualized). Using the average P/TBV and P/E for a Regional Bank (1.22 and 11.57) gives an expected value range of $17.97-20.38. Today’s price of $18.25 falls at the low end of this range. My buyout value, based on average buyout P/TBV, is calculated at $24.11, which is about 33% higher than the current price. Although I tend to skim over most of the other bank ratios unless they are terribly skewed, the editors at SA asked that I discuss other ratios as well, so here we go:

The Shareholder Equity (SE)-to-Assets ratio is 9.35%, but has been increasing in the past four years. This falls slightly behind the industry average of around 11%. The ratio was at the industry average until SE was used to finance the Preferred Stock redemption in 2015, and it still hasn’t quite recovered.

The Non-Performing Assets-to-Assets ratio is a solid .42%. This compares favorably with the bank’s Virginia peer group average of 1.27% and the national average of .95%. As long as the economy stays strong, this figure should continue to be impress.

The Net Interest Margin is calculated by the company as 4.05%, while the table shows 3.65%. This is probably explained by the company using the trailing four quarters, while I have annualized the rest of the year using the first-half results. Regardless, it exceeds the peer group as well as the nationwide average of 3.37%.

The Efficiency Ratio (ER), at least to me, is one of the least meaningful ratios, as it measures the bank’s overhead to its revenue. Although an extremely high ER would indicate a top-heavy bank, a low one may indicate that the bank does not hire enough people to provide adequate customer service. So, I will not comment on this other than to say the nationwide average is 64% and FXNC's is 65%.

Finally, the low Dividend Payout Ratio makes the case for future hikes, potentially large. The current payout ratio of 20% is well below an average payout of 30%, thus indicating the bank could easily raise the dividend 50% or more.

I iterate this is not a home run, and we probably won’t get the immediate 40% return we got with AUBN. But I already have a couple of potential home runs (or flyouts if they fizzle) in the portfolio, so I need a grinder - a slow, steady entry that I believe will return 7-10% on an annual basis. Since this is not a high-flyer, I believe the risks to be lower than for a company that is growing exponentially (such as ORBN), or one that isn’t very liquid and awaiting a merger (as I believe to be the case with UNIF).

Obviously, there are risks; the interest rate risk affects every bank, but I don’t see the rates increasing substantially anytime soon. The bank is trying to increase its Loan/Deposit ratio, and it could do this by making more marginal loans, thus causing a drop in asset quality. The biggest risk would be a recession in the Virginia area. The bank serves a very high-income area, and a spike in unemployment could cause a large number of loan defaults and a resultant large drop in property values.

Finally, I look at Seeking Alpha to see if there are any other articles about the bank I have chosen. This is always the last thing I do, as I don’t want to plagiarize in any way. There have been two articles written about FXNC this year, very unusual for one of my recommendations. Both this one and the other are highly complementary of the bank, and both value it at higher prices than I.

In summary, I like the bank and the 1.9% dividend, as I believe the value will continue to increase, although it may be a slow movement over several years. But in this era of an overvalued stock market (my opinion), these may be the best stocks one can own.

As always, please do your own due diligence, and if you do buy, always set a limit order.

This article was written by

Fred Campbell profile picture
199 Followers
35 years of investment experience. After retiring from Engineering work, went back to school and got Master's in Finance. Worked for Forward View Consulting as financial analyst for two years and have now written approximately 50 articles on various small Regional Banks.

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.

Additional disclosure: Although these are not discussed in the article, they are included in Table 1. I am long PKBK (500 shares), PBBI (900 shares), KTHN (500 shares), and NASB (300 shares).

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