Summary
- Shares are up a good 20% or so from our buy call in the spring, but it is going to be a grind for community banks the next few quarters.
- Q3 headline numbers impressed, all things considered.
- Loans and deposits continue to grow.
- The pending merger is bullish.
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- Prepared by Stephanie, analyst at BAD BEAT Investing
The small regional bank Fauquier Bankshares, Inc. (FBSS) is a name we recently got back behind at $12-$13. Shares are up a good 20% or so from that call, but it is going to be a grind for community banks the next few quarters, while Main Street continues to try and mount a recovery. Rates are low. Borrowers are having trouble paying. New loan activity is mixed. It is a broad set of sector pressures. Given our commentary on many other financials recently, we decided to pick back up coverage of FBSS and other regional banks again.
We all know that COVID-19 has led to a massive selloff in the bank stocks, both large and small, but there has been some recovery. There is a real risk of loan losses in the space, but given the stock has been cut in half, the risk of some losses is offset by the discount and the dividend yield of these regional banks. In this column, we discuss year-over-year performance, including quality of assets, loan growth, and deposit growth. We think the stock is a hold here, but recent performance and a merger bode well for shareholders.
Q3 headline numbers impress all things considered
In the just reported quarter, we see that FBSS followed most other traditional style banks with a reduction in earnings per share in Q3. As reported, the company earned $0.41 per share on net income of $1.5 million. This compares with $1.6 million, or $0.42 per diluted share for the sequential quarter. In addition, it is down from the $2.1 million or $0.54 per diluted share for the third quarter of 2019.
Given the immense pressure on the sectors which saw massive earnings declines for many banks, this result is impressive. The bank was helped by originating over 600 PPP loans since the CARES Act was passed. Let us take a look at the impact on income from lower interest rates and reduced economic activity.
Net interest and non-interest income
We actually thought this would be a down quarter from a year ago. Like many banks and other financials, net interest margin was a concern, thanks to the massive reduction in rates. It came in at 3.22%. This is down from 3.49% for Q2 2020, and also narrowing from the Q3 2019's 3.78%. With rates slashed, we can expect margins to continue to be pressured moving ahead, as we have detailed in many other analyses of other banking institutions. That said, net interest income and non-interest income were both strong, all things considered.
Net interest income decreased to $6.3 million from $6.4 million in the sequential quarter. However, it was up versus the $6.2 million a year ago. That was a surprise, given rates, but there are more assets under management. How about non-interest income? Well, non-interest income rose to $1.5 million from $1.2 million in Q2 2020. However, this was down slightly compared to the same quarter in 2019, which was $1.4 million. Overall, we were impressed with the growth as a whole.
One thing that we consider with FBSS, unlike many of the mega-corporations we cover, is that this is a true community bank. You can tell from the numbers. This is a strength, but also a weakness. It helps real people, in the community. But the bank is at risk from an economy that is shut down. It is a true bread and butter traditional bank. FBSS makes money by taking deposits and issuing loans. We are pleased with the progress in loans and deposits.
