- MSBC has seen significant growth in earnings and assets since a 2013 acquisition.
- Asset quality is high but a sudden uptick in nonperforming loans may signal higher provision expenses are ahead.
- There are some concerns, but the bank is positioned well for rising rates and is modestly priced considering past performance and a low-cost deposit base.
Mission Bancorp (OTCPK:MSBC) is a small but fast-growing bank headquartered in Bakersfield, California. Like a lot of other micro-cap banks, the company doesn’t get a lot of attention, but that hasn’t stopped shares from realizing significant gains over the past few years.
Due to new tax legislation, this year’s earnings were hit with a one-time charge to the deferred tax asset in the amount of $772 thousand. With this expense reported, earnings increased by 20.6% to $6.1 million, and without it, adjusted earnings advanced 35.9% to $6.9 million. For those not familiar with bank financials, it’s not uncommon to find earnings up 10-15% but 20-35% is on another level.
Here is a look at the company’s earnings profile:
2017 - $6.1 million or $3.65 per share (adjusted earnings per share were approximately $4.11).
2016 - $5.1 million or $3.05.
2015 - $3.7 million or $2.49.
2014 - $3.06 million or $2.06.
Looking to become a larger player in southern California, these impressive results were jump-started in 2013 with the acquisition of Mojave Desert Bank - a purchase that helped the company grow assets that year by 38% to $417 million. Since then, though, it’s been all about organically adding small banking relationships with businesses in the area. A strategy that’s been consistently applied and one that helped increase total assets by 13.8% in 2017 to $635.4 million.
2013 was an abnormal year because of the merger but since then, the portfolio has grown between 10-20% a year, pushing loans from below 50% of total assets to 73.7%. Traditional retail loans have never been a really large part of the bank’s portfolio, and in the past two years, they have contributed even less, with major preference given to nonowner-occupied commercial real estate (from 10% in 2009 to ~25% of portfolio) and farmland (from 8% in 2013 to 16%) loans.
While growing, the bank has been mindful of risk tied to rising rates, as evidenced by the fact that 40% of the loan portfolio reprices in less than 3 months (up from 9% in 2014), while loans repricing between 5-15 years have fallen from just under 60% in 2013 to 40% today. I do think there is room to continue to add to the loan portfolio but if the growth rate slows, this ability to quickly reprice loans should provide support for net interest income (interest revenues minus interest expenses) that improved 23.16% in 2017 to $22.35 million.
Providing for new loans without having to take on more expensive debt requires low-cost deposits that the bank already has. For example, at year-end, just under 50% of all deposits were non-interest bearing (the cost of funding earning assets was 0.13% in 2017 up from 0.10% in 2016). 50% is slightly better than the bank’s peer Central Valley (CVCY) and ~20% better than both United Securities Bancshares (UBFO) and Valley Republic Bancorp (OTCQX:VLLX). With rates rising, demand for new loans could be pressured, but the bank’s modest 81.2% loan to deposit ratio in combination with its low-cost deposit base allows for a competitive advantage and plenty of capacity for future growth.
Value And Risk
Consistent positive news has pushed shares up to $62.25, which is 1.94X BV ($32.01) and 15.14X adjusted earnings ($4.11). If these multiples hold, which I think they can (based on higher bank multiples in this area of the country), and investors see earnings per share grow +20% from now to the end of 2019, shares on the low end would improve by ~44%.
With that said, there are a lot of unknowns, and this is far from the slow growth and underappreciated bank profile that I typically like to uncover. In addition to above average growth over the years the company has benefited from above-average asset quality that has required little to no charge-offs for a very long time.
And, this could be challenged by this year’s sudden increase in nonperforming farm loans. This was not announced in the 4th quarter report that includes the year-end results, but in FDIC call data we find noncurrent loans to total loans jumped to 0.9% from 0.09% at the end of 2016, pushing down the coverage ratio to 1.27X from 12.5X.
This is something to monitor that could be reversed in subsequent quarters, but in no time, investors are reminded of the risk that new assets can bear. Based on the recent call report, the nonaccrual loan is tied to secured farmland on the books for $4.063 million. This is equivalent to 7.5% of shareholders' equity and 58% of adjusted earnings.
Mission Bancorp is a name that offers rewards but there are some risks. I like the bank’s low-cost deposit base but am concerned that rapid growth might eventually test asset quality by an amount that’s greater than what I happened to find digging in last quarter’s call data. However, if the bank can continue to profitably grow as fast as it has, earnings will surely drive shares higher.
As an additional word of caution to interested buyers, this is a thinly-traded name that could gap up or down at any time. Because of this, Mission is a name best suited for long-term money (and limit orders).
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