Malaga Bank (MLGF)
Market Cap: $135m
Tangible Book: $106m
What this idea lacks in sizzle it makes up for in simplicity. It’s a well-run bank that is growing TBV mid-high single digit
and paying a low single digit dividend with a track record to indicate it can sustain this pace. Banks are a commodity
business, but some do some stuff better than others. Malaga is sustainably not stupid and careful with expenses. They
have an above average deposit base that funds an average loan book. Their underwriting and cost management has
been fantastic. It currently trades at 1.27x TBV with a 3.5% yield and 12x earnings. With an 11% equity ratio, a high cost
piece of debt in its capital structure, and generally rough interest rate environment to operate in, Malaga trades at a
discount to its normalized ROE potential. Malaga should continue to grow BVPS+Dividends at a double digit rate over
the next 5 years and could be taken out at a premium price to tangible book multiple, resulting in a mid teens CAGR on
an investment at today’s prices.
Malaga Bank is a LA Metro Area lender with a branch network in Rancho Palos Verdes, which is something of an island of
calm at the southwest tip of LA. The area isn’t densely populated and is mostly single family homes, with commercial
developments restricted to a few clusters. Malaga is the dominant local banking option and competes with Wells, BofA,
Citi, OneWest, and Union Bank, all of which are significantly larger but not involved in the community.
One element of Malaga’s lower costs is their larger average deposit size from local affluent residents ($163k and $118k
median household income in Palos Verdes Estates and Rancho Palos Verdes vs. $50k in Los Angeles). Deposit growth
has been quite strong in recent years without a lot of branch expansion. This has also lessened the banks reliance on
FHLB funding, which will have a positive impact on NIMs in coming years. Historically management found it cheaper and
easier to use FHLB loans to finance their bank but have tried to increase the mix of deposits over the past 10 years.
Within the past 5 years they have also switched their deposit base to move savings accounts instead of time deposits.
As the CEO and board get older – several in their 60-70s – they probably realize an exit through acquisition is the best
option and having an attractive deposit mix will increase their proceeds from it.
There is a $96m low cost deposit from the state of California on the balance sheet. This is a state program, but even a
bank as large as HSBC was using it until California decided to end that relationship
(http://blogs.wsj.com/moneybeat/2015/05/20/california-drops-hsbc-from-deposit-program/). California has had
deposits at Malaga since inception. I interpret this as part the state government needing to put its money somewhere
and part back door subsidy for California banks.