Eagle Bancorp Montana, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results include Opportunity Bank of Montana. Financial amounts below are in millions of dollars unless otherwise stated.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $6.16 | $5.42 | $17.52 | $15.23 |
| Loan-loss provision | $0.33 | $0.47 | $0.93 | $1.38 |
| Noninterest income | $3.99 | $4.69 | $10.77 | $11.39 |
| Noninterest expense | $7.56 | $7.16 | $22.62 | $20.39 |
| Net income | $1.72 | $1.77 | $3.55 | $3.68 |
| Diluted earnings per share | $0.45 | $0.46 | $0.92 | $0.95 |
| Net interest margin | 3.80% | 3.55% | 3.68% | 3.40% |
- Growth and balance sheet: Total assets were $702.6 million, up 4.2% from December 31, 2016. Net loans were $504.7 million, up 9.4%; gross loans grew to $511.2 million. Commercial real estate loans increased $32.6 million and construction loans increased $9.2 million. Commercial real estate represented 48.4% of gross loans; total real estate loans were 75.6%.
- Funding and debt: Deposits were $525.2 million, up 2.4%; noninterest-bearing checking rose $22.0 million while certificates of deposit fell $16.3 million. Borrowings totaled $108.6 million, including $83.8 million of FHLB advances and $24.8 million of other long-term debt. In February, the Company issued $10 million of 5.75% senior notes due 2022.
- Liquidity and capital: Cash and cash equivalents were $8.2 million. Shareholders’ equity was $63.3 million, up from $59.5 million at year-end 2016. The Bank reported a 10.57% Tier 1 leverage ratio and total risk-based capital ratio of 15.40%, above stated regulatory requirements. Management said internal liquidity minimums were exceeded, but this excerpt does not state the actual liquidity ratios.
- Cash flow, nine months: Operating activities provided $17.4 million; investing activities used $39.2 million; financing activities provided $22.6 million. Cash increased $0.8 million to $8.2 million. Financing included $12.4 million of net deposit growth and $10 million of senior-note proceeds.
- Asset quality: Nonperforming loans were $1.40 million, versus $1.15 million at year-end; nonperforming assets were $1.92 million, or 0.27% of assets, versus $1.98 million and 0.29%. The allowance for loan losses was $5.50 million, 1.08% of gross loans. The allowance covered nonperforming loans by 394%.
Changes versus comparable periods
- Q3 net income declined 2.9% and nine-month net income declined 3.6%, despite stronger net interest income and wider net interest margins.
- Q3 net interest income increased 13.6%; nine-month net interest income increased 15.0%. Loan growth and improved loan yields contributed, while interest expense also rose: 35.3% in Q3 and 27.6% year to date.
- Noninterest income fell 14.9% in Q3 and 5.5% year to date, primarily reflecting lower gains on mortgage loan sales and, year to date, lower securities-sale results. Mortgage servicing fees increased with the servicing portfolio.
- Noninterest expense rose 5.6% in Q3 and 10.9% year to date. Year-to-date salaries and benefits increased $1.57 million; merger-related costs were $276,000.
- The allowance increased from $4.77 million at year-end. Nonaccrual loans increased to $1.40 million from $0.61 million, although 90-days-past-due accruing loans and restructured loans were zero at September 30.
Outlook, transactions, and risks
- Management emphasized growing loans and deposits, improving net interest margin and fee income, and controlling operating costs. It noted that funding balance-sheet growth efficiently may be challenging amid deposit competition and possible customer shifts to higher-yielding investments. No numerical earnings guidance was provided.
- The Company agreed to acquire TwinCo, Inc. and Ruby Valley Bank, which had approximately $92 million of assets, $78 million of deposits, and $55 million of gross loans at June 30, 2017. Closing was anticipated in Q1 2018, subject to regulatory and shareholder approvals and other conditions. The agreement provides for aggregate consideration of approximately 55% cash and 45% Eagle shares; management estimated about $9.9 million cash and 446,773 shares.
- After quarter-end, on October 13, 2017, the Company completed a public offering of 1,189,041 shares at $18.25 per share, reporting approximately $20.1 million in net proceeds in the financial-statement note. The offering increases the share count and capital available for growth and the proposed acquisition.
- Interest-rate exposure remains relevant: management reported that a 200-basis-point rate increase was projected to raise net interest income by 0.25% in year one and 0.83% in year two; a 100-basis-point decrease was projected to reduce it by 1.80% and 6.30%, respectively. The filing identifies rate changes, deposit competition, real-estate values, borrower credit quality, cybersecurity, regulation, and acquisition integration among risks.
- The Company expects the future expected-credit-loss standard (CECL) to affect its statements and said adoption may increase the allowance; it could not yet reasonably estimate the impact. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether TwinCo/Ruby Valley Bank receives required approvals and closes on the expected timetable and terms.
- How the share offering and acquisition consideration affect dilution, capital ratios, and post-transaction earnings.
- Whether loan growth—particularly commercial real estate and construction—continues without deterioration in delinquencies, nonperforming loans, or loss reserves.
- Whether mortgage-sale volumes and margins, deposit pricing, and borrowing costs sustain net interest income and profitability.
- The eventual quantified impact of CECL and the Company’s funding and liquidity capacity as the balance sheet grows.