Eagle Bancorp Montana, Inc. — 2016 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; monetary amounts below are in millions unless otherwise stated. The company’s principal business is Opportunity Bank of Montana, a Montana commercial bank focused on consumer and commercial lending, deposits, mortgage banking and securities investment.
Financial performance and condition
- Q2 earnings: Net income was $1.264 million, up 59.6% from $0.792 million in Q2 2015. Diluted EPS was $0.32 versus $0.21.
- First-half earnings: Net income was $1.911 million, up 62.2% from $1.178 million. Diluted EPS was $0.49 versus $0.30.
- Interest income and margin: Q2 net interest income rose 10.1% to $4.943 million; first-half net interest income increased to $9.811 million from $8.712 million. Net interest margin was 3.31% for Q2 versus 3.46% a year earlier, and 3.33% for the first half versus 3.41%. Loan growth lifted interest income, while loan yields declined and funding costs rose.
- Other income and expenses: Q2 noninterest income rose 16.2% to $3.806 million, led by loan-sale gains of $2.438 million. First-half noninterest income increased 8.9% to $6.702 million. Noninterest expense increased 3.3% to $6.686 million in Q2 and 3.1% to $13.234 million in the first half, with higher salaries and mortgage commissions partly offset by lower consulting expense.
- Assets and lending: Total assets were $663.336 million, up 5.2% from year-end 2015. Net loans were $439.668 million, up 8.9%; commercial real estate loans grew $32.9 million, and commercial loans grew $9.9 million. Approximately 75% of gross loans were real-estate loans. Securities available for sale totaled $140.449 million, down 3.6% from year-end.
- Credit quality: The allowance for loan losses was $4.260 million, up from $3.550 million at year-end; the first-half provision was $0.909 million. Nonperforming loans were $2.173 million versus $2.548 million at year-end, and nonperforming assets were 0.41% of assets versus 0.50%. Allowance coverage was 196.04% of nonperforming loans.
- Deposits, borrowings and liquidity: Deposits rose 5.3% to $508.882 million; the increase included $11.0 million in additional brokered certificates of deposit. FHLB advances and other borrowings were $75.491 million, with subordinated debentures of $15.155 million principal. Cash and cash equivalents were $6.423 million, down from $7.438 million at year-end. Management said the Bank exceeded its internal minimum liquidity ratios.
- Cash flow: For the first half, operating activities provided $3.495 million, investing activities used $32.399 million and financing activities provided $27.889 million; cash declined $1.015 million.
- Capital: Bank regulatory capital ratios exceeded stated requirements at June 30: total risk-based capital 13.86%, Tier 1 risk-based and common equity Tier 1 each 12.92%, and Tier 1 leverage 9.17%. The leverage ratio was 9.36% at year-end 2015.
- Comprehensive income: First-half comprehensive income was $4.040 million versus $0.307 million in 2015, reflecting favorable changes in the fair value of securities and cash-flow hedges.
Material changes and unusual items
- The company disclosed that its Q1 2016 financial statements were restated and should no longer be relied upon. Mortgage loans sold with servicing retained continued to accrue interest after sale, and sale effective dates were sometimes posted late. The corrections reduced Q1 interest and fees on loans by $226,000 and net income by $176,000; restated Q1 net income was $647,000 and diluted EPS was $0.17, versus previously reported net income of $823,000 and diluted EPS of $0.21. Custodial deposit accounts were also understated. The six-month 2016 figures in this filing reflect the restated Q1 results.
- Management identified a significant deficiency in internal control over financial reporting and concluded disclosure controls were not effective as of June 30, 2016 (or March 31, 2016). Remediation, including added training, transaction review and a proposed disclosure committee and escalation process, was ongoing and not complete.
- Net gains on loan sales contributed materially to noninterest income. Management noted such income may weaken if mortgage origination activity declines.
Outlook, commentary and risks
- No numerical earnings or financial guidance was provided. Management’s stated priorities were to grow loans and deposits, improve core earnings through net interest margin and fee income, and control operating expenses. It noted that efficient funding of balance-sheet growth is a challenge and deposit growth may face competition.
- Management reported that a 200-basis-point rate increase was projected to reduce net interest income by 0.81% in year one and increase it by 0.82% in year two; its policy limit was a 15% reduction. The Bank’s economic value of equity increased 2.5% in the reported rising-rate scenario.
- Forward-looking risks include interest-rate and margin changes, competition for deposits, real-estate prices and loan collateral values, borrower repayment capacity, loan-loss estimate uncertainty, economic conditions, regulatory changes and cybersecurity. Management reported no material change to the risk factors in the 2015 Form 10-K.
- The company declared a $0.08 per-share dividend in July 2016, payable September 2, 2016, and authorized a new repurchase plan for up to 100,000 shares through July 21, 2017. No shares were repurchased in the first half of 2016.
- Management stated that temporarily impaired securities had no expected credit losses and no impairment charge was recorded. It also said there were no material pending legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- Review the Q1 restatement details and confirm the company’s completed remediation of the mortgage-loan setup and financial-reporting control deficiency.
- Track whether commercial real-estate loan growth, allowance provisioning and credit quality remain consistent with management’s risk controls.
- Assess the sustainability of mortgage-sale gains and the effect of rising funding costs on net interest margin and earnings.
- Monitor deposit composition, including brokered certificates, borrowing levels, cash liquidity and regulatory capital.
- Check subsequent filings for changes to guidance, liquidity, interest-rate sensitivity, the dividend or share repurchase activity.