Eagle Bancorp Montana, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are generally with Q1 2018 for results and December 31, 2018 for balance-sheet figures. The company’s Opportunity Bank of Montana focuses on consumer and commercial banking in Montana.
Financial performance and position
- Profitability: Net income was $1.183 million, versus $573,000; diluted EPS was $0.18, versus $0.11. Income before taxes was $1.444 million, versus $700,000.
- Revenue and margins: Net interest income rose 36.9% to $9.375 million. Net interest margin was 4.33%, up from 3.77%; net interest spread was 4.09%, up from 3.61%. Noninterest income was $3.941 million, up 47.0%, including $2.599 million in net gains on loan sales. Noninterest expense increased 35.5% to $11.268 million. Loan-loss provision was $604,000, compared with $502,000.
- Balance sheet: Assets were $979.6 million, up 14.7% from year-end; net loans were $720.9 million, up 18.1%. Deposits were $741.0 million, up 18.3%. Shareholders’ equity was $112.3 million, up 18.4%.
- Funding and debt: FHLB advances and other borrowings were $92.3 million, down from $102.2 million. Other long-term debt was $24.9 million net of issuance costs, with $25.2 million principal outstanding. Total borrowings were $117.2 million.
- Cash flow and liquidity: Operating cash flow was $1.283 million; investing used $11.695 million and financing provided $10.490 million. Cash and equivalents ended at $11.279 million. Management said the Bank exceeded its internal minimum liquidity ratios at quarter-end; the filing does not give the actual ratio values.
- Credit quality: Nonperforming loans were $5.316 million, versus $3.767 million at year-end; nonperforming assets were $5.670 million, or 0.58% of assets, versus $3.874 million and 0.45%. The allowance was $7.1 million, 133.56% of nonperforming loans, compared with 175.21% at year-end.
- Regulatory capital: The Bank was classified as well capitalized. Total risk-based capital was 15.320%, Tier 1 and common equity Tier 1 were each 14.352%, and Tier 1 leverage was 11.272%.
Material changes versus comparable periods
- Big Muddy Bancorp and its State Bank of Townsend subsidiary were acquired effective January 1, 2019. The acquisition added four branches and $89.2 million of loans and $92.7 million of deposits; consideration was $16.436 million, primarily Eagle stock. The acquisition materially affects year-over-year and year-end comparisons.
- Loan growth, including acquisition effects, helped increase interest income; higher average loan yields also contributed. Interest expense rose 57.3%, as deposit and borrowing costs increased.
- Loan-sale gains rose by $1.160 million; mortgage loans sold totaled $72.32 million, versus $47.01 million. Acquisition costs were $1.171 million, versus $234,000, contributing to higher expenses.
- Operating cash flow was lower than Q1 2018 ($1.283 million versus $2.107 million). Treasury-stock purchases were $732,000 for 42,000 shares at an average $17.43 per share; dividends paid were $597,000.
Outlook, risks and unusual items
- No numerical earnings or growth guidance was provided. Management said it is focused on core earnings, net interest margin, fee income, expense control, and growing loans and deposits; funding balance-sheet growth efficiently remains a challenge.
- Management cited competition and potential difficulty attracting deposits, interest-rate changes and margin sensitivity, Montana real-estate conditions, borrower repayment and credit losses, acquisition integration and realizing expected benefits, and cybersecurity and regulatory risks.
- The BMB acquisition accounting remained provisional. It generated $3.586 million of goodwill; $1.171 million of related acquisition costs were expensed in Q1. The company does not track BMB’s standalone revenue or net income, and says it is impracticable to determine those amounts.
- The expected-credit-loss standard (CECL) was not yet adopted. Management expected adoption to increase the allowance but could not reasonably estimate the impact.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting. It reports no material change in previously disclosed risk factors and no material pending legal proceedings.
Important facts for investors to verify
- How much reported growth and earnings improvement is organic versus attributable to BMB and the prior TwinCo acquisition, including the recurring impact of acquisition costs and purchase-accounting accretion.
- Whether the rise in nonperforming loans and assets persists, and whether the allowance remains adequate as the loan portfolio expands.
- Deposit mix, funding costs, and the Bank’s ability to fund continued loan growth without undue reliance on borrowings.
- The eventual CECL allowance impact and the completion of provisional BMB acquisition valuations.
- The MD&A contains an apparent date inconsistency: it refers to $354,000 of repossessed assets “as of March 31, 2018,” while the financial statements and related tables report that amount at March 31, 2019.