Eagle Bancorp Montana, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results include Opportunity Bank of Montana and the January 1, 2019 acquisition of Big Muddy Bancorp (BMB). Unless noted otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest and dividend income | $11.64 | $8.98 | $22.76 | $16.93 |
| Net interest income | $9.69 | $7.81 | $19.07 | $14.66 |
| Loan loss provision | $0.70 | $0.02 | $1.30 | $0.53 |
| Noninterest income | $5.50 | $2.72 | $9.20 | $5.15 |
| Noninterest expense | $10.47 | $8.88 | $21.49 | $16.96 |
| Net income | $3.25 | $1.33 | $4.43 | $1.91 |
| Diluted EPS | $0.51 | $0.24 | $0.69 | $0.35 |
| Net interest margin | 4.31% | 4.18% | 4.32% | 3.91% |
Balance sheet, funding and cash flow
- At June 30, total assets were $1.008 billion, up 18.0% from year-end 2018. Net loans were $744.7 million, up 22.0%; deposits were $748.4 million, up 19.4%. Management attributed much of the balance-sheet growth to BMB, which brought $89.2 million of loans and $92.7 million of deposits.
- Available-for-sale securities were $124.1 million, down 12.7% from December 31, 2018. Cash and cash equivalents were $13.4 million, compared with $11.2 million at year-end.
- Borrowings totaled $131.7 million, including $106.7 million of FHLB advances and other borrowings and $24.9 million of net long-term debt. Long-term debt includes $10 million of 5.75% senior notes due 2022, $10 million of 6.75% subordinated notes due 2025 and $5.2 million of variable-rate subordinated debentures due 2035.
- For the first half, operating cash flow was negative $6.8 million, versus positive $2.7 million a year earlier; the filing identifies a $10.8 million increase in loans held for sale among the reconciling items. Investing cash flow was negative $22.1 million and financing cash flow was positive $31.2 million. Cash increased $2.2 million.
- Shareholders’ equity was $115.7 million, up from $94.8 million at year-end. The increase primarily reflected $16.4 million of stock issued for BMB, earnings and other comprehensive income, partly offset by repurchases and dividends.
Changes and operating drivers
- Q2 net income increased $1.9 million year over year; first-half net income rose $2.5 million. First-half net interest income grew 30.1%, with higher average loan balances and loan yields contributing; loan yield rose to 5.62% from 5.13%.
- First-half noninterest income rose 78.6%, chiefly because gains on loan sales increased to $6.0 million from $3.2 million. Mortgage loans sold increased to $173.7 million from $120.6 million.
- Higher funding costs partly offset growth: first-half interest expense increased to $3.69 million from $2.28 million. The average deposit rate rose to 0.47% from 0.30%; the average borrowing rate rose to 3.11% from 2.10%.
- First-half noninterest expense increased 26.7%, including higher compensation and $1.18 million of acquisition costs, largely related to BMB. BMB-specific revenue and net income were not separately tracked, and the company stated it was impracticable to determine them.
Asset quality, liquidity, outlook and risks
- The allowance for loan losses was $7.75 million, up from $6.60 million at year-end. The first-half provision was $1.30 million. Nonperforming loans were $3.76 million, nearly unchanged from $3.77 million at year-end; nonperforming assets were $3.85 million, or 0.38% of assets. The allowance was 206.39% of nonperforming loans.
- The Bank reported that it exceeded its internal liquidity minimums at June 30. It identified deposits, loan repayments, securities maturities, operations and FHLB borrowing capacity as funding sources, while noting that deposit outflows, competition and interest rates could affect liquidity.
- The Bank was described as well capitalized. Its June 30 total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 leverage ratios were 14.98%, 13.98%, 13.98% and 11.18%, respectively, above stated regulatory minimums.
- No earnings guidance or numerical forecast was provided. Management said it would focus on net interest margin, fee income, expense control, loan and deposit growth, and efficient funding. It noted that deposit competition and funding balance-sheet growth are challenges; mortgage gains can weaken when mortgage activity declines.
- Interest-rate, economic, real-estate, credit, competitive, regulatory, deposit-funding, acquisition-integration and cybersecurity risks are among the factors identified as potentially affecting results. The company said it was evaluating the expected-credit-loss standard (CECL), expected adoption in 2020, and anticipated it could increase the allowance; the impact was not yet reasonably estimable.
- Unusual or notable items include the BMB acquisition, the elevated loan-loss provision, increased mortgage-sale gains, and a $529,000 net loss recorded in noninterest income on mortgage rate-lock and forward commitments for Q2. The July 2019 dividend increase to $0.095 per share and authorization of a new repurchase plan for up to 100,000 shares were disclosed after quarter-end.
- Management concluded disclosure controls were effective as of June 30, 2019. The company reported no material changes in previously disclosed risk factors and no material pending legal proceedings.
Key facts for investors to verify
- How much of earnings growth is recurring versus attributable to mortgage-sale gains, acquired-loan discount accretion and other acquisition-related effects.
- Post-acquisition loan and deposit growth, funding mix and borrowing costs, including the ability to fund further balance-sheet growth economically.
- Credit trends and allowance adequacy as the loan portfolio expands, particularly in commercial real estate, commercial and agricultural lending.
- The amount and timing of any CECL-related allowance increase and its effect on capital and earnings.
- Mortgage origination and sale volumes, mortgage servicing rights valuation and the effect of interest-rate changes on margins and earnings.
- Integration and realized benefits of BMB, and the level of repurchases and dividends under the newly authorized plans.