Eagle Bancorp Montana, Inc. — Q3 2016 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Dollar amounts are in millions unless stated otherwise.
Business context
The company’s principal business is its Montana-chartered subsidiary, Opportunity Bank of Montana. The bank takes local deposits, makes consumer and commercial loans, invests in securities, and earns significant fee income from mortgage originations and loan sales. Management has emphasized commercial lending and broader fee income to diversify beyond residential mortgages.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $5.421 | $4.433 | $15.232 | $13.145 |
| Provision for loan losses | $0.472 | $0.310 | $1.381 | $0.960 |
| Noninterest income | $4.689 | $2.912 | $11.391 | $9.069 |
| Noninterest expense | $7.159 | $6.492 | $20.393 | $19.325 |
| Net income | $1.772 | $0.521 | $3.683 | $1.699 |
| Diluted EPS | $0.46 | $0.14 | $0.95 | $0.44 |
| Net interest margin | 3.55% | 3.28% | 3.40% | 3.36% |
- Quarterly net income increased $1.251 million; year-to-date net income increased $1.984 million (116.5%). Loan growth boosted interest income, while higher mortgage loan-sale gains lifted noninterest income.
- Net gain on sale of loans was $3.164 million in Q3 and $7.320 million year to date, versus $1.639 million and $5.126 million in the respective 2015 periods. Q3 mortgage originations were $100.83 million and sales were $95.55 million.
- Q3 net interest margin improved 27 basis points year over year; the nine-month margin rose 4 basis points. YTD average loan yield declined to 4.53% from 4.65%, while growth in average loan balances supported interest income.
Financial position, cash flow and credit
- Total assets were $674.50 million, up 7.0% from year-end 2015. Net loans were $456.85 million, up 13.2%; commercial real estate loans rose to $205.82 million from $167.93 million, and commercial loans rose to $60.10 million from $39.07 million.
- Deposits increased 6.6% to $515.28 million. Brokered certificates of deposit rose to $18.07 million from $7.07 million, including $11.00 million of additional brokered certificates. FHLB advances and other borrowings increased 8.4% to $78.86 million.
- Cash and cash equivalents were $7.83 million at September 30. For the first nine months, operating cash flow was $9.12 million, investing cash flow was negative $46.08 million, and financing cash flow was positive $37.35 million; cash increased $0.39 million.
- Total liabilities were $614.46 million and shareholders’ equity was $60.04 million. Subordinated debentures had $15.16 million principal outstanding, including $10 million of 6.75% notes due 2025 and $5.16 million of variable-rate debentures due 2035.
- Nonperforming loans were $1.77 million, down from $2.55 million at year-end; nonperforming assets were $2.28 million, or 0.34% of assets, versus $3.14 million, or 0.50%. The allowance for loan losses was $4.65 million, or 263.31% of nonperforming loans, compared with $3.55 million and 139.32% at year-end. The nine-month provision rose to $1.38 million as the loan portfolio grew.
- Management said the bank exceeded its internal minimum liquidity ratios; the filing does not provide the period-end ratio values. Bank regulatory capital ratios exceeded stated requirements: total risk-based capital 14.02%, Tier 1 13.01%, common equity Tier 1 13.01%, and Tier 1 leverage 9.18%.
Outlook, risks and unusual items
- No numerical earnings or financial guidance is provided. Management expects to pursue loan and deposit growth, improve net interest margin and fee income, and control operating costs. It identifies efficient funding of balance-sheet growth as a challenge amid deposit competition.
- Key disclosed risks include interest-rate and margin changes, Montana real-estate values, competition, borrower repayment and allowance-estimation uncertainty, deposit outflows and funding costs, regulatory changes, cybersecurity, and execution of growth or acquisition plans. Management said risk factors had not materially changed from the 2015 Form 10-K.
- The company reported a significant internal-control deficiency identified during Q2: loan setup errors overstated mortgage interest income for the quarter ended March 31, 2016, and escalation was not timely. Management stated that it remediated the deficiency through added training, stronger transaction review, a disclosure committee, and a written escalation process. CEO and CFO concluded disclosure controls were effective as of September 30, 2016.
- Available-for-sale securities declined to $133.75 million from $145.74 million, largely due to sales and maturities. Management considered unrealized losses temporary and reported no expected credit losses on these securities.
- The board authorized repurchase of up to 100,000 shares in July 2016; none were repurchased in Q3. A $0.08-per-share dividend was declared in October, payable in December.
Important facts for investors to verify
- How sustainable mortgage origination and loan-sale gains are, and how results may change if mortgage activity slows.
- Whether rapid commercial real-estate and commercial loan growth is matched by underwriting quality and appropriate allowance levels.
- The source, maturity and cost of funding for loan growth, including brokered deposits and FHLB borrowings.
- Details and continuing effectiveness of the remediation for the mortgage-interest-income control deficiency.
- The bank’s detailed liquidity measures and sensitivity of net interest income to changing rates; the filing reports internal liquidity compliance and rate scenarios but not every underlying assumption.