Eagle Bancorp Montana, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017. The unaudited statements consolidate the Company and Opportunity Bank of Montana. The Bank provides consumer and commercial banking, with lending, deposits, securities, mortgage sales and servicing as key activities.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Interest and dividend income | $7.96 million | $6.34 million |
| Net interest income | $6.85 million | $5.48 million |
| Net interest margin | 3.77% | 3.57% |
| Loan-loss provision | $502,000 | $301,000 |
| Noninterest income | $2.68 million | $3.21 million |
| Noninterest expense | $8.32 million | $7.44 million |
| Net income | $573,000 | $763,000 |
| Basic and diluted EPS | $0.11 | $0.20 |
| Operating cash flow | $2.11 million | $11.72 million |
Net income fell 24.9% year over year. Higher net interest income after provision was more than offset by lower noninterest income and higher operating expense. The comparative 2017 income statement is labeled “As Restated”; the supplied filing text does not explain the restatement.
Financial condition, liquidity and capital
- At March 31, total assets were $815.94 million, up 13.8% from year-end; net loans were $560.85 million and available-for-sale securities were $158.42 million.
- Deposits were $625.94 million, up 20.2% from year-end. FHLB advances and other borrowings were $69.53 million, down from $82.97 million; long-term debt, net of issuance costs, was $24.83 million. Total borrowings were $94.36 million.
- Cash and cash equivalents ended the quarter at $12.91 million, versus $7.44 million at year-end. Investing activities used $5.88 million and financing activities provided $9.25 million. Operating cash flow was notably lower than in Q1 2017, when proceeds reflected a much larger reduction in loans held for sale.
- Shareholders’ equity was $90.95 million, up 8.8% from year-end. Other comprehensive loss of $1.86 million, chiefly reflecting a decline in available-for-sale securities value, partly offset net income and acquisition-related stock issuance.
- The Bank reported a 11.124% Tier 1 leverage ratio and 15.984% total risk-based capital ratio, exceeding stated regulatory requirements, and was classified as “well capitalized.” It reported meeting internal liquidity minimums. In a +200-basis-point scenario, projected net interest income sensitivity was positive 1.86% in year one and 3.96% in year two.
Material changes and unusual items
- The Company completed its acquisition of TwinCo, Inc. and Ruby Valley Bank on January 31, 2018, for $18.93 million: $9.90 million cash and $9.03 million in stock. The acquired business added about $55.06 million of loans, $82.19 million of deposits and two Montana branches; goodwill recorded was $5.09 million. Acquisition costs were $234,000 in Q1. TwinCo results are included from February 1, and management said acquired-business revenue and net income for the post-acquisition period could not practicably be determined.
- Loan growth was largely acquisition-driven: gross loans rose 10.5% from year-end, while management said loans excluding acquired balances decreased $1.61 million. Commercial real estate, farmland and agricultural lending expanded.
- Nonperforming loans increased to $3.36 million from $977,000, and nonperforming assets to $4.00 million from $1.50 million. The increase included $1.62 million of restructured loans acquired with TwinCo; nonaccrual loans were $1.74 million. The allowance was $6.13 million, covering 182.33% of nonperforming loans, compared with 588.54% at year-end.
- Gain on sale of loans declined to $1.44 million from $1.83 million; mortgage loans sold were $47.01 million versus $56.57 million. The Company also recorded a $105,000 loss on securities sales.
- Available-for-sale securities had $3.04 million of gross unrealized losses at quarter-end, versus $1.10 million at year-end. Management considered the declines temporary and reported no other-than-temporary impairment.
Outlook, commentary and risks
The filing provides no numerical earnings or growth guidance. Management said it intends to improve core earnings through net interest margin growth, fee income and expense control, while growing loans and deposits; it identified efficient funding of balance-sheet growth as a key challenge amid deposit competition. The federal funds target rate rose to 1.75% during the quarter. Management expects the forthcoming expected-credit-loss standard (CECL) to affect the financial statements and said adoption is likely to increase the loan-loss allowance, but the impact was not yet reasonably estimable.
Disclosed risks include interest-rate and margin changes, competition and deposit outflows, Montana real-estate values, borrower repayment capacity, loan growth and asset quality, regulatory changes, securities-market volatility, cybersecurity, acquisition integration, and uncertainty in estimates such as the allowance for loan losses. No material change to previously reported risk factors was identified. The Company reported no material pending legal proceedings and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Review the basis and effects of the 2017 comparative results marked “As Restated.”
- Assess TwinCo’s post-acquisition contribution, integration costs, acquired-loan performance and deposit retention; standalone contribution was not separately reported.
- Track the rise in nonperforming assets and the allowance’s lower coverage ratio, distinguishing acquired restructured loans from organic credit deterioration.
- Evaluate the sustainability of earnings given weaker mortgage-sale income, higher expenses and acquisition-related costs, alongside improved net interest margin.
- Monitor unrealized securities losses, interest-rate sensitivity, liquidity and the expected CECL allowance impact.