Eagle Bancorp Montana, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results include Opportunity Bank of Montana and the Big Muddy Bancorp acquisition, which closed January 1, 2019. Unless noted otherwise, dollar amounts below are in millions.
Business context and financial performance
The company operates a Montana community bank focused on consumer and commercial lending, deposits, securities investment, and mortgage originations and servicing. It reported 22 full-service branches.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $9.70 | $7.48 | $28.77 | $22.13 |
| Provision for loan losses | $0.69 | $0.19 | $2.00 | $0.72 |
| Noninterest income | $8.42 | $3.47 | $17.62 | $8.62 |
| Noninterest expense | $12.22 | $8.76 | $33.72 | $25.71 |
| Net income | $4.11 | $1.63 | $8.54 | $3.54 |
| Diluted earnings per share | $0.63 | $0.30 | $1.32 | $0.65 |
| Net interest margin | 4.15% | 3.95% | 4.26% | 3.97% |
Net interest margin is as reported by the company. Q3 net income rose $2.48 million year over year; nine-month net income rose $5.00 million.
Financial condition, cash flow and capital
- Growth: Total assets were $1,022.2 million at September 30, up 19.7% from December 31, 2018. Net loans were $745.4 million, up 22.1%; deposits were $789.5 million, up 26.0%. Management attributed much of the growth to BMB, with additional organic loan and deposit growth.
- Funding and debt: Noninterest-bearing deposits were $199.1 million and interest-bearing deposits $590.4 million. FHLB advances and other borrowings were $76.7 million; other long-term debt, net, was $24.9 million. Total borrowings were $101.6 million, down from $127.1 million at year-end. Deposits included $10.2 million of brokered CDs and $16.0 million of brokered CDARS certificates.
- Liquidity and cash: Cash and cash equivalents were $13.3 million, compared with $11.2 million at year-end. For the nine months, operating cash flow was negative $3.6 million, investing cash flow negative $35.9 million and financing cash flow positive $41.6 million; cash increased $2.1 million. The company said the Bank exceeded its internal liquidity minimums, but did not provide the actual ratios in this discussion.
- Credit quality: The allowance for loan losses was $8.2 million, versus $6.6 million at year-end. Nonperforming loans were $3.71 million, or 0.49% of loans, versus $3.77 million, or 0.61%, at year-end. Allowance coverage of nonperforming loans was 220.96%. Commercial real estate represented 42.12% of gross loans; total real estate loans represented 74.10%.
- Capital: Shareholders’ equity was $120.5 million, up from $94.8 million at year-end. The Bank was described as well capitalized; its total risk-based capital, Tier 1, common equity Tier 1 and leverage ratios were 15.70%, 14.62%, 14.62% and 11.21%, respectively.
Material changes and unusual items
- Q3 interest and dividend income rose 33.3% year over year, driven mainly by higher average loan balances and loan yields. Interest expense rose 53.9%, reflecting higher deposit and borrowing balances and funding costs.
- Q3 noninterest income increased by $4.95 million, primarily as gain on sale of loans rose to $5.49 million from $2.29 million. For the nine months, mortgage loans sold were $329.05 million versus $205.06 million, and reported mortgage sale margins rose to 3.48% from 2.66%.
- Expense growth reflected higher salaries and benefits, including commissions, added mortgage and compliance staff, BMB-related staffing, and acquisition costs. Nine-month acquisition costs were $1.69 million.
- Q3 results included a $0.44 million gain on disposal of premises and equipment. The company also reported a $1.39 million net gain on mortgage-related derivatives in Q3 and $0.86 million for the nine months.
- The company discontinued wealth management services in July 2019; wealth management income was $11,000 in Q3 versus $130,000 in Q3 2018.
- Other comprehensive income was $11.67 million for the nine months, including a favorable change in the fair value of available-for-sale securities; this is separate from net income.
Outlook, risks and contingencies
The filing provides no numerical earnings or growth guidance. Management said it intends to pursue loan and deposit growth, improve net interest margin and fee income, and control operating expenses. Management identified efficient funding of balance-sheet growth as a challenge amid competition for deposits and possible shifts by customers into other assets.
- The acquisition of Western Holding Company of Wolf Point was pending, with closing expected in Q4 2019, subject to conditions. Based on June 30, 2019 information, the transaction was expected to add approximately $100 million of assets, $77 million of deposits and $41 million of gross loans.
- Management cited sensitivity to interest rates, real estate values and economic conditions; competition and deposit funding; acquisition integration and realization of expected benefits; borrower repayment and allowance-estimate uncertainty; and cybersecurity and technology risks.
- The Bank’s 200-basis-point rising-rate scenario projected net interest income increases of 1.5% in year one and 3.7% in year two; a 100-basis-point decline projected decreases of 2.7% and 4.2%, respectively. The company also noted that the federal funds target rate fell from 2.50% to 2.00% during the nine months.
- The company expected adoption of the current expected credit loss standard to increase the allowance, but said the impact could not yet be reasonably estimated. The filing reported the effective date had been deferred to fiscal years beginning after December 15, 2022.
- No material changes to previously disclosed risk factors were reported. The company and Bank reported no material pending legal proceedings other than ordinary-course matters.
Important facts for investors to verify
- Whether mortgage origination volumes, sale margins and servicing income remain strong, and how results respond to lower mortgage activity or changing interest rates.
- Whether loan growth, commercial real estate concentration, credit performance and the allowance remain appropriate as the acquired portfolios season.
- Progress and final terms of the Western Holding Company acquisition, integration costs, and realization of expected benefits.
- Deposit retention and funding costs, including the role and renewal terms of brokered CDs and CDARS certificates.
- The drivers of negative operating cash flow, including mortgage loans held for sale, and the company’s ability to fund lending and other commitments.
- The eventual effect of expected-credit-loss accounting on the allowance, earnings and capital.