Eagle Bancorp Montana, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited; dollar amounts below are in millions unless noted. The company operates Opportunity Bank of Montana, a Montana commercial bank focused on consumer and commercial lending.
Financial performance and position
- Q3 results: Net interest income was $7.48 million, up 21.4% year over year; net income was $1.63 million, down 5.2%. Diluted EPS was $0.30 versus $0.45.
- Nine-month results: Net interest income rose 26.3% to $22.13 million, while net income was nearly unchanged at $3.54 million versus $3.55 million. Diluted EPS fell to $0.65 from $0.92.
- Income and margins: Q3 total interest and dividend income was $8.83 million and noninterest income was $3.76 million. Net interest margin increased to 3.95% from 3.77% in Q3 2017; for the nine months, it was 3.97% versus 3.69%. Higher loan balances and yields supported interest income.
- Costs and credit provision: Q3 noninterest expense increased 19.7% to $9.05 million, including higher compensation, acquisition-related branch costs, and data-processing costs. The nine-month provision for loan losses was $0.72 million, down from $0.93 million.
- Balance sheet: Total assets grew 17.2% from year-end 2017 to $839.97 million. Net loans were $590.29 million, up 16.3%; deposits were $621.30 million, up 19.4%; shareholders’ equity was $91.99 million, up 10.0%.
- Liquidity, debt, and capital: Cash and cash equivalents were $8.97 million. FHLB advances and other borrowings totaled $95.73 million; other long-term debt was $24.86 million net of issuance costs. The Bank reported regulatory capital ratios above requirements: total risk-based capital 15.779%, Tier 1 risk-based capital 14.759%, common equity Tier 1 14.759%, and Tier 1 leverage 11.434%. Management said internal liquidity ratios exceeded policy minimums.
- Cash flow, nine months: Operating activities provided $9.11 million, investing activities used $37.40 million, and financing activities provided $29.82 million. Cash increased $1.53 million to $8.97 million.
Material changes and notable items
- The January 31, 2018 TwinCo acquisition added two Montana branches, $55.06 million of loans and $82.19 million of deposits at acquisition-date fair value. Consideration was $18.93 million, including $9.03 million in stock; goodwill recorded was $5.09 million. The acquisition materially contributed to balance-sheet growth. The company does not separately track TwinCo’s post-acquisition revenue or net income.
- Loan growth included increases in commercial real estate, farmland, and agricultural lending. Commercial real estate made up 39.63% of total loans at September 30.
- Asset quality weakened from year-end: nonperforming loans rose to $1.71 million from $0.98 million, and nonperforming assets to $2.17 million from $1.50 million. Nonperforming assets were 0.26% of total assets. The allowance was $6.35 million, or 370.91% of nonperforming loans.
- Available-for-sale securities had $4.06 million in gross unrealized losses at September 30, versus $1.10 million at December 31, 2017; accumulated other comprehensive loss was $2.64 million. Management considered the securities temporarily impaired and reported no expected credit losses.
- Q3 and nine-month expenses included acquisition costs of $0.22 million and $0.59 million, respectively. Data-processing expense also included one-time network infrastructure costs. Mortgage loan-sale gains declined year over year amid lower sales volume and mortgage-market competition.
Outlook, risks, and contingencies
- No quantified earnings or financial guidance was provided. Management’s stated priorities include growing loans and deposits, improving core earnings, increasing net interest margin and fee income, and controlling operating expenses. Management identified funding balance-sheet growth efficiently as a challenge.
- The company agreed to acquire Big Muddy Bancorp, parent of The State Bank of Townsend, with closing expected in the first quarter of 2019, subject to regulatory and shareholder approvals and other conditions. The announced terms imply approximately 996,142 Eagle shares to be issued; the merger could affect share count and integration costs.
- Management disclosed interest-rate, competition, deposit-funding, real-estate, borrower-credit, cybersecurity, regulatory, and acquisition-integration risks. The Bank’s modeled net interest income sensitivity was +0.61% in year one and +1.62% in year two for a 200-basis-point rate increase; a 200-basis-point decrease produced -2.47% and -9.07%, respectively. All were within the stated 15% policy limit.
- The company expects the forthcoming expected-credit-loss standard (CECL) to affect its financial statements and said adoption is likely to increase the allowance, but the effect could not yet be reasonably estimated. Lease accounting changes were also under evaluation.
- Management reported effective disclosure controls as of September 30, 2018, no material change in internal control over financial reporting during the quarter, and no material changes to previously disclosed risk factors. Pending legal matters were described as non-material and in the ordinary course.
Important facts for investors to verify
- How much of loan, deposit, and earnings growth reflects TwinCo versus organic growth, given that TwinCo’s contribution is not separately tracked?
- Whether rising nonperforming loans and commercial real estate exposures lead to further credit deterioration, provision expense, or charge-offs.
- Whether deposit and borrowing costs continue to rise faster than asset yields, and how that affects net interest margin and liquidity.
- The drivers and potential duration of securities-related unrealized losses and their effects on equity and capital.
- Closing conditions, final share issuance, integration costs, and expected financial effects of the proposed Big Muddy transaction.
- The eventual CECL adoption impact and any additional allowance or implementation costs.