Trading far below the value of its peers, Eagle Bancorp Montana EBMT is a top-value play, according to community bank stock-picking expert, Tim Melvin. In addition to being inexpensive, the bank consistently increases its dividend and has had several buybacks in recent years.
With six full-service offices, Eagle Bancorp traditionally focused on mortgage loans, but is undergoing the transition to serve commercial customers as well.
To garner better insight into the company’s future, Melvin spoke with CEO Pete Johnson on everything from future acquisitions to the balance sheet.
Business Transformation
You are operating under American Federal Savings bank, but you are changing that pretty soon, correct?
Yes, we have applications to switch to a state commercial bank charter, which will necessitate a name change. We expect that to happen in mid-October.
What was the driver on that decision?
Well, there are a couple of things. As a thrift charter, there are some limitations as to the composition of our balance sheet. We are required to keep 65 percent of our assets in investments that are mortgage-related or investment securities that qualify under the regulation to meet that regulation. So, it limits how much small business lending and commercial real estate lending that we can do.
Starting about six years ago, we made a concerned effort to really change our balance sheet to be more like a bank. We are at the point right now where we need to make a change to our charter to allow us to accomplish that.
Essentially opening up more opportunities in your lending portfolio?
Yes, correct.
Loan Exposure
You guys have a pretty diverse service areas, per your last file 10K. You have exposure to agricultural, universities, mining and a bunch of other industries. How generally would you describe the economy and the pace of recovery in your sector?
Well, Montana is a large state, and we have some diverse areas. Our focus is on small businesses, and there is no real major manufacturing industries in the state if you exclude mining and timber. So, we end up dealing with small businesses, like the mom and pop type of businesses, that own their building.
To address your question about the overall economy in Montana: Because we have a lot of natural resources, such as oil, coal and gas, we avoided the great recession of '07 and '08. Our economy, other than a few markets that have had some down terms in the housing market, really came through pretty well compared to other parts of the country.
Do you guys have much exposure to the shell gas fields? I know some of them do run up in to Montana?
We have very little business that is related to the oil field in eastern Montana.
Eagle had phenomenal loan growth in commercial and commercial real estate in your last quarter earnings report. It sounds like all the moms and pops have been reaching out to bring business, rather than any specific industry, driving in the growth.
That is correct. We have moved from four commercial lenders to 10. That has fueled our growth. It allows us to go out and contact potential customers and take advantage of what has happened in the market with other banks to try to bring out some of their customers over to us.
Competition
Right within the striking distance of pretty much all 13 of your branches, U.S Bank and Wells Fargo have pretty large presence with a huge deposit base. Do you guys have any specific marketing plans to go after those big bank deposits and loans?
Well, nothing specific other than we are known for our quick turnaround on loan approvals and good local people that run our branches. So, we we don’t have anything specifically targeting them, but we make it apparent with how we treat our customers that we are a local community bank and try to draw the distinction that way between us and the big banks.
Across the nation, big banks have such a dominant market share, and I’m always a little surprised when the local banks are not taking from them. It sounds like you guys are getting your share.
We do okay. I think, in the last few years, people have become more aware of the difference between the large mega banks and the local community banks. I think that is more important to them than it was few years ago.
I would think that would be particularly true with the mom and pop type businesses that you seem to be going after.
Balance Sheet
Your non-performing asset ratio is one of the lowest in the banking industry. Was it a specific goal to improve on the 1.86 percent you had in 2011 to where it is today?
We have always have a conservative credit culture here. It is really just a reflection of that. Our markets have been very strong, and we have just avoided any of the relaxed underwriting standards that happen to harm other people in the industry. Its just the consistent conservative effort to only offer credits to the strong borrowers.
On the same vein, your loan loss allowance as a percentage of non-performing loans has been growing steadily for several quarters. It looks like you’re currently at 407 percent of non-performing loans.
That is extremely conservative, and again, I think it is one of the highest I have seen. At what point do you start thinking about cutting back and releasing some of those reserves back in to earnings, or do you just feel good of having that large coverage?
There are several metrics that we use in looking at the adequacy of the reserve. With the loan growth that you referred to earlier, we realize that the mix in our portfolio has changed from primarily residential loans to now there is a lot of commercial and commercial real estate loans.
As our mix of changed, the risk has changed. That is why we are adding to the allowance. We are going to continue to add that just because we know the risk profile in that portfolio is changing a little bit.
Shareholder Value
You guys seem to be an incredibly shareholder-friendly bank. You just raised the dividend and have had a couple of buyback programs. Is that something you see continuing going forward?
Yes, over the years we have done buybacks, and we increase our dividend every year. We know the value of having good shareholder relations, and we are shareholders, too, so we want to make sure that the company is acting in the best interest of the shareholders as well.
When I look at your shareholder list as published with the SCC, there are a few big time bank stock activists and investors. Did you ever feel any pressure from those investors looking over your shoulder?
No.
All of your officers or the majority of your officers have a decent size position in your stock. Do you have a mandatory ownership provision?
No.
That is pretty impressive, because all your officers and executives seem to have a pretty decent position in the stock. I believe your ESOP owns a decent position, too, right?
Yes.
Do you feel like that gives regular employees more of an incentive to perform at a higher level?
We think so. We reinforce every year when we discuss our benefits with our employees that they are owners of the company as well. We want the company to do well and, in turn, that allows the employees to participate in that success as well.
I want to congratulate you guys because the officer and director ownership is at a very high level without a mandatory provision that a lot of the banks have put in where they have to own it.
Looking at last year's proxy, most of your officers have been with the bank for an incredibly long time. How do you explain that high of retention rate of your executives?
Thank you. It is a little unusual in banking to have that kind longevity in your management team. I think it just reinforces the fact that the bank is well run, it is a good place to work, we have good relationships with our shareholders and regulators.
Our internal mantra is that we always want to do what is best interest for the customer, because that, in the long run, that is going to be in the best interest of the bank. Employees really like that philosophy. I think that is a big part of why people stay here a long time.
Mergers and Acquisitions
A couple of years ago, you made a decent-sized acquisition. Is that part of the plan going forward? I know that there is talk of the merger and acquisition wave developing in the banks about your size.
Yes, acquisitions are always on the table as one of our strategies.
The acquisition we did in 2012 was a large branch acquisition. We don’t anticipate doing anything large because it was really a transformative change. We almost doubled in size. But, we think there might be opportunities down the road for partnering with other banks in the state. It certainly is an option that we are keeping open.
Looking Forward
You have seen all kinds of turmoil in the banking industry and the economy. What do you see going forward for your bank and for the banking industry in general?
The industry has changed a lot, but regulations are always going to be there, that is just part of the game when you are in banking.
I think our challenges going forward will just be to continue to execute on our plan, which is to continue to have loan growth, to rebalance our balance sheet, a higher loan-to-deposit ratio and continue to look for growth in the state.
A lot of banks have really struggled with this regulatory thing. Are you guys coping with it okay?
We added to our compliance staff when we did our acquisition two years ago, and we feel we have extremely qualified people. They love what they do, and they are very good at it. We feel we have got a very strong program.
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