Eagle Bancorp Montana, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. The company operates Opportunity Bank of Montana, a community bank focused primarily on Montana.
Financial and operating highlights
| Metric | FY 2019 / year-end | FY 2018 / prior year-end |
|---|---|---|
| Total assets | $1.054 billion | $853.9 million |
| Loans receivable, net | $770.6 million | $610.3 million |
| Total deposits | $809.0 million | $626.6 million |
| Net income | $10.87 million | $4.98 million |
| Basic / diluted EPS | $1.69 / $1.69 | $0.92 / $0.91 |
| Net interest income | $38.79 million | $29.74 million |
| Net interest margin | 4.25% | 3.96% |
| Cash and cash equivalents | $24.92 million | $11.20 million |
| Shareholders’ equity | $121.66 million | $94.81 million |
Net interest income rose 30.4%, with loan growth and higher loan yields more than offsetting higher funding costs. Average loan yield increased to 5.54% from 5.15%; the average cost of interest-bearing liabilities rose to 1.11% from 0.86%. The effective tax rate was 22.2%, compared with 15.5%.
Noninterest income increased to $23.84 million from $12.12 million, principally on net gains from loan sales of $16.68 million, versus $7.74 million. The bank sold $480.05 million of residential mortgage loans, up from $279.74 million. Noninterest expense rose 31.6% to $46.03 million, including higher compensation, occupancy costs and acquisition expenses.
Operating cash flow was $366,000, down from $13.57 million; management attributed the decrease mainly to mortgage loan originations held for sale exceeding related sale proceeds. Investing activities used $59.70 million, while financing activities provided $73.05 million. Year-end cash and cash equivalents were $24.92 million.
At year-end, FHLB advances and other borrowings were $88.35 million, and other long-term debt was $24.94 million. Long-term debt includes $10 million of 5.75% senior notes due 2022, $10 million of 6.75% subordinated notes due 2025, and $5.16 million of variable-rate subordinated debentures due 2035. The bank reported that it exceeded its internal liquidity minimums; specific year-end liquidity ratios are not provided in the filing text summarized here.
The loan portfolio was increasingly weighted toward commercial real estate: total commercial real estate loans were $434.0 million, or 55.6% of loans, versus 53.1% in 2018. Commercial and agricultural business loans totaled $113.3 million, or 14.5%. The allowance for loan losses increased to $8.60 million from $6.60 million. Nonperforming loans rose to $5.45 million from $3.77 million, and the nonperforming-loan ratio increased to 0.70% from 0.61%.
The bank’s regulatory capital ratios remained above minimums. At December 31, 2019, its total risk-based capital ratio was 15.23%, Tier 1 risk-based capital was 14.14%, common equity Tier 1 was 14.14%, and Tier 1 leverage was 11.08%. The bank was classified as “well capitalized.”
Material changes and significant events
- The January 1, 2019 acquisition of Big Muddy Bancorp added four Montana branches and $89.2 million of loans and $92.7 million of deposits. The acquisition was a major contributor to balance-sheet growth; management does not separately report its attributable revenue or earnings.
- Assets grew 23.5%, net loans 26.3%, and deposits 29.1% year over year. The filing attributes substantial portions of that growth to the Big Muddy acquisition.
- Loan-sale gains and mortgage production increased sharply, while mortgage servicing rights rose to $8.74 million from $7.10 million. These results make earnings meaningfully exposed to mortgage volumes and secondary-market demand.
- Wealth management services were discontinued in July 2019; related income was $258,000 versus $536,000 in 2018.
- The Western Holding Company / Western Bank of Wolf Point merger closed January 1, 2020, after year-end. The acquired institution had approximately $102.7 million of assets, $89.2 million of deposits and $44.6 million of gross loans; purchase accounting fair values were still being determined.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management says it intends to grow through diversified lending, core-deposit gathering, branch expansion and selective acquisitions, while improving net interest margin, fee income and expense control. Management identifies efficient funding of balance-sheet growth as a key challenge amid deposit competition.
- Financial reporting controls: Management concluded that internal control over financial reporting and disclosure controls were not effective at December 31, 2019. The material weakness involved controls over the completeness, documentation and independent review of manual journal entries. No resulting financial-statement misstatement was identified. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management expected remediation before the end of the second quarter of 2020; remediation was not yet established as complete in this filing.
- Credit and geographic concentration: The business is concentrated in Montana, with increased exposure to commercial real estate, construction, commercial business and agricultural lending. Economic, real-estate, commodity-price or weather deterioration could increase delinquencies, losses and provisions.
- Mortgage and interest-rate exposure: Mortgage sale income depends on origination volumes, margins and continued access to secondary-market purchasers. Interest-rate changes may affect net interest income, prepayments, securities values and deposit costs.
- Acquisition and goodwill risk: Continued expansion may entail integration, credit-quality and execution risks. Goodwill was $15.84 million at year-end; impairment could reduce earnings and book value.
- Credit-loss accounting: The company expected adoption of the current expected credit loss standard, scheduled for fiscal years beginning after December 15, 2022, to likely increase the allowance, but could not reasonably estimate the impact.
- Commitments: Undrawn commitments to extend credit were $142.8 million and letters of credit were $3.1 million at year-end. These are potential funding needs, though commitments may expire undrawn.
Most important facts for investors to verify
- Whether the manual-journal-entry control weakness was remediated on schedule, and whether subsequent testing or filings report any further control deficiencies or financial adjustments.
- How much of 2019 earnings growth was recurring versus acquisition-related, mortgage-sale gains, purchased-loan discount accretion and other unusual items.
- Trends in nonperforming and classified loans, charge-offs and provision needs, particularly in commercial real estate, agricultural and commercial lending.
- The sustainability of deposit growth and funding costs, including the maturity and repricing profile of certificates of deposit and FHLB advances.
- The completed purchase accounting and post-merger performance of the January 2020 Wolf Point acquisition, including integration costs and acquired-credit quality.