Eagle Bancorp Montana, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY2016. The company is a Montana-focused bank holding company operating Opportunity Bank of Montana. Its lending mix includes residential and commercial real estate, commercial business, home equity, construction and consumer loans.
Financial performance and condition
| Metric | FY2017 / Dec. 31, 2017 | FY2016 / Dec. 31, 2016 |
|---|---|---|
| Total assets | $716.8 million | $673.9 million |
| Total loans, net | $507.4 million | $461.4 million |
| Total deposits | $520.6 million | $512.8 million |
| Total shareholders’ equity | $83.6 million | $59.5 million |
| Net interest income | $23.8 million | $20.8 million |
| Net interest margin | 3.71% | 3.46% |
| Noninterest income | $14.3 million | $16.0 million |
| Noninterest expense | $30.6 million | $28.0 million |
| Income before taxes | $6.2 million | $6.9 million |
| Net income | $4.1 million | $5.1 million |
| Basic / diluted EPS | $1.01 / $0.99 | $1.36 / $1.32 |
| Operating / investing / financing cash flow | $20.1 million / ($56.8 million) / $36.9 million | $12.9 million / ($51.1 million) / $38.1 million |
- Growth and funding: Assets rose 6.4%; net loans increased 10.0%, while deposits grew 1.5%. Core deposits were 77.9% of deposits, including IRA certificates (72.5% excluding them). Year-end cash and cash equivalents were $7.4 million.
- Earnings and margins: Net interest income grew 14.3%, supported by larger loan balances and a higher average loan yield. Net interest margin increased 25 basis points. Total interest expense rose 31.3%, reflecting higher borrowing costs and additional debt.
- Credit quality: Nonperforming loans were $977,000, down from $1.15 million; nonperforming assets were $1.50 million, or 0.21% of assets. The allowance for loan losses was $5.75 million, 1.12% of total loans; net charge-offs were 0.05% of average loans.
- Debt and capital: FHLB advances and other borrowings totaled $83.0 million; other long-term debt, net of issuance costs, was $24.8 million. The Bank’s total risk-based capital ratio was 17.41%, Tier 1 ratio 16.30%, common equity Tier 1 ratio 16.30%, and leverage ratio 12.17%; it was categorized as well capitalized.
Material changes and unusual items
- Net income declined $1.03 million, or about 20%, despite higher net interest income after loan-loss provision. The filing attributes the decline primarily to lower noninterest income, higher noninterest expense and higher income tax expense.
- Net gains on loan sales fell to $8.80 million from $10.35 million as residential originations and mortgage sales decreased. Total noninterest income declined 10.4%.
- Noninterest expense rose 9.4%. Salaries and benefits increased $1.59 million; the company also recorded $676,000 of costs related to the TwinCo merger agreement.
- The effective tax rate rose to 34.15% from 25.96%. The fourth quarter included a one-time $715,000 net tax charge to revalue deferred tax items following the Tax Cuts and Jobs Act.
- In October 2017, the company issued 1,189,041 shares in a public offering and received approximately $20.16 million net proceeds. It also issued $10 million of 5.75% senior unsecured notes due 2022.
- The TwinCo/Ruby Valley Bank acquisition closed January 31, 2018, after year-end. Ruby Valley Bank had approximately $96 million in assets, $81 million in deposits and $57 million in gross loans at December 31, 2017. The filing expected to record acquisition goodwill in the first quarter of 2018.
Outlook, commentary and risks
Management’s stated priorities are to grow and diversify lending, attract lower-cost core deposits, maintain asset quality, control expenses and pursue selective acquisitions or branch expansion. The filing provides no numerical earnings or revenue guidance. Management noted that efficient balance-sheet funding, deposit competition and customer demand are important challenges. It expects adoption of the expected-credit-loss standard (CECL) to likely increase the allowance, but said the impact could not yet be reasonably estimated.
- Key exposures include Montana economic and real-estate conditions, growing commercial real estate and commercial business lending, interest-rate and funding costs, and dependence on mortgage originations, secondary-market sales and servicing income.
- Other disclosed risks include credit-loss estimation, securities valuation and impairment, goodwill impairment, cybersecurity and third-party data-processing disruptions, regulatory costs, and integration and execution risks from acquisitions.
- The company reported no pending or known contemplated lawsuits as of year-end and said routine legal claims were not expected to materially affect the financial statements.
- The independent auditor issued an unqualified opinion on the 2017 consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal controls.
Most important facts for investors to verify
- Whether the decline in earnings and mortgage-sale income is offset by ongoing loan growth and improved net interest margin, while monitoring rising funding costs.
- Commercial real estate and commercial business concentrations, underwriting performance, and whether the allowance remains appropriate as those portfolios grow.
- The realized cost savings, integration results, goodwill recorded and capital impact of the January 2018 Ruby Valley Bank acquisition.
- The duration and sensitivity of mortgage servicing income and servicing-right valuations, and the company’s dependence on secondary-market purchasers.
- The effect of the one-time tax revaluation charge, future tax rates and New Markets Tax Credit realization; the filing does not provide a clear quantified ongoing earnings impact.
- Liquidity and refinancing needs, including $42.9 million of FHLB and other borrowings scheduled within one year, and the continued availability of funding sources.