Eagle Bancorp Montana, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Unaudited consolidated results. The company operates Opportunity Bank of Montana, a Montana-focused bank with 23 full-service branches.
Financial performance
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net interest income | $11.14 | $10.48 |
| Net interest margin | 3.97% | 4.04% |
| Noninterest income | $13.39 | $8.30 |
| Noninterest expense | $17.21 | $12.85 |
| Loan-loss provision | $0.30 | $0.67 |
| Net income | $5.27 | $3.93 |
| Diluted earnings per share | $0.78 | $0.57 |
| Operating cash flow | $3.93 | $3.69 |
Net income rose 34% year over year. Noninterest income increased $5.09 million, while net interest income after provision increased $1.03 million; higher noninterest expense, up $4.36 million, and taxes partly offset these gains. The effective tax rate was 25.0%, versus 25.4%.
Mortgage-related results were significant and uneven: gain on sale of loans was $14.28 million, up from $5.41 million, while mortgage banking, net, was a loss of $2.51 million versus income of $1.60 million. The filing attributes the latter largely to net derivative losses of $1.28 million, compared with gains of $1.25 million in Q1 2020. Residential mortgage sales were $260.49 million versus $132.12 million; reported gross sale margin was 5.48% versus 4.10%. Salaries and benefits increased $4.41 million, primarily reflecting mortgage commissions and additional staff.
Financial position, liquidity and capital
- Total assets were $1.31 billion, up 4.3% from year-end. Cash and cash equivalents were $111.22 million, versus $69.80 million.
- Deposits increased 5.8% to $1.09 billion. Noninterest-bearing deposits were $331.59 million. Net loans were $817.44 million, down 1.5%; commercial real estate loans grew while residential balances declined.
- Available-for-sale securities were $180.28 million, up 10.6%. Shareholders’ equity was $155.83 million, up 1.9%, including $5.27 million of earnings, offset partly by $1.90 million of other comprehensive loss and $0.66 million of dividends.
- Total borrowings were $41.67 million, down from $46.86 million. This includes $29.81 million of other long-term debt, including $10 million of senior notes due 2022 and $15 million of subordinated notes due 2030.
- Cash flow from investing was negative $16.96 million and financing cash flow was positive $54.45 million; cash increased $41.42 million during the quarter. Management said internal liquidity measures exceeded policy minimums.
- The Bank was deemed well capitalized. Its Tier 1 leverage ratio was 11.94%; total risk-based capital was 17.33%, Tier 1 risk-based capital 16.08%, and common equity Tier 1 16.08%.
Asset quality and material changes
Nonperforming loans were $8.11 million, or 0.98% of total loans, compared with $8.47 million and 1.00% at year-end. The allowance for loan losses was $11.90 million, equal to 146.71% of nonperforming loans. The quarter’s provision was lower than in 2020; management stated that the allowance was adequate but could rise if the economic outlook worsens.
COVID-19-related modifications covered 41 borrowers and $27.83 million of loans at quarter-end, down from 40 borrowers and $29.00 million at year-end. About 26 residential mortgage forbearances remained, most on loans sold and serviced. PPP lending supported 446 borrowers with $15.23 million of new loans in Q1; cumulative PPP originations were $45.71 million, with $30.20 million forgiven and paid off by quarter-end.
Interest expense fell 60% year over year, mainly as deposit costs declined. Average loan yield fell to 5.03% from 5.46%, reflecting lower rates and PPP loans, while reported net interest margin eased to 3.97% from 4.04%. The securities portfolio recorded a $2.57 million pretax fair-value decline, reducing accumulated other comprehensive income by $1.90 million after tax.
Outlook, commentary and risks
No specific earnings or financial guidance was provided. Management described first-quarter performance as strong, driven by high mortgage activity and loan-sale gains, and said it continues to focus on loan and deposit growth, net interest margin, fee income and expense control. It noted that maintaining efficient funding for growth may become more difficult amid deposit competition. The federal funds target rate remained at 0.25% during the quarter, which management said continued to pressure loan yields.
Key uncertainties include COVID-19’s effects on borrowers, local economies, credit quality and fee income; interest-rate and securities-market changes; Montana real-estate and industry concentration; deposit funding and liquidity; and the assumptions used in loan-loss, mortgage-servicing-rights and goodwill valuations. COVID-19-exposed loan categories included hotels and lodging (4.4% of gross loans excluding loans held for sale and PPP), health and social assistance (3.0%), bars and restaurants (3.0%), casinos (1.2%) and nursing homes (0.5%). Management said capital exceeded regulatory requirements and liquidity was above internal minimums. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
The company reported $20.80 million of goodwill and no impairment at year-end 2020; it cautioned that a sustained stock-price decline or other triggering event could lead to an impairment test. Adoption of the expected-credit-loss standard is scheduled for 2023; management expects it may increase the allowance but cannot yet estimate the effect.
Important facts for investors to verify
- Whether mortgage loan-sale volumes and margins remain strong, and whether mortgage banking and derivative results normalize.
- How deposit growth, PPP-related cash flows and loan balances develop, and whether liquidity remains adequate as loan demand changes.
- Whether credit quality, COVID-19 accommodations and the allowance for loan losses remain stable, particularly in exposed industries and Montana real estate.
- The sustainability of earnings after the unusually large mortgage-related contribution and the quarter’s higher compensation expense.
- The effects of market rates on loan yields, net interest margin, securities values and mortgage servicing rights.
- Future expected-credit-loss adoption assumptions and the potential effect on reserves and capital.