Eagle Bancorp Montana, Inc. — FY2020 Form 10-K
Business context and reporting period. Eagle Bancorp Montana is a Montana-focused bank holding company whose wholly owned Opportunity Bank of Montana serves individuals and small businesses through 23 full-service branches. The filing covers the fiscal year ended December 31, 2020; comparisons below are with FY2019 unless stated otherwise. In January 2020, Eagle acquired Western Holding Company of Wolf Point, adding one branch.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | Prior comparable |
|---|---|---|
| Net income | $21.21 million | $10.87 million |
| Basic / diluted EPS | $3.12 / $3.11 | $1.69 / $1.69 |
| Net interest income | $43.17 million | $38.79 million |
| Net interest margin | 3.94% | 4.25% |
| Total noninterest income | $49.07 million | $23.84 million |
| Net gain on mortgage loan sales | $36.39 million | $16.68 million |
| Noninterest expense | $60.67 million | $46.03 million |
| Net cash from operating activities | $2.12 million | $0.37 million |
| Total assets | $1.258 billion | $1.054 billion |
| Gross loans / loans, net | $843.14 million / $829.50 million | $780.54 million / $770.64 million |
| Deposits | $1.033 billion | $808.99 million |
| Cash and cash equivalents | $69.80 million | $24.92 million |
| FHLB advances and other borrowings | $17.07 million | $88.35 million |
| Other long-term debt, net | $29.79 million | $24.94 million |
| Shareholders’ equity | $152.94 million | $121.66 million |
Net cash used in investing activities was $22.04 million and financing activities provided $64.80 million. The Bank’s total risk-based capital ratio was 16.71%, Tier 1 leverage ratio 11.72%, and it was categorized as well capitalized. Gross loans were concentrated in commercial real estate (53.12% of loans) and commercial business lending (19.15%, as reported in MD&A).
Material changes versus FY2019
- Net income nearly doubled, largely reflecting mortgage banking: mortgage loans sold rose to $874.72 million from $480.05 million, while the reported gross sale margin increased to 4.16% from 3.47%.
- Net interest income rose 11.3%, supported by asset and loan growth and lower funding costs. Net interest margin nevertheless fell to 3.94% from 4.25%; average loan yield declined 37 basis points to 5.17%.
- Noninterest expense increased 31.8%, including an $11.21 million increase in salaries and benefits, associated in part with mortgage commissions, added staff and the acquisition. FY2020 also included $792,000 of mortgage servicing-rights impairment.
- Assets increased 19.3%. Deposits grew 27.7%; management attributed growth partly to the acquisition, PPP-related deposits and economic stimulus. Excluding acquired deposits, deposits increased $137.52 million.
- The allowance for loan losses increased to $11.60 million from $8.60 million. Provision expense was $3.13 million, including approximately $1.40 million attributed to COVID-related economic factors.
- Nonperforming loans, including restructured loans, rose to $8.47 million from $5.45 million; nonperforming loans were 1.00% of total loans versus 0.70%. Net charge-offs remained low at 0.01% of average loans.
Outlook, risks and unusual items
- Outlook: No numerical earnings or financial guidance is provided. Management emphasizes loan and deposit growth, lower-cost core deposits, fee income and expense control; it notes that efficient funding of growth is a key challenge. Mortgage banking contributed substantially to 2020 results, and management cautions that lower mortgage activity could reduce gains and related income.
- COVID-19: The Bank offered deferrals, forbearances and interest-only arrangements. At year-end, 40 nonresidential borrowers had remaining modifications totaling approximately $29.0 million, or 3.5% of loans; approximately 54 residential mortgage forbearances remained. The Bank reported industry exposures including hotels/lodging (4.1%), health/social assistance (2.6%), bars/restaurants (2.6%), casinos (1.2%) and nursing homes (0.5%) of loans.
- PPP: Eagle originated 764 PPP loans totaling $45.71 million. By year-end, 195 loans totaling over $15 million had been paid in full; $29.58 million remained outstanding. The remaining PPP loans were SBA-guaranteed.
- Debt and capital: Eagle issued $15 million of subordinated notes in June 2020 at 5.50% fixed through June 2025, then floating (expected three-month SOFR plus 509 basis points); it redeemed $10 million of 6.75% subordinated notes in July. Management says capital ratios exceeded regulatory requirements, but further credit losses could pressure capital and the parent relies on Bank dividends and cash to service debt.
- Key risks: Montana economic and real-estate concentration; credit deterioration in commercial, agricultural and COVID-affected borrowers; interest-rate and margin sensitivity; deposit funding competition; reliance on mortgage originations and secondary-market sales; acquisition integration and goodwill impairment; cybersecurity and third-party technology risks; and transition from LIBOR to replacement benchmarks.
- Accounting and unusual items: Goodwill was $20.80 million and was not impaired at year-end, after impairment assessments during 2020. The expected-credit-loss standard (CECL), then scheduled for adoption in 2023, was expected to increase the allowance, but the impact was not yet estimable. The auditor issued an unqualified opinion on the financial statements and identified allowance-for-loan-loss qualitative factors as a critical audit matter. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an opinion on internal control.
Investor verification priorities
- Assess how much of FY2020 earnings depended on unusually strong mortgage production, sale gains and servicing income, and whether those levels are sustainable.
- Review credit trends behind the increase in nonperforming loans and reserves, including agricultural exposures, COVID-related modifications and subsequent borrower performance.
- Verify deposit growth durability and liquidity after pandemic-related stimulus and PPP flows; note that $123.73 million of time certificates were scheduled to mature in 2021.
- Evaluate the effects of lower rates, margin compression and the large adjustable-rate share of the loan portfolio on future net interest income.
- Review the subordinated debt terms, 2022 senior-note maturity, dividend capacity and holding-company dependence on Bank distributions.
- Track mortgage servicing-rights valuation and prepayment assumptions, acquisition integration and goodwill impairment indicators, and CECL implementation estimates.