Eagle Bancorp Montana, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. The company operates Opportunity Bank of Montana, a Montana-focused commercial bank with 23 full-service branches. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $10.42 | $9.69 | $20.90 | $19.07 |
| Loan-loss provision | $1.23 | $0.70 | $1.90 | $1.30 |
| Noninterest income | $13.70 | $5.50 | $22.00 | $9.20 |
| Noninterest expense | $15.13 | $10.47 | $27.98 | $21.49 |
| Net income | $5.74 | $3.25 | $9.66 | $4.43 |
| Diluted earnings per share | $0.84 | $0.51 | $1.41 | $0.69 |
| Net interest margin | 3.85% | 4.31% | 3.95% | 4.32% |
- Balance sheet at June 30: Assets were $1.248 billion, up 18.4% from December 31, 2019; net loans were $830.3 million; deposits were $955.4 million; shareholders’ equity was $141.5 million. The January 2020 WHC acquisition contributed to growth.
- Revenue and earnings drivers: Q2 net gain on loan sales was $7.92 million versus $3.36 million, and mortgage banking income was $3.36 million versus $0.72 million. Mortgage originations, sales and margins increased sharply. For the first half, net gain on loan sales was $13.33 million versus $5.96 million. These gains made a substantial contribution to reported income.
- Margins: Net interest income grew, but net interest margin declined year over year in both Q2 and the first half. Management cited lower loan and investment yields following rate cuts, partly offset by larger average balances and lower borrowing costs.
- Cash flows, first half: Operating cash flow was negative $17.3 million versus negative $6.8 million; investing cash flow was negative $27.9 million versus negative $22.1 million; financing cash flow was positive $73.2 million versus positive $31.2 million. Cash and cash equivalents increased $28.0 million to $52.9 million. Operating cash flow reflects substantial mortgage-loan originations and sales.
- Funding and debt: Deposits rose $146.5 million from year-end, including acquired deposits and funds deposited by PPP borrowers. Borrowings totaled $130.5 million at June 30, including $23.8 million of Federal Reserve PPP Liquidity Facility funding and $40.2 million principal of other long-term debt. The company issued $15 million of subordinated notes in June; on July 10 it redeemed $10 million of 6.75% notes due 2025.
- Liquidity and capital: Management said internal liquidity minimums were exceeded and the Bank was “well capitalized.” The Bank’s Tier 1 leverage ratio was 11.14%; total risk-based capital was 15.61%, above the stated 10.50% minimum.
Material changes and asset quality
- Nonperforming loans, including restructured loans, increased to $8.43 million from $5.45 million at December 31, 2019; nonperforming loans were 1.00% of total loans versus 0.70%. The allowance for loan losses was $10.5 million, or 124.56% of nonperforming loans, compared with 157.80% at year-end.
- The first-half provision included approximately $1.0 million of additional reserve attributed to COVID-19 economic factors; the Q2 provision included approximately $0.8 million for those factors. Management warned that worsening economic forecasts could require further increases.
- At June 30, 222 loans totaling $77.73 million had payment deferrals of up to 90 days; about 93 borrowers with $47.98 million of loans had approval for up to six months of interest-only payments. The filing also reports $2.13 million of troubled debt restructurings, up from $0.25 million at year-end.
- Commercial and agricultural lending expanded, while commercial real estate remained the largest loan category. PPP loans totaled approximately $44.85 million and were SBA-guaranteed.
Outlook, risks and unusual items
- Management described Q2 performance as strong but emphasized uncertainty from COVID-19. It is monitoring affected borrowers and industries and cautioned that prolonged economic disruption could worsen asset quality, reduce interest and fee income, and increase credit-loss reserves. The company did not provide numerical earnings guidance.
- Largest cited industry exposures as a share of loans included lessors of nonresidential buildings (10.0%), farm and ranch related (8.2%), construction and related (8.0%), lessors of residential buildings with five or more units (6.8%), and hotels (3.4%).
- Mortgage servicing rights were impaired by $1.22 million in the first half, including $1.06 million in Q2, as lower rates increased assumed prepayments. Q2 also included approximately $0.2 million of pandemic-related workplace and safety costs.
- Goodwill was $20.8 million and was not impaired at June 30; management noted that a sustained stock-price decline or other triggering event could require an impairment test. The company’s Montana concentration, interest-rate exposure, funding needs, acquisitions, and borrower credit quality are additional risks.
- A previously reported material weakness in review of manual journal entries was reported as remediated, with management concluding the related controls operated effectively at June 30. Disclosure controls and procedures were also deemed effective.
- Subsequent events: the Board authorized a new repurchase plan of up to 100,000 shares on July 23; 21,854 shares were purchased during July at an average $15.63. A quarterly dividend of $0.0975 per share was declared, payable in September.
Important facts for investors to verify
- How much of earnings growth is sustainable from net interest income and core fees versus elevated mortgage-sale gains, mortgage banking activity and securities gains?
- Whether COVID-related deferrals and interest-only arrangements convert into delinquencies, restructurings or losses, and whether the allowance remains adequate as conditions evolve.
- Whether lower interest rates and faster mortgage prepayments continue to pressure net interest margin and mortgage servicing rights values.
- How deposit growth, PPP-related balances and Federal Reserve funding change as PPP loans are repaid, and whether liquidity and capital remain strong after debt redemption, dividends and repurchases.
- The ongoing contribution and integration effects of the WHC acquisition; reported year-over-year comparisons include acquired operations, and the filing says WHC-attributable revenue and net income were not tracked separately.