Eagle Bancorp Montana, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Unless noted otherwise, amounts are in U.S. dollars. The company operates Opportunity Bank of Montana, a Montana-focused community bank. The quarter includes Western Holding Company of Wolf Point (WHC), acquired January 1, 2020.
Financial performance and position
- Earnings: Net income was $3.93 million, versus $1.18 million in Q1 2019. Diluted EPS was $0.57, versus $0.18. Income before tax was $5.26 million; the effective tax rate was 25.4%, compared with 18.1%.
- Interest income and margins: Interest and dividend income rose 13.6% to $12.63 million; interest expense rose 23.4% to $2.15 million. Net interest income increased 11.7% to $10.48 million. Net interest margin declined to 4.04% from 4.33%, and the interest rate spread fell to 3.79% from 4.09%.
- Noninterest income and expenses: Noninterest income increased to $8.30 million from $3.69 million, mainly from mortgage lending: net gains on loan sales were $5.41 million, versus $2.60 million, and mortgage banking income was $1.60 million, versus $0.37 million. Noninterest expense rose 16.6% to $12.85 million, including $7.68 million in salaries and benefits. Mortgage commissions increased to $2.25 million from $0.72 million.
- Credit costs and quality: The loan-loss provision was $670,000, including an approximately $220,000 increase attributed to COVID-19-related economic factors. The allowance was $9.25 million. Nonperforming loans, including restructured loans, were $5.94 million, or 0.72% of loans; allowance coverage was 155.83%. Management said the allowance was adequate but warned it could rise if economic conditions worsen.
- Cash flow: Operating activities provided $3.69 million, compared with $1.28 million. Investing activities used $1.88 million and financing activities used $6.95 million. Cash and cash equivalents ended the quarter at $19.77 million, down $5.15 million from year-end.
- Balance sheet and funding: Total assets were $1.159 billion, up 9.9% from December 31, 2019. Net loans were $812.78 million; deposits were $888.23 million; shareholders’ equity was $133.71 million. FHLB advances and other borrowings were $94.59 million; other long-term debt was $24.96 million net of issuance costs. Deposit growth largely reflected WHC; excluding acquired deposits, deposits decreased $10.04 million.
- Capital and liquidity: The Bank was reported as well capitalized. Its total risk-based capital ratio was 15.45%, Tier 1 and common equity Tier 1 ratios were 14.39%, and Tier 1 leverage ratio was 11.88%, all above stated regulatory minimums. The Bank exceeded its internal liquidity minimums.
Material changes versus comparable periods
- Profit increased by $2.74 million year over year, supported by higher net interest income and a substantial rise in mortgage-related income. Mortgage originations and margins on loans sold increased; residential mortgage sales were $132.12 million versus $72.32 million.
- WHC added $43.42 million of loans and $89.27 million of deposits at acquisition. The acquisition contributed to quarter-end growth in assets, loans, securities and deposits; excluding acquired loans, loans receivable decreased $1.28 million.
- Average loan balances increased, but the average loan yield declined to 5.46% from 5.61%. Deposit costs increased, and lower market rates added pressure to loan yields. The federal funds target rate fell to 0.25% during the quarter.
- Nonperforming loans increased from $5.45 million at year-end, while the nonperforming-loan-to-total-loans ratio edged up from 0.70% to 0.72%.
Outlook, risks, contingencies and unusual items
- COVID-19: Montana’s shelter-in-place order began March 28 and was lifted effective April 27, 2020, with phased reopening. Management said effects on borrowers, asset quality, fee income and the broader economy remained uncertain; future credit losses and reduced fees could pressure results. The filing does not provide earnings guidance or a reliable estimate of the pandemic’s financial impact.
- Customer relief and PPP, subsequent to quarter-end: As of April 30, 2020, 185 loans totaling $69.13 million had 90-day payment deferrals; about 113 borrowers with $45.38 million in loans had been approved for up to six months of interest-only payments; and 116 residential mortgage forbearances totaling $23.92 million were in process. The Bank had PPP approvals for $43.81 million and had funded 471 loans totaling $31.29 million. It had also drawn $24.07 million under the Federal Reserve’s PPP Loan Funding Facility at 0.35%, secured by PPP loans.
- Portfolio and valuation risks: Real estate loans represented 74.78% of gross loans, including commercial real estate at 40.96%. Management identified exposures in hotels/accommodations ($36.25 million), healthcare and social assistance ($27.39 million), bars and restaurants ($17.11 million), storage units ($12.37 million), casinos ($9.59 million), nursing homes ($6.10 million) and educational services ($2.28 million). Goodwill was $20.80 million and was not impaired at quarter-end; management cautioned that a sustained stock-price decline or other triggering event could lead to impairment testing.
- Other notable items: Management estimated approximately $100,000 of additional COVID-related equipment and safety expenses in Q2. Mortgage servicing rights had a $153,000 impairment charge. The WHC acquisition generated provisionally recorded goodwill of $4.96 million, subject to measurement-period adjustments.
- Controls: Disclosure controls were not effective as of March 31, 2020 because remediation of a material weakness in manual journal-entry review was ongoing. The filing states the weakness had not caused an identified financial-statement misstatement; remediation was not yet complete.
- Legal matters and guidance: The company reported no material pending legal proceedings other than ordinary-course matters and no specific numerical earnings guidance.
Important facts for investors to verify
- Whether COVID-related deferrals and forbearances convert into delinquencies, charge-offs or higher provisions, and whether the allowance remains adequate.
- Whether mortgage volume and sale margins remain strong enough to offset lower interest rates, higher deposit costs and possible reductions in fee income.
- How WHC integration, acquired-loan performance and deposit trends develop, particularly given the decline in deposits excluding acquisition effects.
- Whether the Bank’s capital and liquidity remain adequate as customer relief, PPP lending and economic conditions evolve; distinguish quarter-end balances from the post-quarter-end PPPLF borrowing.
- Whether management completes and tests remediation of the manual journal-entry control weakness, and whether goodwill or mortgage servicing rights require further impairment.