Eagle Bancorp Montana, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results. The company operates Opportunity Bank of Montana, a Montana-focused community bank with 23 full-service branches. Comparisons below are with Q3 or the first nine months of 2019 unless otherwise noted; balance-sheet comparisons are with December 31, 2019. The January 1, 2020 Western Holding Company acquisition affects year-over-year and year-to-date comparisons.
Financial performance and position
| Metric | Q3 2020 | Prior comparable | Nine months 2020 | Prior comparable |
|---|---|---|---|---|
| Net interest income | $10.78 million | $9.70 million | $31.68 million | $28.77 million |
| Provision for loan losses | $0.85 million | $0.69 million | $2.75 million | $2.00 million |
| Noninterest income | $14.97 million | $8.42 million | $36.97 million | $17.62 million |
| Noninterest expense | $16.35 million | $12.22 million | $44.33 million | $33.72 million |
| Net income | $6.38 million | $4.11 million | $16.04 million | $8.54 million |
| Diluted EPS | $0.94 | $0.63 | $2.35 | $1.32 |
| Net interest margin | 3.83% | 4.15% | 3.91% | 4.26% |
Drivers and margins: Q3 net income increased about 55% and nine-month net income about 88%. Growth in net interest income reflected larger average loan balances and lower funding costs, while lower asset yields compressed net interest margin. Mortgage gains were a major earnings driver: gain on loan sales was $11.10 million in Q3 and $24.43 million year to date, versus $5.49 million and $11.45 million, respectively, in 2019. Mortgage banking income was $7.16 million year to date, compared with $2.48 million. The company attributed this performance to higher mortgage volumes and sale margins; $621.11 million of residential mortgages were sold in the first nine months, versus $329.05 million a year earlier.
Expense growth partly offset revenue gains. Nine-month noninterest expense rose about 31%, primarily from salaries and benefits, including mortgage commissions, additional staffing and acquisition-related staffing. The effective tax rate was 25.6% for the first nine months, compared with 20.0% in 2019.
Balance sheet, funding and cash flow
- Assets and loans: Total assets were $1.26 billion, up 19.0% from year-end 2019. Net loans were $837.18 million, up $66.54 million, or 8.6%; reported loan growth includes $43.42 million of loans acquired with WHC. Commercial loans increased, while residential and commercial real estate loan balances declined modestly.
- Deposits and liquidity: Deposits reached $998.33 million, up 23.4%; noninterest-bearing deposits were $295.06 million. Cash and cash equivalents were $72.81 million, compared with $24.92 million at year-end. Management said the Bank exceeded its internal liquidity minimums. Deposit growth was associated in part with PPP-related funds and economic stimulus.
- Debt: FHLB advances and other borrowings were $59.78 million, down from $88.35 million. Total borrowings, including other long-term debt, were $89.55 million versus $113.29 million. The company issued $15 million of subordinated notes due 2030 in June and redeemed $10 million of 2025 subordinated notes in July. The notes carry a 5.50% fixed rate through 2025 and then a floating rate.
- Cash flow, first nine months: Operating activities provided $3.71 million, versus cash used of $3.63 million in 2019; investing activities used $29.23 million; financing activities provided $73.42 million. Cash increased by $47.89 million to $72.81 million. Deposit growth and borrowings were significant funding sources.
- Capital: Bank regulatory capital exceeded stated requirements, and the Bank was deemed “well capitalized.” At September 30, its total risk-based capital ratio was 16.17%, Tier 1 risk-based ratio 14.93%, common equity Tier 1 ratio 14.93%, and Tier 1 leverage ratio 11.54%. These are Bank ratios, not necessarily the holding company’s.
Material changes, outlook and risks
- COVID-19 and credit: Management cited pandemic-related uncertainty and increased its loan-loss analysis for economic conditions. The allowance for loan losses was $11.30 million, up from $8.60 million at year-end. Nonperforming loans were $7.48 million, or 0.88% of total loans, versus $5.45 million, or 0.70%, at year-end; allowance coverage of nonperforming loans was 151.03%. Management cautioned that a worsening economic forecast could require additional provisions.
- The Bank reported 66 borrowers with $55.21 million of loans in specified deferral, interest-only or Montana Board of Investments assistance programs at September 30, compared with 315 borrowers and $125.71 million at June 30. It also reported approximately 76 residential mortgage forbearances, most on loans sold and serviced. PPP loans totaled $45.22 million to 758 customers; forgiveness processing had begun.
- Management identified health and social assistance, hotels and lodging, bars and restaurants, casinos, and nursing homes as exposed industries, representing 2.9%, 4.2%, 2.5%, 1.2% and 0.4% of loans, respectively. It warned that prolonged pandemic effects could weaken asset quality, reduce interest and fee income, and affect capital. Management reported no goodwill impairment at quarter-end, but noted a sustained stock-price decline or other triggering event could require testing the $20.80 million goodwill balance.
- Mortgage servicing: The company recorded $878,000 of servicing-rights impairment for the first nine months, partly offset by a $338,000 Q3 recovery as prepayment assumptions slowed. Mortgage servicing rights, net, were $9.52 million at September 30.
- Outlook: No numerical earnings or revenue guidance is provided in the filing. Management’s stated priorities include growing loans and deposits, improving net interest margin and fee income, and controlling expenses. It described low rates as pressuring loan yields and identified competition and the ability to fund balance-sheet growth efficiently as challenges. Management also noted mortgage gains may diminish if mortgage activity falls.
- Other risks and contingencies: The business is concentrated in Montana and exposed to local economic and real-estate conditions, interest-rate changes, borrower repayment capacity, funding competition, acquisition integration and cybersecurity risks. Management reported no material change to previously disclosed risk factors and no material pending legal proceedings.
Most important facts for investors to verify
- Whether unusually strong mortgage originations, gain-on-sale margins and related earnings persist, and how sensitive results are to lower mortgage volumes.
- Whether COVID-related borrower accommodations convert into delinquencies, nonaccruals, losses or additional reserve needs; reconcile reported nonperforming loans with the increase in troubled debt restructurings.
- How deposit growth and liquidity evolve as PPP and stimulus-related balances change, and whether funding remains available at acceptable cost.
- Whether net interest margin stabilizes after rate declines, and how loan yields, deposit costs and interest-rate sensitivity develop.
- How the WHC acquisition affects ongoing expense levels, credit quality and returns, and whether goodwill valuation assumptions remain supportable.
- The terms and future cost of subordinated debt, and the Bank’s capital and liquidity capacity under a prolonged economic downturn.