Eagle Bancorp Montana, Inc 10-Q for FY2020 Q1
Eagle Bancorp Montana, Inc. (EBMT)
About this 10-Q
Eagle Bancorp Montana, Inc filed this 10-Q on May 11, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $3.93M
- up 232.0% from net income of $1.18M a year earlier
- Diluted EPS
- $0.57
- up 216.7% from $0.18 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____.
Commission file number 1-34682
Eagle Bancorp Montana, Inc.
(Exact name of small business issuer as specified in its charter)
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Delaware |
27-1449820 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1400 Prospect Avenue, Helena, MT 59601
(Address of principal executive offices)
(406) 442-3080
(Issuer's telephone number)
Website address: www.opportunitybank.com
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
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Non-accelerated filer ☐ |
Smaller reporting company ☒ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
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Common Stock par value $0.01 per share |
EBMT |
The Nasdaq Stock Market LLC |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
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Common stock, par value $0.01 per share |
6,818,883 shares outstanding |
As of May 11, 2020
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PART I. |
FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Statements of Financial Condition as of March 31, 2020 and December 31, 2019 |
1 |
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Consolidated Statements of Income for the three months ended March 31, 2020 and 2019 |
3 |
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Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019 |
5 |
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6 |
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Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 |
7 |
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9 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
35 |
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Item 3. |
49 |
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Item 4. |
50 |
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PART II. |
OTHER INFORMATION |
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Item 1. |
51 |
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Item 1A. |
51 |
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Item 2. |
52 |
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Item 3. |
52 |
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Item 4. |
52 |
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Item 5. |
52 |
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Item 6. |
53 |
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54 |
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Note Regarding Forward-Looking Statements
This report includes “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations; |
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statements regarding our business plans, prospects, growth and operating strategies; |
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statements regarding the current global COVID-19 pandemic; |
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statements regarding the asset quality of our loan and investment portfolios; and |
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estimates of our risks and future costs and benefits. |
These forward-looking statements are based on current beliefs and expectations of the management of Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”) and Opportunity Bank of Montana (“OBMT” or the “Bank”), Eagle’s wholly-owned subsidiary, and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
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the negative impacts and disruptions resulting from the recent outbreak of the novel coronavirus, or COVID-19, on the economies and communities we serve, which may likely have an adverse impact on our credit portfolio, goodwill, stock price, borrowers and the economy as a whole both globally and domestically; |
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local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our assets and liabilities; |
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competition among depository and other financial institutions; |
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risks related to the concentration of our business in Montana, including risks associated with changes in the prices, values and sales volume of residential and commercial real estate in Montana; |
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inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; |
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our ability to attract deposits and other sources of funding or liquidity; |
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changes or volatility in the securities markets; |
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our ability to implement our growth strategy, including identifying and consummating suitable acquisitions, raising additional capital to finance such transactions, entering new markets, possible failures in realizing the anticipated benefits from such acquisitions and an inability of our personnel, systems and infrastructure to keep pace with such growth; |
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the effect of acquisitions we may make, if any, including, without limitation, the failure to achieve expected revenue growth and/or expense savings from such acquisitions; |
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risks related to the integration of any businesses we have acquired or expect to acquire, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel; |
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potential impairment on the goodwill we have recorded or may record in connection with business acquisitions; |
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political developments, uncertainties or instability; |
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our ability to enter new markets successfully and capitalize on growth opportunities; |
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changes in consumer spending, borrowing and savings habits; |
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our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans; |
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possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises; |
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the level of future deposit insurance premium assessments; |
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our ability to develop and maintain secure and reliable information technology systems, effectively defend ourselves against cyberattacks, or recover from breaches to our cybersecurity infrastructure; |
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the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates; |
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changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and |
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the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters. |
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2019, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
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March 31, |
December 31, |
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2020 |
2019 |
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ASSETS: |
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Cash and due from banks |
$ | 11,544 | $ | 18,094 | ||||
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Interest bearing deposits in banks |
8,229 | 4,284 | ||||||
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Federal funds sold |
- | 2,540 | ||||||
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Total cash and cash equivalents |
19,773 | 24,918 | ||||||
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Securities available-for-sale, at fair value |
167,904 | 126,875 | ||||||
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Federal Home Loan Bank ("FHLB") stock |
5,161 | 4,683 | ||||||
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Federal Reserve Bank ("FRB") stock |
2,601 | 2,526 | ||||||
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Mortgage loans held-for-sale, at fair value |
25,187 | 25,612 | ||||||
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Loans receivable, net of allowance for loan losses of $9,250 at March 31, 2020 and $8,600 at December 31, 2019 |
812,784 | 770,635 | ||||||
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Accrued interest and dividends receivable |
5,329 | 4,577 | ||||||
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Mortgage servicing rights, net |
9,018 | 8,739 | ||||||
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Premises and equipment, net |
51,731 | 40,082 | ||||||
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Cash surrender value of life insurance, net |
25,898 | 23,608 | ||||||
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Goodwill |
20,798 | 15,836 | ||||||
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Core deposit intangible, net |
2,832 | 2,786 | ||||||
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Other assets |
9,584 | 3,383 | ||||||
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Total assets |
$ | 1,158,600 | $ | 1,054,260 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
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March 31, |
December 31, |
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2020 |
2019 |
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LIABILITIES: |
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Deposit accounts: |
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Noninterest bearing |
$ | 223,723 | $ | 200,035 | ||||
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Interest bearing |
664,502 | 608,958 | ||||||
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Total deposits |
888,225 | 808,993 | ||||||
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Accrued expenses and other liabilities |
17,067 | 9,825 | ||||||
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Deferred tax liability, net |
58 | 492 | ||||||
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FHLB advances and other borrowings |
94,585 | 88,350 | ||||||
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Other long-term debt: |
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Principal amount |
25,155 | 25,155 | ||||||
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Unamortized debt issuance costs |
(198 | ) | (214 | ) | ||||
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Total other long-term debt, net |
24,957 | 24,941 | ||||||
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Total liabilities |
1,024,892 | 932,601 | ||||||
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SHAREHOLDERS' EQUITY: |
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Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; no shares issued or outstanding) |
- | - | ||||||
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Common stock (par value $0.01 per share; 20,000,000 shares authorized; 7,110,833 and 6,714,983 shares issued; 6,818,883 and 6,423,033 shares outstanding at March 31, 2020 and December 31, 2019, respectively) |
71 | 67 | ||||||
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Additional paid-in capital |
77,399 | 68,826 | ||||||
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Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") |
(269 | ) | (311 | ) | ||||
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Treasury stock, at cost |
(3,643 | ) | (3,643 | ) | ||||
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Retained earnings |
58,670 | 55,391 | ||||||
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Accumulated other comprehensive income, net of tax |
1,480 | 1,329 | ||||||
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Total shareholders' equity |
133,708 | 121,659 | ||||||
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Total liabilities and shareholders' equity |
$ | 1,158,600 | $ | 1,054,260 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
2019 |
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INTEREST AND DIVIDEND INCOME: |
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Interest and fees on loans |
$ | 11,432 | $ | 10,048 | ||||
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Securities available-for-sale |
1,027 | 958 | ||||||
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FHLB and FRB dividends |
94 | 95 | ||||||
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Other interest income |
78 | 20 | ||||||
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Total interest and dividend income |
12,631 | 11,121 | ||||||
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INTEREST EXPENSE: |
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Deposits |
1,339 | 787 | ||||||
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FHLB advances and other borrowings |
463 | 594 | ||||||
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Other long-term debt |
352 | 365 | ||||||
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Total interest expense |
2,154 | 1,746 | ||||||
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NET INTEREST INCOME |
10,477 | 9,375 | ||||||
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Loan loss provision |
670 | 604 | ||||||
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NET INTEREST INCOME AFTER LOAN LOSS PROVISION |
9,807 | 8,771 | ||||||
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NONINTEREST INCOME: |
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Service charges on deposit accounts |
316 | 261 | ||||||
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Net gain on sale of loans |
5,411 | 2,599 | ||||||
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Mortgage banking, net |
1,602 | 365 | ||||||
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Interchange and ATM fees |
337 | 275 | ||||||
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Appreciation in cash surrender value of life insurance |
160 | 157 | ||||||
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Net loss on sale of available-for-sale securities |
- | (55 | ) | |||||
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Other noninterest income |
478 | 92 | ||||||
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Total noninterest income |
8,304 | 3,694 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
2019 |
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NONINTEREST EXPENSE: |
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Salaries and employee benefits |
$ | 7,682 | $ | 5,992 | ||||
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Occupancy and equipment expense |
1,209 | 1,034 | ||||||
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Data processing |
1,250 | 928 | ||||||
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Advertising |
249 | 268 | ||||||
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Amortization |
164 | 254 | ||||||
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Loan costs |
247 | 135 | ||||||
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Federal Deposit Insurance Corporation ("FDIC") insurance premiums |
69 | 60 | ||||||
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Postage |
98 | 68 | ||||||
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Professional and examination fees |
285 | 305 | ||||||
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Acquisition costs |
128 | 1,171 | ||||||
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Other noninterest expense |
1,467 | 806 | ||||||
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Total noninterest expense |
12,848 | 11,021 | ||||||
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INCOME BEFORE PROVISION FOR INCOME TAXES |
5,263 | 1,444 | ||||||
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Provision for income taxes |
1,336 | 261 | ||||||
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NET INCOME |
$ | 3,927 | $ | 1,183 | ||||
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BASIC EARNINGS PER SHARE |
$ | 0.58 | $ | 0.18 | ||||
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DILUTED EARNINGS PER SHARE |
$ | 0.57 | $ | 0.18 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
2019 |
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NET INCOME |
$ | 3,927 | $ | 1,183 | ||||
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OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS) BEFORE TAX: |
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Change in fair value of investment securities available-for-sale |
205 | 1,486 | ||||||
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Reclassification for net realized losses on investment securities available-for-sale |
- | 55 | ||||||
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Change in fair value of loans held-for-sale |
- | 296 | ||||||
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Reclassification for net realized gains on loans held-for-sale |
- | (309 | ) | |||||
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Total other items of comprehensive income |
205 | 1,528 | ||||||
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Income tax (provision) benefit related to: |
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Investment securities |
(54 | ) | (407 | ) | ||||
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Loans held-for-sale |
- | 4 | ||||||
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Total income tax provision |
(54 | ) | (403 | ) | ||||
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COMPREHENSIVE INCOME |
$ | 4,078 | $ | 2,308 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2020 and 2019
(Dollars in Thousands, Except for Per Share Data)
(Unaudited)
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ACCUMULATED |
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ADDITIONAL |
UNALLOCATED |
OTHER |
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PREFERRED |
COMMON |
PAID-IN |
ESOP |
TREASURY |
RETAINED |
COMPREHENSIVE |
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STOCK |
STOCK |
CAPITAL |
SHARES |
STOCK |
EARNINGS |
INCOME (LOSS) |
TOTAL |
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Balance at January, 1 2020 |
$ | - | $ | 67 | $ | 68,826 | $ | (311 | ) | $ | (3,643 | ) | $ | 55,391 | $ | 1,329 | $ | 121,659 | ||||||||||||||
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Net income |
- | - | - | - | - | 3,927 | - | 3,927 | ||||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | - | 151 | 151 | ||||||||||||||||||||||||
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Dividends paid ($0.095 per share) |
- | - | - | - | - | (648 | ) | - | (648 | ) | ||||||||||||||||||||||
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Stock issued in connection with Western Holding Company of Wolf Point acquisition |
- | 4 | 8,463 | - | - | - | - | 8,467 | ||||||||||||||||||||||||
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Stock compensation expense |
- | - | 70 | - | - | - | - | 70 | ||||||||||||||||||||||||
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ESOP shares allocated (4,154 shares) |
- | - | 40 | 42 | - | - | - | 82 | ||||||||||||||||||||||||
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Balance at March 31, 2020 |
$ | - | $ | 71 | $ | 77,399 | $ | (269 | ) | $ | (3,643 | ) | $ | 58,670 | $ | 1,480 | $ | 133,708 | ||||||||||||||
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Balance at January, 1 2019 |
$ | - | $ | 57 | $ | 52,051 | $ | (477 | ) | $ | (2,640 | ) | $ | 46,926 | $ | (1,111 | ) | $ | 94,806 | |||||||||||||
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Net income |
- | - | - | - | - | 1,183 | - | 1,183 | ||||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | - | 1,125 | 1,125 | ||||||||||||||||||||||||
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Dividends paid ($0.0925 per share) |
- | - | - | - | - | (597 | ) | - | (597 | ) | ||||||||||||||||||||||
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Stock issued in connection with Big Muddy Bancorp, Inc. acquisition |
- | 10 | 16,425 | - | - | - | - | 16,435 | ||||||||||||||||||||||||
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ESOP shares allocated (4,154 shares) |
- | - | 30 | 42 | - | - | - | 72 | ||||||||||||||||||||||||
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Treasury stock purchased (42,000 shares at $17.43 average cost per share) |
- | - | - | - | (732 | ) | - | - | (732 | ) | ||||||||||||||||||||||
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Balance at March 31, 2019 |
$ | - | $ | 67 | $ | 68,506 | $ | (435 | ) | $ | (3,372 | ) | $ | 47,512 | $ | 14 | $ | 112,292 | ||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
2019 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 3,927 | $ | 1,183 | ||||
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Loan loss provision |
670 | 604 | ||||||
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Impairment of servicing rights |
153 | - | ||||||
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Depreciation |
574 | 417 | ||||||
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Net amortization of investment securities premiums and discounts |
280 | 280 | ||||||
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Amortization of mortgage servicing rights |
511 | 247 | ||||||
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Amortization of right-of-use assets |
117 | 119 | ||||||
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Amortization of core deposit intangible and tax credits |
164 | 254 | ||||||
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Compensation expense related to restricted stock awards |
70 | - | ||||||
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ESOP compensation expense for allocated shares |
82 | 72 | ||||||
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Deferred income tax benefit |
(23 | ) | (589 | ) | ||||
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Net gain on sale of loans |
(5,411 | ) | (2,599 | ) | ||||
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Originations of loans held-for-sale |
(132,225 | ) | (72,293 | ) | ||||
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Proceeds from sales of loans held-for-sale |
138,061 | 74,122 | ||||||
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Net loss on sale of available-for-sale securities |
- | 55 | ||||||
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Net loss on sale of real estate owned and other repossessed assets |
- | 37 | ||||||
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Net gain on sale/disposal of premises and equipment |
(4 | ) | - | |||||
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Net appreciation in cash surrender value of life insurance |
(160 | ) | (157 | ) | ||||
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Net change in: |
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Accrued interest and dividends receivable |
256 | (270 | ) | |||||
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Other assets |
(6,042 | ) | 353 | |||||
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Accrued expenses and other liabilities |
2,688 | (552 | ) | |||||
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Net cash provided by operating activities |
3,688 | 1,283 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Activity in available-for-sale securities: |
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Sales |
- | 3,900 | ||||||
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Maturities, principal payments and calls |
4,106 | 2,919 | ||||||
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Purchases |
(1,500 | ) | (1,513 | ) | ||||
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FHLB stock (purchased) redeemed |
(263 | ) | 468 | |||||
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FRB stock purchased |
- | (7 | ) | |||||
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Net cash received from acquisitions |
7,744 | 6,901 | ||||||
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Loan origination and principal collection, net |
(371 | ) | (22,583 | ) | ||||
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Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans |
- | 70 | ||||||
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Purchases of premises and equipment, net |
(11,596 | ) | (1,850 | ) | ||||
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Net cash used in investing activities |
(1,880 | ) | (11,695 | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
2019 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net (decrease) increase in deposits |
$ | (10,040 | ) | $ | 21,728 | |||
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Net short-term advances (payments) on FHLB and other borrowings |
7,910 | (11,047 | ) | |||||
|
Long-term advances from FHLB and other borrowings |
10,000 | 18,000 | ||||||
|
Payments on long-term FHLB and other borrowings |
(14,175 | ) | (16,862 | ) | ||||
|
Purchase of treasury stock |
- | (732 | ) | |||||
|
Dividends paid |
(648 | ) | (597 | ) | ||||
|
Net cash (used in) provided by financing activities |
(6,953 | ) | 10,490 | |||||
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(5,145 | ) | 78 | |||||
|
CASH AND CASH EQUIVALENTS, beginning of period |
24,918 | 11,201 | ||||||
|
CASH AND CASH EQUIVALENTS, end of period |
$ | 19,773 | $ | 11,279 | ||||
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
|
Cash paid during the period for interest |
$ | 2,172 | $ | 1,613 | ||||
|
Cash paid during the period for income taxes |
$ | - | $ | - | ||||
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
|
Increase in fair value of securities available-for-sale |
$ | 205 | $ | 1,541 | ||||
|
Mortgage servicing rights recognized |
$ | 943 | $ | 465 | ||||
|
Right-of-use assets obtained in exchange for lease liabilities |
$ | - | $ | 2,461 | ||||
|
Loans transferred to real estate and other assets acquired in foreclosure |
$ | 34 | $ | 131 | ||||
|
Stock issued in connection with acquisitions |
$ | 8,467 | $ | 16,435 | ||||
See Note 2. Mergers and Acquisitions for additional information related to assets acquired and liabilities assumed in acquisitions.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”), is a Delaware corporation that holds 100% of the capital stock of Opportunity Bank of Montana (“OBMT” or the “Bank”). The Bank was founded in 1922 as a Montana-chartered building and loan association and has conducted operations and maintained its administrative office in Helena, Montana since that time. In 1975, the Bank adopted a federal thrift charter and in October 2014 converted to a Montana chartered commercial bank and became a member bank in the Federal Reserve System.
In September 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, Inc. ("TwinCo"), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank to acquire 100% of TwinCo’s equity voting interests. On January 31, 2018, TwinCo merged with and into Eagle, with Eagle continuing as the surviving corporation. Ruby Valley Bank operated two branches in Madison County, Montana.
In August 2018, Eagle entered into an Agreement and Plan of Merger with Big Muddy Bancorp, Inc. (“BMB”), a Montana corporation and BMB’s wholly-owned subsidiary, The State Bank of Townsend (“SBOT”), a Montana chartered commercial bank to acquire 100% of BMB’s equity voting interests. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana.
In August 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point (“WHC”), a Montana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point (“WB”), a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, WHC would merge with and into Eagle, with Eagle continuing as the surviving corporation. The merger closed on January 1, 2020. WB operated one branch in Wolf Point, Montana.
The Bank currently has 23 full service branches. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. The Bank also operates certain branches under the names Dutton State Bank, Farmers State Bank of Denton and The State Bank of Townsend.
Basis of Financial Statement Presentation and Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2019, as filed with the SEC on March 11, 2020. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.
The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or any other period. In preparing consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the fair value of financial instruments, the valuation of goodwill and deferred tax assets and liabilities.
Principles of Consolidation
The consolidated financial statements include Eagle, the Bank, Eagle Bancorp Statutory Trust I (the “Trust”) and Western Financial Services, Inc. (“WFS”). WFS was acquired through the WHC merger. All significant intercompany transactions and balances have been eliminated in consolidation.
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
Reclassifications
Certain prior period amounts were reclassified to conform to the presentation for 2020. These reclassifications had no impact on net income or shareholders’ equity.
Subsequent Events
The Company has evaluated events and transactions subsequent to March 31, 2020 for recognition and/or disclosure.
On March 28, 2020 the State of Montana implemented a Shelter-in-Place order related to the COVID-19 pandemic. This resulted in a substantial reduction is business activity and in some cases the temporary closing of certain businesses. The order was lifted effective April 27, 2020, including the beginning of a phased approach to re-open businesses. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been affected.
Ongoing impact of COVID-19 on business operations:
|
■ |
Loan Accommodations – The bank is offering multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. As of April 30, 2020, there were 185 loans totaling $69,131,000 deferring payments for 90 days, primarily from the real estate rental, accommodation and food services, and the art, entertainment and recreation industries. Approximately 113 borrowers representing $45,375,000 in loans have been approved for up to 6-months interest only payments. There have been approximately 116 forbearances in process for residential mortgage loans totaling $23,921,000. |
|
■ |
Payroll Protection Program – On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. In April 2020, additional funding was approved for the PPP. Eagle began taking loan applications from its small business clients immediately after the program was implemented, and as of April 30, 2020, had received approvals for $43,808,000 in SBA PPP loans, with 471 loans funded for $31,287,000. |
|
■ |
Liquidity Changes – Subsequent to the end of the quarter and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, a new funding facility through the FRB called Payroll Protection Program Loan Funding (“PPPLF”) was made available and the Bank has received approval to collateralize with pools of PPP loans for funding. As of April 30, 2020, the Bank had $24,065,000 in PPPLF borrowings secured by 334 PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay the FRB borrowings. |
NOTE 2. MERGERS AND ACQUISITIONS
Effective January 1, 2019, Eagle completed its merger with BMB. The transaction provided an opportunity to expand market presence and lending activities throughout the state. The acquisition closed after receipt of approvals from regulatory authorities, approval of BMB shareholders and the satisfaction of other closing conditions. The total consideration paid was $16,436,000 and included cash consideration of $1,000 and common stock issued of $16,435,000.
Effective January 1, 2020, Eagle completed its previously announced merger with WHC. At the effective time of the Merger, WHC merged with and into Eagle, with Eagle continuing as the surviving corporation. The acquisition closed after receipt of approvals from regulatory authorities, approval of WHC shareholders and the satisfaction of other closing conditions. The total consideration paid was $14,967,000 and included cash consideration of $6,500,000 and common stock issued of $8,467,000.
These transactions were accounted for under the acquisition method of accounting.
NOTE 2. MERGERS AND ACQUISITIONS – continued
All of the assets acquired and liabilities assumed were recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combinations were expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgement regarding methods and assumptions used to calculate estimated fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The goodwill recorded is not deductible for federal income tax purposes.
The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.
|
WHC |
BMB |
|||||||
|
January 1, |
January 1, |
|||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Assets acquired: |
||||||||
|
Cash and cash equivalents |
$ | 14,244 | $ | 6,902 | ||||
|
Securities available-for-sale |
43,710 | 2,096 | ||||||
|
Loans receivable |
43,424 | 89,204 | ||||||
|
Premises and equipment |
740 | 2,246 | ||||||
|
Cash surrender value of life insurance |
2,131 | 2,862 | ||||||
|
Other real estate owned |
- | 223 | ||||||
|
Core deposit intangible |
208 | 1,988 | ||||||
|
Other assets |
1,874 | 1,995 | ||||||
|
Total assets acquired |
$ | 106,331 | $ | 107,516 | ||||
|
Liabilities assumed: |
||||||||
|
Deposits |
$ | 89,272 | $ | 92,706 | ||||
|
Accrued expenses and other liabilities |
4,554 | 1,960 | ||||||
|
Other borrowings |
2,500 | - | ||||||
|
Total liabilities assumed |
$ | 96,326 | $ | 94,666 | ||||
|
Net assets acquired |
$ | 10,005 | $ | 12,850 | ||||
|
Consideration paid: |
||||||||
|
Cash |
$ | 6,500 | $ | 1 | ||||
|
Common stock issued (395,850 shares WHC and 996,041 shares BMB) |
8,467 | 16,435 | ||||||
|
Total consideration paid |
$ | 14,967 | $ | 16,436 | ||||
|
Goodwill resulting from acquisition |
$ | 4,962 | $ | 3,586 | ||||
Goodwill recorded for the WHC acquisition during the three months ended March 31, 2020 was provisionally $4,962,000 due to the timing of the transaction. Amounts may be subject to change due to retrospective measurement period adjustments based on new information. Goodwill recorded for the BMB acquisition during the three months ended March 31, 2019 was $3,586,000. Certain estimates that existed at January 1, 2019 were realized and a final true up of $126,000 was recorded to goodwill during the three months ended December 31, 2019. The final goodwill recorded related to the BMB acquisition was $3,712,000.
WHC investments were written up $425,000 to fair value on the date of acquisition based on market prices obtained from an independent third party. BMB investment fair value adjustments were considered insignificant.
NOTE 2. MERGERS AND ACQUISITIONS – continued
For acquisitions, the fair value analysis of the loan portfolios resulted in a valuation adjustment for each loan based on an amortization schedule of expected cash flow. Individual amortization schedules were used for each loan over a certain amount and those with specifically identified loss exposure. The remainder of the loans were grouped by type and risk rating into loan pools (based on loan type, fixed or variable interest rate, revolving or term payments and risk rating). Yield inputs for the amortization schedules included contractual interest rates, estimated prepayment speeds, liquidity adjustments and market yields. Credit inputs for the amortization schedules included probability of payment default, loss given default rates and individually identified loss exposure.
The total accretable discount on WHC acquired loans was $1,166,000 as of January 1, 2020. During the three months ended March 31, 2020, accretion of the loan discount was $130,000. The remaining accretable loan discount was $1,036,000 as of March 31, 2020.
The total accretable discount on BMB acquired loans was $2,813,000 as of January 1, 2019. During the year ended December 31, 2019, accretion of the loan discount was $1,480,000. During the three months ended March 31, 2020, accretion of the loan discount was $119,000. The remaining accretable loan discount was $1,214,000 as of March 31, 2020.
One impaired loan was acquired through the WHC acquisition with an insignificant balance as of January 1, 2020. Four impaired loans were acquired through the BMB acquisition with a net balance of $556,000 as of January 1, 2019. The balance of the acquired impaired loans as of March 31, 2020 was $134,000.
Fair value adjustments of $590,000 and $276,000 were recorded for WHC and BMB, respectively, related to premises and equipment. The Company used independent third party appraisals in the determination of the fair value of acquired assets.
Core deposit intangible assets of $208,000 were recorded for WHC and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years. Core deposit intangible assets of $1,988,000 were recorded for BMB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years.
For acquisitions, the core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. These cash flow streams were discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near the acquisition date.
Direct costs related to the acquisitions were expensed as incurred. The Company recorded acquisition costs related to WHC of $128,000 during the three months ended March 31, 2020 and $818,000 during the years ended December 31, 2019. The Company recorded acquisition costs related to BMB of $1,380,000 and $804,000 during the years ended December 31, 2019 and 2018, respectively. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.
Operations of WHC have been included in the consolidated financial statements since January 1, 2020. The Company does not consider WHC a separate reporting segment and does not track the amount of revenues and net income attributable to WHC since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2020 through March 31, 2020.
Operations of BMB have been included in the consolidated financial statements since January 1, 2019. The Company does not consider BMB a separate reporting segment and does not track the amount of revenues and net income attributable to BMB since acquisition. As such, it is impracticable to determine such amounts for the period from January 1, 2019 through March 31, 2020.
NOTE 2. MERGERS AND ACQUISITIONS – continued
The accompanying consolidated statements of income include the results of operations of WHC since the January 1, 2020 acquisition date. The following table presents unaudited pro forma results of operations for the three months ended March 31, 2019 as if the acquisition had occurred on January 1, 2019. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of WHC on January 1, 2019. Cost savings are also not reflected in the unaudited pro forma amounts for the three months ended March 31, 2019.
|
Three Months Ended |
||||
|
March 31, 2019 |
||||
|
(Dollars in Thousands, Except Per Share Data) |
||||
|
Pro forma net income(1) |
||||
|
Net interest income after loan loss provision |
$ | 9,486 | ||
|
Noninterest income |
3,983 | |||
|
Noninterest expense |
11,710 | |||
|
Income before provision for income taxes |
1,759 | |||
|
Income tax provision |
352 | |||
|
Net income |
$ | 1,407 | ||
|
Pro forma earnings per share(1) |
||||
|
Basic earnings per share |
$ | 0.22 | ||
|
Diluted earnings per share |
$ | 0.22 | ||
|
Basic weighted average shares outstanding |
6,450,326 | |||
|
Diluted weighted average shares outstanding |
6,510,486 | |||
(1) Significant assumptions utilized include the acquisition cost noted above and a 20.00% effective tax rate.
NOTE 3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
|
March 31, 2020 |
December 31, 2019 |
|||||||||||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||||||||||
|
Amortized |
Unrealized |
Fair |
Amortized |
Unrealized |
Fair |
|||||||||||||||||||||||||||
|
Cost |
Gains |
(Losses) |
Value |
Cost |
Gains |
(Losses) |
Value |
|||||||||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||||||||||
|
Available-for-Sale: |
||||||||||||||||||||||||||||||||
|
U.S. government and agency obligations |
$ | 15,257 | $ | 610 | $ | - | $ | 15,867 | $ | 13,318 | $ | 279 | $ | - | $ | 13,597 | ||||||||||||||||
|
Municipal obligations |
70,685 | 2,117 | (118 | ) | 72,684 | 50,699 | 1,616 | (93 | ) | 52,222 | ||||||||||||||||||||||
|
Corporate obligations |
8,349 | 24 | (304 | ) | 8,069 | 8,356 | 40 | (8 | ) | 8,388 | ||||||||||||||||||||||
|
Mortgage-backed securities |
10,066 | 95 | (33 | ) | 10,128 | 9,460 | 56 | (21 | ) | 9,495 | ||||||||||||||||||||||
|
Collateralized mortgage obligations |
44,040 | 1,375 | (287 | ) | 45,128 | 33,129 | 297 | (92 | ) | 33,334 | ||||||||||||||||||||||
|
Asset-backed securities |
17,499 | - | (1,471 | ) | 16,028 | 10,110 | - | (271 | ) | 9,839 | ||||||||||||||||||||||
|
Total |
$ | 165,896 | $ | 4,221 | $ | (2,213 | ) | $ | 167,904 | $ | 125,072 | $ | 2,288 | $ | (485 | ) | $ | 126,875 | ||||||||||||||
Proceeds from sales of available-for-sale securities and the associated gross realized gains and losses were as follows:
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Proceeds from sale of available-for-sale securities |
$ | - | $ | 3,900 | ||||
|
Gross realized gain on sale of available-for-sale securities |
$ | - | $ | 11 | ||||
|
Gross realized loss on sale of available-for-sale securities |
- | (66 | ) | |||||
|
Net realized loss on sale of available-for-sale securities |
$ | - | $ | (55 | ) | |||
NOTE 3. INVESTMENT SECURITIES – continued
The amortized cost and fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
March 31, 2020 |
||||||||
|
Amortized |
Fair |
|||||||
|
Cost |
Value |
|||||||
|
(In Thousands) |
||||||||
|
Due in one year or less |
$ | 11,771 | $ | 11,811 | ||||
|
Due from one to five years |
16,110 | 15,962 | ||||||
|
Due from five to ten years |
15,575 | 16,150 | ||||||
|
Due after ten years |
68,334 | 68,725 | ||||||
| 111,790 | 112,648 | |||||||
|
Mortgage-backed securities |
10,066 | 10,128 | ||||||
|
Collateralized mortgage obligations |
44,040 | 45,128 | ||||||
|
Total |
$ | 165,896 | $ | 167,904 | ||||
As of March 31, 2020 and December 31, 2019 securities with a fair value of $28,345,353 and $18,897,000, respectively were pledged to secure public deposits and for other purposes required or permitted by law.
The Company’s investment securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months were as follows:
|
March 31, 2020 |
||||||||||||||||
|
Less Than 12 Months |
12 Months or Longer |
|||||||||||||||
|
Gross |
Gross |
|||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||
|
Value |
Losses |
Value |
Losses |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Municipal obligations |
$ | 9,520 | $ | (118 | ) | $ | - | $ | - | |||||||
|
Corporate obligations |
5,036 | (304 | ) | - | - | |||||||||||
|
Mortgage-backed securities and collateralized mortgage obligations |
13,815 | (291 | ) | 2,740 | (29 | ) | ||||||||||
|
Asset-backed securities |
6,967 | (478 | ) | 9,061 | (993 | ) | ||||||||||
|
Total |
$ | 35,338 | $ | (1,191 | ) | $ | 11,801 | $ | (1,022 | ) | ||||||
NOTE 3. INVESTMENT SECURITIES – continued
|
December 31, 2019 |
||||||||||||||||
|
Less Than 12 Months |
12 Months or Longer |
|||||||||||||||
|
Gross |
Gross |
|||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||
|
Value |
Losses |
Value |
Losses |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Municipal obligations |
$ | 11,142 | $ | (93 | ) | $ | - | $ | - | |||||||
|
Corporate obligations |
- | - | 992 | (8 | ) | |||||||||||
|
Mortgage-backed securities and collateralized mortgage obligations |
9,868 | (35 | ) | 7,968 | (78 | ) | ||||||||||
|
Asset-backed securities |
940 | (33 | ) | 8,900 | (238 | ) | ||||||||||
|
Total |
$ | 21,950 | $ | (161 | ) | $ | 17,860 | $ | (324 | ) | ||||||
Unrealized losses associated with investments are believed to be caused by changing market conditions, primarily spreads related to U.S. treasuries, that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the three months ended March 31, 2020, or 2019. As of March 31, 2020 and December 31, 2019, there were, respectively, 58 and 28 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.
As of March 31, 2020, 27 U.S. government and agency securities and municipal obligations had unrealized losses of approximately 1.22% of the fair value associated with these securities. At December 31, 2019, 10 U.S. government and agency securities and municipal obligations had unrealized losses of approximately 0.83% of the fair value associated with these securities. As of March 31, 2020, 6 corporate obligations had unrealized losses of approximately 5.69% of the fair value associated with these securities. At December 31, 2019, 1 corporate obligation had an unrealized loss of approximately 0.80% of the fair value associated with these securities. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.
As of March 31, 2020, 15 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses of approximately 1.90% of the fair value associated with these securities. At December 31, 2019, 12 MBSs and CMOs had unrealized losses of approximately 0.63% of the fair value associated with these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.
As of March 31, 2020, 10 asset-backed securities (“ABSs”) had unrealized losses of approximately 8.41% of the fair value associated with these securities. At December 31, 2019, 5 ABSs had unrealized losses of approximately 2.68% of the fair value associated with these securities. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.
NOTE 4. LOANS RECEIVABLE
Loans receivable consisted of the following:
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
$ | 160,047 | $ | 157,898 | ||||
|
Commercial real estate |
455,620 | 434,025 | ||||||
|
Other loans: |
||||||||
|
Home equity |
57,752 | 56,414 | ||||||
|
Consumer |
19,924 | 18,882 | ||||||
|
Commercial |
129,876 | 113,319 | ||||||
|
Total |
823,219 | 780,538 | ||||||
|
Deferred loan fees, net |
(1,185 | ) | (1,303 | ) | ||||
|
Allowance for loan losses |
(9,250 | ) | (8,600 | ) | ||||
|
Total loans, net |
$ | 812,784 | $ | 770,635 | ||||
Within the loan categories above, $11,610,000 and $13,602,000 was guaranteed by the United States Department of Agriculture Rural Development at March 31, 2020 and December 31, 2019, respectively. Also within the loan categories above, $8,686,000 and $5,701,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at March 31, 2020 and December 31, 2019, respectively.
NOTE 4. LOANS RECEIVABLE – continued
Allowance for loan losses activity was as follows:
|
Residential |
Commercial |
Home |
||||||||||||||||||||||
|
1-4 Family |
Real Estate |
Equity |
Consumer |
Commercial |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance, January 1, 2020 |
$ | 1,301 | $ | 4,826 | $ | 477 | $ | 284 | $ | 1,712 | $ | 8,600 | ||||||||||||
|
Charge-offs |
- | (18 | ) | - | (8 | ) | (10 | ) | (36 | ) | ||||||||||||||
|
Recoveries |
- | 6 | - | 8 | 2 | 16 | ||||||||||||||||||
|
Provision |
- | 400 | - | 70 | 200 | 670 | ||||||||||||||||||
|
Ending balance, March 31, 2020 |
$ | 1,301 | $ | 5,214 | $ | 477 | $ | 354 | $ | 1,904 | $ | 9,250 | ||||||||||||
|
Ending balance, March 31, 2020 allocated to loans individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | 74 | $ | 74 | ||||||||||||
|
Ending balance, March 31, 2020 allocated to loans collectively evaluated for impairment |
$ | 1,301 | $ | 5,214 | $ | 477 | $ | 354 | $ | 1,830 | $ | 9,176 | ||||||||||||
|
Loans receivable: |
||||||||||||||||||||||||
|
Ending balance, March 31, 2020 |
$ | 160,047 | $ | 455,620 | $ | 57,752 | $ | 19,924 | $ | 129,876 | $ | 823,219 | ||||||||||||
|
Ending balance, March 31, 2020 of loans individually evaluated for impairment |
$ | 1,074 | $ | 2,115 | $ | 136 | $ | 179 | $ | 1,489 | $ | 4,993 | ||||||||||||
|
Ending balance, March 31, 2020 of loans collectively evaluated for impairment |
$ | 158,973 | $ | 453,505 | $ | 57,616 | $ | 19,745 | $ | 128,387 | $ | 818,226 | ||||||||||||
|
Residential |
Commercial |
Home |
||||||||||||||||||||||
|
1-4 Family |
Real Estate |
Equity |
Consumer |
Commercial |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Beginning balance, January, 1 2019 |
$ | 1,301 | $ | 3,593 | $ | 477 | $ | 190 | $ | 1,039 | $ | 6,600 | ||||||||||||
|
Charge-offs |
- | (20 | ) | - | (9 | ) | (95 | ) | (124 | ) | ||||||||||||||
|
Recoveries |
- | 6 | - | 6 | 8 | 20 | ||||||||||||||||||
|
Provision |
- | 344 | - | 10 | 250 | 604 | ||||||||||||||||||
|
Ending balance, March 31, 2019 |
$ | 1,301 | $ | 3,923 | $ | 477 | $ | 197 | $ | 1,202 | $ | 7,100 | ||||||||||||
|
Ending balance, March 31, 2019 allocated to loans individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Ending balance, March 31, 2019 allocated to loans collectively evaluated for impairment |
$ | 1,301 | $ | 3,923 | $ | 477 | $ | 197 | $ | 1,202 | $ | 7,100 | ||||||||||||
|
Loans receivable: |
||||||||||||||||||||||||
|
Ending balance, March 31, 2019 |
$ | 144,313 | $ | 394,988 | $ | 54,637 | $ | 19,043 | $ | 116,122 | $ | 729,103 | ||||||||||||
|
Ending balance, March 31, 2019 of loans individually evaluated for impairment |
$ | 984 | $ | 1,239 | $ | 433 | $ | 129 | $ | 1,743 | $ | 4,528 | ||||||||||||
|
Ending balance, March 31, 2019 of loans collectively evaluated for impairment |
$ | 143,329 | $ | 393,749 | $ | 54,204 | $ | 18,914 | $ | 114,379 | $ | 724,575 | ||||||||||||
NOTE 4. LOANS RECEIVABLE – continued
Internal classification of the loan portfolio was as follows:
|
March 31, 2020 |
||||||||||||||||||||||||
|
Special |
||||||||||||||||||||||||
|
Pass |
Mention |
Substandard |
Doubtful |
Loss |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Real estate loans: |
||||||||||||||||||||||||
|
Residential 1-4 family |
$ | 121,510 | $ | - | $ | 1,140 | $ | - | $ | - | $ | 122,650 | ||||||||||||
|
Residential 1-4 family construction |
37,060 | - | 337 | - | - | 37,397 | ||||||||||||||||||
|
Commercial real estate |
334,121 | 185 | 2,913 | - | - | 337,219 | ||||||||||||||||||
|
Commercial construction and development |
55,756 | 94 | - | - | - | 55,850 | ||||||||||||||||||
|
Farmland |
61,645 | 83 | 770 | 53 | - | 62,551 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
|
Home equity |
57,517 | 99 | 136 | - | - | 57,752 | ||||||||||||||||||
|
Consumer |
19,745 | - | 179 | - | - | 19,924 | ||||||||||||||||||
|
Commercial |
76,043 | 958 | 697 | - | - | 77,698 | ||||||||||||||||||
|
Agricultural |
50,740 | 121 | 881 | 436 | - | 52,178 | ||||||||||||||||||
|
Total |
$ | 814,137 | $ | 1,540 | $ | 7,053 | $ | 489 | $ | - | $ | 823,219 | ||||||||||||
|
December 31, 2019 |
||||||||||||||||||||||||
|
Special |
||||||||||||||||||||||||
|
Pass |
Mention |
Substandard |
Doubtful |
Loss |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Real estate loans: |
||||||||||||||||||||||||
|
Residential 1-4 family |
$ | 118,116 | $ | - | $ | 1,180 | $ | - | $ | - | $ | 119,296 | ||||||||||||
|
Residential 1-4 family construction |
38,265 | - | 337 | - | - | 38,602 | ||||||||||||||||||
|
Commercial real estate |
328,750 | - | 2,312 | - | - | 331,062 | ||||||||||||||||||
|
Commercial construction and development |
52,620 | - | 50 | - | - | 52,670 | ||||||||||||||||||
|
Farmland |
49,959 | 108 | 168 | 58 | - | 50,293 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
|
Home equity |
56,039 | 78 | 297 | - | - | 56,414 | ||||||||||||||||||
|
Consumer |
18,694 | - | 188 | - | - | 18,882 | ||||||||||||||||||
|
Commercial |
71,868 | 159 | 707 | 63 | - | 72,797 | ||||||||||||||||||
|
Agricultural |
39,347 | 138 | 570 | 467 | - | 40,522 | ||||||||||||||||||
|
Total |
$ | 773,658 | $ | 483 | $ | 5,809 | $ | 588 | $ | - | $ | 780,538 | ||||||||||||
NOTE 4. LOANS RECEIVABLE – continued
The following tables include information regarding delinquencies within the loan portfolio.
|
March 31, 2020 |
||||||||||||||||||||||||
|
Loans Past Due and Still Accruing |
||||||||||||||||||||||||
|
90 Days |
||||||||||||||||||||||||
|
30-89 Days |
and |
Non-Accrual |
Current |
Total |
||||||||||||||||||||
|
Past Due |
Greater |
Total |
Loans |
Loans |
Loans |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Real estate loans: |
||||||||||||||||||||||||
|
Residential 1-4 family |
$ | 1,656 | $ | 127 | $ | 1,783 | $ | 737 | $ | 120,130 | $ | 122,650 | ||||||||||||
|
Residential 1-4 family construction |
32 | 99 | 131 | 337 | 36,929 | 37,397 | ||||||||||||||||||
|
Commercial real estate |
2,863 | - | 2,863 | 971 | 333,385 | 337,219 | ||||||||||||||||||
|
Commercial construction and development |
70 | - | 70 | - | 55,780 | 55,850 | ||||||||||||||||||
|
Farmland |
371 | 379 | 750 | 1,050 | 60,751 | 62,551 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
|
Home equity |
169 | - | 169 | 136 | 57,447 | 57,752 | ||||||||||||||||||
|
Consumer |
133 | - | 133 | 179 | 19,612 | 19,924 | ||||||||||||||||||
|
Commercial |
327 | 210 | 537 | 707 | 76,454 | 77,698 | ||||||||||||||||||
|
Agricultural |
228 | 128 | 356 | 782 | 51,040 | 52,178 | ||||||||||||||||||
|
Total |
$ | 5,849 | $ | 943 | $ | 6,792 | $ | 4,899 | $ | 811,528 | $ | 823,219 | ||||||||||||
|
December 31, 2019 |
||||||||||||||||||||||||
|
Loans Past Due and Still Accruing |
||||||||||||||||||||||||
|
90 Days |
||||||||||||||||||||||||
|
30-89 Days |
and |
Non-Accrual |
Current |
Total |
||||||||||||||||||||
|
Past Due |
Greater |
Total |
Loans |
Loans |
Loans |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Real estate loans: |
||||||||||||||||||||||||
|
Residential 1-4 family |
$ | 702 | $ | 4 | $ | 706 | $ | 618 | $ | 117,972 | $ | 119,296 | ||||||||||||
|
Residential 1-4 family construction |
260 | - | 260 | 337 | 38,005 | 38,602 | ||||||||||||||||||
|
Commercial real estate |
793 | - | 793 | 583 | 329,686 | 331,062 | ||||||||||||||||||
|
Commercial construction and development |
72 | - | 72 | 50 | 52,548 | 52,670 | ||||||||||||||||||
|
Farmland |
1,039 | - | 1,039 | 476 | 48,778 | 50,293 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
|
Home equity |
420 | - | 420 | 98 | 55,896 | 56,414 | ||||||||||||||||||
|
Consumer |
128 | - | 128 | 156 | 18,598 | 18,882 | ||||||||||||||||||
|
Commercial |
484 | - | 484 | 824 | 71,489 | 72,797 | ||||||||||||||||||
|
Agricultural |
702 | 1,805 | 2,507 | 499 | 37,516 | 40,522 | ||||||||||||||||||
|
Total |
$ | 4,600 | $ | 1,809 | $ | 6,409 | $ | 3,641 | $ | 770,488 | $ | 780,538 | ||||||||||||
NOTE 4. LOANS RECEIVABLE – continued
The following tables include information regarding impaired loans.
|
March 31, 2020 |
||||||||||||
|
Unpaid |
||||||||||||
|
Recorded |
Principal |
Related |
||||||||||
|
Investment |
Balance |
Allowance |
||||||||||
|
(In Thousands) |
||||||||||||
|
Real estate loans: |
||||||||||||
|
Residential 1-4 family |
$ | 737 | $ | 793 | $ | - | ||||||
|
Residential 1-4 family construction |
337 | 387 | - | |||||||||
|
Commercial real estate |
971 | 1,170 | - | |||||||||
|
Commercial construction and development |
94 | 94 | - | |||||||||
|
Farmland |
1,050 | 1,092 | - | |||||||||
|
Other loans: |
||||||||||||
|
Home equity |
136 | 157 | - | |||||||||
|
Consumer |
179 | 195 | - | |||||||||
|
Commercial |
707 | 750 | 74 | |||||||||
|
Agricultural |
782 | 1,047 | - | |||||||||
|
Total |
$ | 4,993 | $ | 5,685 | $ | 74 | ||||||
|
December 31, 2019 |
||||||||||||
|
Unpaid |
||||||||||||
|
Recorded |
Principal |
Related |
||||||||||
|
Investment |
Balance |
Allowance |
||||||||||
|
(In Thousands) |
||||||||||||
|
Real estate loans: |
||||||||||||
|
Residential 1-4 family |
$ | 618 | $ | 657 | $ | - | ||||||
|
Residential 1-4 family construction |
337 | 387 | - | |||||||||
|
Commercial real estate |
583 | 766 | - | |||||||||
|
Commercial construction and development |
50 | 225 | - | |||||||||
|
Farmland |
476 | 513 | - | |||||||||
|
Other loans: |
||||||||||||
|
Home equity |
98 | 115 | - | |||||||||
|
Consumer |
156 | 169 | - | |||||||||
|
Commercial |
824 | 887 | 74 | |||||||||
|
Agricultural |
499 | 756 | - | |||||||||
|
Total |
$ | 3,641 | $ | 4,475 | $ | 74 | ||||||
NOTE 4. LOANS RECEIVABLE – continued
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Average Recorded Investment |
||||||||
|
(In Thousands) |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
$ | 677 | $ | 301 | ||||
|
Residential 1-4 family construction |
337 | 634 | ||||||
|
Commercial real estate |
777 | 490 | ||||||
|
Commercial construction and development |
72 | 7 | ||||||
|
Farmland |
763 | 346 | ||||||
|
Other loans: |
||||||||
|
Home equity |
117 | 462 | ||||||
|
Consumer |
167 | 128 | ||||||
|
Commercial |
766 | 563 | ||||||
|
Agricultural |
641 | 478 | ||||||
|
Total |
$ | 4,317 | $ | 3,409 | ||||
Interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019 is considered insignificant. Interest payments received related to impaired loans were $454,000 and $394,000 for March 31, 2020 and December 31, 2019, respectively.
As of March 31, 2020 and December 31, 2019, there were troubled debt restructured (“TDR”) loans of $340,000 and $246,000, respectively.
During the three months ended March 31, 2020, there was one new TDR loan. The recorded investment for the commercial construction and development loan at time of restructure was $94,000. No charge-offs were incurred and the loan is on accrual status.
During the year ended December 31, 2019, there were two new TDR loans. The recorded investments at time of restructure were $76,000 for a commercial loan and $153,000 for a farmland loan. No charge-offs were incurred and the loans are on non-accrual status. The recorded investments were $74,000 and $153,000, respectively at March 31, 2020.
There were no loans modified as TDR’s that defaulted during the three months ended March 31, 2020 where the default occurred within 12 months of restructuring. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.
As of March 31, 2020, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in troubled debt restructures.
NOTE 5. MORTGAGE SERVICING RIGHTS
The Company is servicing mortgage loans for the benefit of others which are not included in the consolidated statements of financial condition and have unpaid principal balances of $1,217,718,000 and $1,169,869,000 at March 31, 2020 and December 31, 2019, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Mortgage loan servicing fees were $739,000 and $612,000 for the three months ended March 31, 2020 and 2019, respectively. These fees, net of amortization, are included mortgage banking, net which is a component of noninterest income on the consolidated statements of income.
Custodial balances maintained in connection with the foregoing loan servicing, and included in noninterest checking deposits, were $12,708,000 and $8,402,000 at March 31, 2020 and December 31, 2019, respectively.
The following table is a summary of activity in mortgage servicing rights:
|
As of or For the |
||||||||
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Mortgage servicing rights: |
||||||||
|
Beginning balance |
$ | 8,739 | $ | 7,100 | ||||
|
Mortgage servicing rights capitalized |
943 | 465 | ||||||
|
Amortization of mortgage servicing rights |
(511 | ) | (247 | ) | ||||
|
Ending balance |
$ | 9,171 | $ | 7,318 | ||||
|
Valuation allowance: |
||||||||
|
Beginning balance |
- | - | ||||||
|
Impairment of servicing rights |
(153 | ) | - | |||||
|
Ending balance |
(153 | ) | - | |||||
|
Mortgage servicing rights, net |
$ | 9,018 | $ | 7,318 | ||||
Impairment of servicing rights is included in other noninterest expense on the consolidated statements of income.
The fair values of these rights were $9,018,000 and $9,835,000 at March 31, 2020 and December 31, 2019, respectively. The fair value of servicing rights was determined at loan level, depending on the interest rate and term of the specific loan, using the following valuation assumptions:
|
March 31, |
December 31, |
|||||||||
|
2020 |
2019 |
|||||||||
|
Key assumptions: |
||||||||||
|
Discount rate |
12% |
|
12% |
|
||||||
|
Prepayment speed range |
128 | - | 256% |
|
110 | - | 246% |
|
||
|
Weighted average prepayment speed |
231% |
|
171% |
|
||||||
NOTE 6. DEPOSITS
Deposits are summarized as follows:
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Noninterest checking |
$ | 223,723 | $ | 200,035 | ||||
|
Interest bearing checking |
133,493 | 116,397 | ||||||
|
Savings |
146,477 | 126,991 | ||||||
|
Money market |
155,996 | 132,506 | ||||||
|
Time certificates of deposit |
228,536 | 233,064 | ||||||
|
Total |
$ | 888,225 | $ | 808,993 | ||||
Time certificates of deposits include $3,808,000 and $10,180,000 related to fixed rate brokered CDs at March 31, 2020 and December 31, 2019, respectively. In addition, time certificates of deposits include $6,000,000 and $16,000,000 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at March 31, 2020 and December 31, 2019, respectively.
NOTE 7. OTHER LONG-TERM DEBT
Other long-term debt consisted of the following:
|
March 31, 2020 |
December 31, 2019 |
|||||||||||||||
|
Unamortized |
Unamortized |
|||||||||||||||
|
Debt |
Debt |
|||||||||||||||
|
Principal |
Issuance |
Principal |
Issuance |
|||||||||||||
|
Amount |
Costs |
Amount |
Costs |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Senior notes fixed at 5.75%, due 2022 |
$ | 10,000 | $ | (81 | ) | $ | 10,000 | $ | (92 | ) | ||||||
|
Subordinated debentures fixed at 6.75%, due 2025 |
10,000 | (117 | ) | 10,000 | (122 | ) | ||||||||||
|
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035 |
5,155 | - | 5,155 | - | ||||||||||||
|
Total other long-term debt |
$ | 25,155 | $ | (198 | ) | $ | 25,155 | $ | (214 | ) | ||||||
In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The interest will be paid semi-annually through maturity date. The notes are not subject to redemption at the option of the Company.
In June 2015, the Company completed the issuance of $10,000,000 in aggregate principal amount of subordinated notes due in 2025 in a private placement transaction to an institutional accredited investor. The notes will bear interest at an annual fixed rate of 6.75% and interest will be paid quarterly through maturity date or earlier redemption. The notes are subject to redemption at the option of the Company on or after June 19, 2020.
NOTE 7. OTHER LONG-TERM DEBT – continued
In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to the Trust. The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 2.871% and 3.328% as of March 31, 2020 and December 31, 2019, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date.
For the three months ended March 31, 2020 and 2019, interest expense on all other long-term debt was $352,000 and $365,000, respectively.
NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table includes information regarding the activity in accumulated other comprehensive income (loss).
|
Unrealized |
||||||||||||
|
Unrealized |
Gains (Losses) |
|||||||||||
|
Gains (Losses) |
on Investment |
|||||||||||
|
on Loans |
Securities |
|||||||||||
|
Held-for-Sale |
Available-for-Sale |
Total |
||||||||||
|
(In Thousands) |
||||||||||||
|
Balance, January 1, 2020 |
$ | - | $ | 1,329 | $ | 1,329 | ||||||
|
Other comprehensive income, before reclassifications and income taxes |
- | 205 | 205 | |||||||||
|
Amounts reclassified from accumulated other comprehensive income, before income taxes |
- | - | - | |||||||||
|
Income tax provision |
- | (54 | ) | (54 | ) | |||||||
|
Total other comprehensive income |
- | 151 | 151 | |||||||||
|
Balance, March 31, 2020 |
$ | - | $ | 1,480 | $ | 1,480 | ||||||
|
Balance, January 1, 2019 |
$ | 227 | $ | (1,338 | ) | $ | (1,111 | ) | ||||
|
Other comprehensive income, before reclassifications and income taxes |
296 | 1,486 | 1,782 | |||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss), before income taxes |
(309 | ) | 55 | (254 | ) | |||||||
|
Income tax benefit (provision) |
4 | (407 | ) | (403 | ) | |||||||
|
Total other comprehensive (loss) income |
(9 | ) | 1,134 | 1,125 | ||||||||
|
Balance, March 31, 2019 |
$ | 218 | $ | (204 | ) | $ | 14 | |||||
NOTE 9. EARNINGS PER SHARE
The computations of basic and diluted earnings per share are as follows:
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
(Dollars in Thousands, Except Per Share Data) |
||||||||
|
Basic weighted average shares outstanding |
6,818,883 | 6,450,326 | ||||||
|
Dilutive effect of stock compensation |
12,042 | 60,160 | ||||||
|
Diluted weighted average shares outstanding |
6,830,925 | 6,510,486 | ||||||
|
Net income available to common shareholders |
$ | 3,927 | $ | 1,183 | ||||
|
Basic earnings per share |
$ | 0.58 | $ | 0.18 | ||||
|
Diluted earnings per share |
$ | 0.57 | $ | 0.18 | ||||
There were no anti-dilutive shares at March 31, 2020 and December 31, 2019.
NOTE 10. DIVIDENDS AND STOCK REPURCHASE PROGRAM
Dividends
For the year ended December 31, 2019, Eagle paid dividends of $0.0925 per share for the quarters ended March 31 and June 30, 2019. Eagle paid dividends of $0.095 per share for the quarters ended September 30 and December 31, 2019. A dividend of $0.095 per share was declared on January 23, 2020 and paid on March 6, 2020 to shareholders of record on February 14, 2020. A dividend of $0.095 per share was declared on April 23, 2020, payable on June 5, 2020 to shareholders of record on May 15, 2020.
Stock Repurchase Program
On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. The plan expires on July 18, 2020.
On July 19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2018. However, during the first quarter of 2019, 42,000 shares were purchased at an average price of $17.43 per share. In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $17.09 per share. The plan expired on July 19, 2019.
NOTE 11. DERIVATIVES AND HEDGING ACTIVITIES
The Company enters into commitments to originate and sell mortgage loans. The Bank uses derivatives to hedge the risk of changes in fair values of interest rate lock commitments and mortgage loans held-for-sale. An optimal amount of mortgage loans are sold directly into bulk commitments with investors at the time an interest rate is locked, other loans are sold on an individual best efforts basis at the time an interest rate is locked, and the remaining balance of locked loans are hedged using To-Be-Announced (“TBA”) mortgage-backed securities or bulk mandatory forward loan sale commitments.
Derivatives are accounted for as free-standing or economic derivatives and are measured at fair value. Derivatives are recorded as either other assets or other liabilities on the consolidated statements of condition.
Derivatives are summarized as follows:
|
March 31, 2020 |
December 31, 2019 |
|||||||||||||||||||||||
|
Notional |
Fair Value |
Notional |
Fair Value |
|||||||||||||||||||||
|
Amount |
Asset |
Liability |
Amount |
Asset |
Liability |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Interest rate lock commitments |
$ | 187,583 | $ | 4,451 | $ | - | $ | 48,303 | $ | 554 | $ | - | ||||||||||||
|
Forward TBA mortgage-backed securities |
99,000 | - | 1,796 | 67,000 | - | 201 | ||||||||||||||||||
|
Mandatory forward commitments |
71,000 | - | 1,054 | - | - | - | ||||||||||||||||||
Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the consolidated statements of income. A net gain of $1,247,000 was recorded for the three months ended March 31, 2020. The Company did not record the aforementioned derivatives related to mortgage banking during the quarter ended March 31, 2019 as they were not considered significant.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Assets and liabilities that are measured at fair value are grouped in three levels within the fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
The fair value hierarchy is as follows:
|
■ |
Level 1 Inputs – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. |
|
■ |
Level 2 Inputs – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. |
|
■ |
Level 3 Inputs – Valuations are based on unobservable inputs that may include significant management judgement and estimation. |
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy at the reporting date, is set forth below.
Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include but is not limited to dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.
Loans Held-for-Sale – These loans are reported at fair value. Fair value is determined based on expected proceeds based on committed sales contracts and commitments of similar loans if not already committed and are considered Level 2 inputs.
Derivative Instruments – The fair value of the interest rate lock commitments, forward TBA mortgage-backed securities and mandatory forward commitments are estimated using quoted or published market prices for similar instruments and adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. Interest rate lock commitments are considered Level 3 inputs and forward TBA mortgage-backed securities and mandatory forward commitments are considered Level 2 inputs.
Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral or using a discounted cash flow if the loan is not collateral dependent. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.
Real Estate and Other Repossessed Assets – Fair values are determined at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based primarily on third party appraisals, less costs to sell and are considered Level 3 inputs for determining fair value. Repossessed assets are reviewed and evaluated periodically for additional impairment and adjusted accordingly.
Mortgage Servicing Rights – The fair value of mortgage servicing rights are estimated using net present value of expected cash flows based on a third party model that incorporates industry assumptions and is adjusted for factors such as prepayments speeds and are considered level 3 inputs.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
|
March 31, 2020 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Financial assets: |
||||||||||||||||
|
Available-for-sale securities |
||||||||||||||||
|
U.S. government and agency |
$ | - | $ | 15,867 | $ | - | $ | 15,867 | ||||||||
|
Municipal obligations |
- | 72,684 | - | 72,684 | ||||||||||||
|
Corporate obligations |
- | 8,069 | - | 8,069 | ||||||||||||
|
Mortgage-backed securities |
- | 10,128 | - | 10,128 | ||||||||||||
|
Collateralized mortgage obligations |
- | 45,128 | - | 45,128 | ||||||||||||
|
Asset-backed securities |
- | 16,028 | - | 16,028 | ||||||||||||
|
Loans held-for-sale |
- | 25,187 | - | 25,187 | ||||||||||||
|
Interest rate lock commitments |
- | - | 4,451 | 4,451 | ||||||||||||
|
Financial liabilities: |
||||||||||||||||
|
Forward TBA mortgage-backed securities |
- | 1,796 | - | 1,796 | ||||||||||||
|
Mandatory forward commitments |
- | 1,054 | - | 1,054 | ||||||||||||
|
December 31, 2019 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Financial assets: |
||||||||||||||||
|
Available-for-sale securities |
||||||||||||||||
|
U.S. government and agency |
$ | - | $ | 13,597 | $ | - | $ | 13,597 | ||||||||
|
Municipal obligations |
- | 52,222 | - | 52,222 | ||||||||||||
|
Corporate obligations |
- | 8,388 | - | 8,388 | ||||||||||||
|
Mortgage-backed securities |
- | 9,495 | - | 9,495 | ||||||||||||
|
Collateralized mortgage obligations |
- | 33,334 | - | 33,334 | ||||||||||||
|
Asset-backed securities |
- | 9,839 | - | 9,839 | ||||||||||||
|
Loans held-for-sale |
- | 25,612 | - | 25,612 | ||||||||||||
|
Interest rate lock commitments |
- | - | 554 | 554 | ||||||||||||
|
Financial liabilities: |
||||||||||||||||
|
Forward TBA mortgage-backed securities |
- | 201 | - | 201 | ||||||||||||
|
Mandatory forward commitments |
- | - | - | - | ||||||||||||
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent, real estate and other repossessed assets and mortgage servicing rights.
The following table summarizes financial assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods presented:
|
March 31, 2020 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Impaired loans |
$ | - | $ | - | $ | 59 | $ | 59 | ||||||||
|
Real estate and other repossessed assets |
- | - | - | - | ||||||||||||
|
Mortgage servicing rights |
- | - | 9,018 | 9,018 | ||||||||||||
|
December 31, 2019 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Impaired loans |
$ | - | $ | - | $ | 491 | $ | 491 | ||||||||
|
Real estate and other repossessed assets |
- | - | 25 | 25 | ||||||||||||
|
Mortgage servicing rights |
- | - | - | - | ||||||||||||
The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs.
|
Principal |
Significant |
Range of |
|||||||
|
Valuation |
Unobservable |
Signficant Input |
|||||||
|
Instrument |
Technique |
Inputs |
Values |
||||||
|
Impaired loans |
Fair value of underlying collateral |
|
Discount applied to the obtained appraisal |
10 | - | 30% | |||
|
Real estate and other repossessed assets |
Fair value of collateral |
Discount applied to the obtained appraisal |
10 | - | 30% | ||||
|
Mortgage servicing rights |
Discounted cash flows |
Discount rate Prepayment speeds |
10 100 |
- - |
15% 300% |
||||
| Interest rate lock commitments | Internal pricing model | Pull-through expectations | 80 | - | 90% | ||||
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis.
|
Interest |
||||
|
Rate Lock |
||||
|
Commitments |
||||
|
(In Thousands) |
||||
|
Balance, January 1, 2020 |
$ | 554 | ||
|
Purchases and issuances |
5,797 | |||
|
Sales and settlements |
(1,900 | ) | ||
|
Balance, March 31, 2020 |
$ | 4,451 | ||
|
Net change in unrealized gains relating to items held at end of period |
$ | 3,897 | ||
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The tables below summarize the estimated fair values of financial instruments of the Company, whether or not recognized at fair value on the consolidated statements of condition. The tables are followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.
|
March 31, 2020 |
||||||||||||||||||||
|
Total |
||||||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Estimated |
Carrying |
||||||||||||||||
|
Inputs |
Inputs |
Inputs |
Fair Value |
Amount |
||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 19,773 | $ | - | $ | - | $ | 19,773 | $ | 19,773 | ||||||||||
|
FHLB stock |
5,161 | - | - | 5,161 | 5,161 | |||||||||||||||
|
FRB stock |
2,601 | - | - | 2,601 | 2,601 | |||||||||||||||
|
Loans receivable, net |
- | - | 814,328 | 814,328 | 812,784 | |||||||||||||||
|
Accrued interest and dividends receivable |
5,329 | - | - | 5,329 | 5,329 | |||||||||||||||
|
Mortgage servicing rights |
- | - | 9,018 | 9,018 | 9,018 | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Non-maturing interest bearing deposits |
- | 435,966 | - | 435,966 | 435,966 | |||||||||||||||
|
Noninterest bearing deposits |
223,723 | - | - | 223,723 | 223,723 | |||||||||||||||
|
Time certificates of deposit |
- | - | 230,227 | 230,227 | 228,536 | |||||||||||||||
|
Accrued expenses and other liabilities |
14,217 | - | - | 14,217 | 14,217 | |||||||||||||||
|
FHLB advances and other borrowings |
- | - | 95,143 | 95,143 | 94,585 | |||||||||||||||
|
Other long-term debt |
- | - | 25,390 | 25,390 | 25,155 | |||||||||||||||
|
December 31, 2019 |
||||||||||||||||||||
|
Total |
||||||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Estimated |
Carrying |
||||||||||||||||
|
Inputs |
Inputs |
Inputs |
Fair Value |
Amount |
||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 24,918 | $ | - | $ | - | $ | 24,918 | $ | 24,918 | ||||||||||
|
FHLB stock |
4,683 | - | - | 4,683 | 4,683 | |||||||||||||||
|
FRB stock |
2,526 | - | - | 2,526 | 2,526 | |||||||||||||||
|
Loans receivable, net |
- | - | 770,327 | 770,327 | 770,635 | |||||||||||||||
|
Accrued interest and dividends receivable |
4,577 | - | - | 4,577 | 4,577 | |||||||||||||||
|
Mortgage servicing rights |
- | - | 9,835 | 9,835 | 8,739 | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Non-maturing interest bearing deposits |
- | 375,894 | - | 375,894 | 375,894 | |||||||||||||||
|
Noninterest bearing deposits |
200,035 | - | - | 200,035 | 200,035 | |||||||||||||||
|
Time certificates of deposit |
- | - | 233,041 | 233,041 | 233,064 | |||||||||||||||
|
Accrued expenses and other liabilities |
9,624 | - | - | 9,624 | 9,624 | |||||||||||||||
|
FHLB advances and other borrowings |
- | - | 88,447 | 88,447 | 88,350 | |||||||||||||||
|
Other long-term debt |
- | - | 24,661 | 24,661 | 25,155 | |||||||||||||||
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard requires organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also requires qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and was adopted by the Company in the first quarter of 2019. The adoption of the standard did not have a significant impact on our consolidated financial statements. The Company’s operating leases primarily relate to branch locations. We currently lease six locations that are full-service branches and one mortgage lending branch. The leases expire on various dates through 2028. As a result of adopting the lease standard on January 1, 2019, the Company recorded right-of-use assets of $2,374,000 and corresponding lease liabilities. The right-of-use assets are included in premises and equipment, net and the lease liabilities are included in accrued expenses and other liabilities on the consolidated statement of financial condition.
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this standard in the first quarter of 2019 did not have a significant impact on our consolidated financial statements, as we typically do not invest in these types of securities.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) to remove disclosure requirements that no longer are considered cost beneficial, modify/clarify specific requirements of certain disclosures and add disclosure requirements identified as relevant. The amendment became effective for the Company on January 1, 2020 and did not have a significant impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
In October 2019, the FASB amended the effective date of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS – continued
The Company believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is continuing to evaluate the significance of that impact, even though the adoption date has been deferred. In that regard, we have established a working group under the direction of our Chief Financial Officer and Chief Credit Officer. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan and lease losses as a result of changing from an “incurred loss” model to an “expected loss” model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance is effective for the Company on January 1, 2023 and adoption of the standard is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Bank is currently evaluating this guidance to determine the date of adoption and the potential impact.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company’s primary business activity is the ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”). The Bank is a Montana chartered commercial bank that focuses on both consumer and commercial lending. It engages in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense. The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by changes in market interest rates. The Bank also generates noninterest income in the form of fee income and gain on sale of loans.
The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by single-family residential mortgages, which has enabled it to successfully market home equity loans, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years, the Bank has also focused on adding commercial loans to its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s dependence on the residential mortgage market, as well as to improve its ability to manage its spread. Recent acquisitions have added to our agricultural loans, which generally have shorter maturities and nominally higher interest rates. This has provided additional interest income and improved interest rate sensitivity. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income. Fee income is also supplemented with fees generated from the Bank’s deposit accounts. The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread. Non-maturity deposits and certificates of deposits do not automatically reprice as interest rates rise. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.
The Company previously offered wealth management services through financial advisors employed by the Bank. Income from wealth management services was included in noninterest income on the consolidated statement of income. The company discontinued its wealth management services during July of 2019.
Management continues to focus on improving the Bank’s earnings. Management believes the Bank needs to continue to concentrate on increasing net interest margin, other areas of fee income and control of operating expenses to achieve earnings growth going forward. Management’s strategy of growing the bank’s loan portfolio and deposit base is expected to help achieve these goals as follows: loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to the strategy is funding the growth of the Bank’s balance sheet in an efficient manner. Though deposit growth has been steady, it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.
The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee changed the federal funds target rate from 2.50% to 1.75% during the year ended December 31, 2019. The rate decreased from 1.75% to 0.25% during the three months ended March 31, 2020. The rate reductions add continued pressure on loan yields.
Recent Events
COVID-19
The first quarter performance was strong, however, the Company has begun to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. On March 28, 2020 the State of Montana implemented a Shelter-in-Place order, resulting in the closing of businesses or a substantial reduction in business activity. Recently, Montana’s governor lifted the order effective April 27, 2020, including the beginning of a phased approach to re-open businesses. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.
Restaurants, lodging, schools, childcare, health care, ranchers, farmers and entertainment industries, among others, have seen a dramatic change in revenues for their business.
Recent Events – continued
COVID-19 – continued
The bank is offering multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. As of April 30, 2020, there were 185 loans totaling $69.13 million deferring payments for 90 days, primarily from the real estate rental, accommodation and food services, and the art, entertainment and recreation industries. Approximately 113 borrowers representing $45.38 million in loans have been approved for up to 6-months interest only payments. There have been approximately 116 forbearances in process for residential mortgage loans totaling $23.92 million. Our interest income in future periods could be reduced as a result of such measures. In addition, it is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. Utilization of borrowing lines at approximately 85% remained constant at the end of the quarter compared to the previous quarter. The Paycheck Protection Program is expected to provide some temporary relief to small business customers of Eagle but the extent of the impact the pandemic will have on businesses’ ability to sustain operations is unclear at this point. Eagle will continue to closely monitor each of its loans for risk.
Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, early withdrawal fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the $349 billion Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. In April 2020, additional funding was approved for the PPP. Eagle began taking loan applications from its small business clients immediately after the program was implemented, and as of April 30, 2020, had received approvals for $43.81 million in SBA PPP loans, with 471 loans funded for $31.29 million.
As of March 31, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.
Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
As of March 31, 2020, our goodwill was not impaired. COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At March 31, 2020 we had goodwill of $20.80 million.
While all industries have and will continue to experience adverse impacts as a result of COVID-19 virus, we had exposures (on balance sheet loans and commitments to lend) in the following industry categories considered to be “at-risk” of significant impact as of March 31, 2020: storage units - $12.37 million, educational services - $2.28 million, healthcare and social assistance - $27.39 million, nursing homes - $6.10 million, casinos - $9.59 million, hotels/accommodations - $36.25 million and bars and restaurants - $17.11 million.
The Company is committed to assisting our customers and communities in this time of need. Most branch locations have converted to drive-thru only in order to ensure the health and safety of our customers and team members. The branches with lobbies open will be retrofitted with sneeze guard protective screens and our branches have been supplied with gloves and disinfectant materials for lobby, drive through and ATM equipment. All of our facilities are being deep cleaned daily. Accommodations have also been made for employees to work from home as needed. We continue to support the communities we serve as demonstrated by donations to local food banks.
Recent Events – continued
Acquisitions
The Bank has used growth through mergers or acquisition in addition to its strategy of organic growth. In September 2017, the Company entered into an Agreement and Plan of Merger with TwinCo, Inc. (“TwinCo”), a Montana corporation, and TwinCo’s wholly-owned subsidiary, Ruby Valley Bank, a Montana chartered commercial bank. Ruby Valley Bank operated two branches in Madison County, Montana. The transaction provided an opportunity to expand market presence and lending activities, particularly in agricultural lending. On January 31, 2018, TwinCo merged with and into Eagle, with Eagle continuing as the surviving corporation. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.
In August 2018, the Company entered into an Agreement and Plan of Merger with Big Muddy Bancorp, Inc. (“BMB”), a Montana corporation, and BMB’s wholly-owned subsidiary, The State Bank of Townsend, a Montana chartered commercial bank (“SBOT”). SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities, throughout the state. On January 1, 2019, BMB merged with and into Eagle, with Eagle continuing as the surviving corporation. The total consideration paid was $16.44 million and it was primarily related to common stock issued.
On August 8, 2019, Eagle and OBMT, entered into an Agreement and Plan of Merger with Western Holding Company of Wolf Point (“WHC”), a Montana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point (“WB”), a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, WHC would merge with and into Eagle, with Eagle continuing as the surviving corporation. The deal closed on January 1, 2020 after receipt of approvals from regulatory authorities, approval of WHC shareholders and the satisfaction of other closing conditions. In the transaction, Eagle acquired one retail bank branch in Wolf Point, Montana. The total consideration paid was $14.97 million and included cash consideration of $6.50 million and common stock issued of $8.47 million.
Financial Condition
Comparisons of financial condition in this section are between March 31, 2020 and December 31, 2019.
Total assets were $1.16 billion at March 31, 2020, an increase of $104.34 million, or 9.9% from $1.05 billion at December 31, 2019. The increase was largely due to the change in securities available-for sale and loans receivable which were impacted by the acquisition of WHC. Securities available-for-sale increased by $41.02 million from December 31, 2019. Loans receivable increased by $42.14 million from December 31, 2019. Total liabilities were $1.02 billion at March 31, 2020, an increase of $92.29 million, or 9.9%, from $932.60 million at December 31, 2019. The increase was mainly due to an increase in deposits which was impacted by the WHC acquisition. Total deposits increased by $79.24 million from December 31, 2019. Total shareholders’ equity increased by $12.05 million from December 31, 2019.
Balance Sheet Details
Investment Activities
The following table summarizes investment activities:
|
March 31, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Fair Value |
Percentage of Total |
Fair Value |
Percentage of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
Securities available-for-sale: |
||||||||||||||||
|
U.S. government and agency |
$ | 15,867 | 9.45 | % | $ | 13,597 | 10.72 | % | ||||||||
|
Municipal obligations |
72,684 | 43.29 | % | 52,222 | 41.17 | % | ||||||||||
|
Corporate obligations |
8,069 | 4.81 | % | 8,388 | 6.61 | % | ||||||||||
|
Mortgage-backed securities |
10,128 | 6.03 | % | 9,495 | 7.48 | % | ||||||||||
|
Collateralized mortgage obligations |
45,128 | 26.87 | % | 33,334 | 26.27 | % | ||||||||||
|
Asset-backed securities |
16,028 | 9.55 | % | 9,839 | 7.75 | % | ||||||||||
|
Total securities available-for-sale |
$ | 167,904 | 100.00 | % | $ | 126,875 | 100.00 | % | ||||||||
Securities available-for-sale were $167.90 million at March 31, 2020, an increase of $41.02 million, or 32.3%, from $126.88 million at December 31, 2019. Securities available-for-sale increased during the period mainly related to the WHC acquisition.
Financial Condition – continued
Lending Activities
The following table includes the composition of the Bank’s loan portfolio by loan category:
|
March 31, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Amount |
Percent of Total |
Amount |
Percent of Total |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||
|
Real estate loans: |
||||||||||||||||
|
Residential 1-4 family (1) |
$ | 122,650 | 14.90 | % | $ | 119,296 | 15.28 | % | ||||||||
|
Residential 1-4 family construction |
37,397 | 4.54 | % | 38,602 | 4.95 | % | ||||||||||
|
Total residential 1-4 family |
160,047 | 19.44 | % | 157,898 | 20.23 | % | ||||||||||
|
Commercial real estate |
337,219 | 40.96 | % | 331,062 | 42.41 | % | ||||||||||
|
Commercial construction and development |
55,850 | 6.78 | % | 52,670 | 6.75 | % | ||||||||||
|
Farmland |
62,551 | 7.60 | % | 50,293 | 6.44 | % | ||||||||||
|
Total commercial real estate |
455,620 | 55.34 | % | 434,025 | 55.60 | % | ||||||||||
|
Total real estate loans |
615,667 | 74.78 | % | 591,923 | 75.83 | % | ||||||||||
|
Other loans: |
||||||||||||||||
|
Home equity |
57,752 | 7.02 | % | 56,414 | 7.23 | % | ||||||||||
|
Consumer |
19,924 | 2.42 | % | 18,882 | 2.42 | % | ||||||||||
|
Commercial |
77,698 | 9.44 | % | 72,797 | 9.33 | % | ||||||||||
|
Agricultural |
52,178 | 6.34 | % | 40,522 | 5.19 | % | ||||||||||
|
Total commercial loans |
129,876 | 15.78 | % | 113,319 | 14.52 | % | ||||||||||
|
Total other loans |
207,552 | 25.22 | % | 188,615 | 24.17 | % | ||||||||||
|
Total loans |
823,219 | 100.00 | % | 780,538 | 100.00 | % | ||||||||||
|
Deferred loan fees |
(1,185 | ) | (1,303 | ) | ||||||||||||
|
Allowance for loan losses |
(9,250 | ) | (8,600 | ) | ||||||||||||
|
Total loans, net |
$ | 812,784 | $ | 770,635 | ||||||||||||
|
|
(1) |
Excludes loans held-for-sale. |
Loans receivable, net increased $42.14 million, or 5.5%, to $812.78 million at March 31, 2020 from $770.64 million at December 31, 2019 primarily due to the WHC acquisition. The WHC acquisition included $43.42 million of acquired loans. Excluding acquired loans, loans receivable decreased by $1.28 million. Including acquired loans, total commercial real estate loans increased $21.59 million, total commercial loans increased $16.56 million, total residential loans increased $2.15 million, home equity loans increased $1.34 million and consumer loans increased $1.04 million.
Financial Condition – continued
Lending Activities– continued
Total loan originations were $201.01 million for the three months ended March 31, 2020. Total residential 1-4 family originations were $142.13 million, which includes $132.23 million of loans held-for-sale originations. Total commercial real estate originations were $28.96 million. Total commercial and home equity loan originations totaled $21.33 million and $5.82 million, respectively, for the same period. Consumer loan originations totaled $2.77 million. Loans held-for-sale decreased by $425,000, to $25.19 million at March 31, 2020 from $25.61 million at December 31, 2019.
Generally, our collection procedures provide that when a loan is 15 or more days delinquent, the borrower is sent a past due notice. If the loan becomes 30 days delinquent, the borrower is sent a written delinquency notice requiring payment. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower, including face to face meetings and counseling to resolve the delinquency. All collection actions are undertaken with the objective of compliance with the Fair Debt Collection Act.
For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. Subsequent write-downs are recorded as a charge to operations. However, in light of the COVID-19 pandemic, the Bank has temporarily modified these procedures by temporarily halting foreclosures in accordance with the decree of Montana’s Governor. As of March 31, 2020 and December 31, 2019, the Bank had $60,000 and $26,000, respectively, of real estate owned and other repossessed property.
The State of Montana placed a freeze on foreclosures on March 28, 2020. Subsequently it released the freeze effective May 24, 2020 with the exception of continued protection for those individuals deemed vulnerable to the coronavirus. The Bank has had minimal impact due to foreclosures affected by this freeze.
Financial Condition – continued
Lending Activities– continued
The following table sets forth information regarding nonperforming assets:
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(Dollars in Thousands) |
||||||||
|
Non-accrual loans |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
$ | 737 | $ | 618 | ||||
|
Residential 1-4 family construction |
337 | 337 | ||||||
|
Commercial real estate |
971 | 583 | ||||||
|
Commercial construction and development |
- | 50 | ||||||
|
Farmland |
897 | 323 | ||||||
|
Other loans: |
||||||||
|
Home equity |
117 | 78 | ||||||
|
Consumer |
179 | 156 | ||||||
|
Commercial |
633 | 750 | ||||||
|
Agricultural |
782 | 499 | ||||||
|
Accruing loans delinquent 90 days or more |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
127 | 4 | ||||||
|
Residential 1-4 family construction |
99 | - | ||||||
|
Farmland |
379 | - | ||||||
|
Other loans: |
||||||||
|
Commercial |
210 | - | ||||||
|
Agricultural |
128 | 1,805 | ||||||
|
Restructured loans: |
||||||||
|
Real estate loans: |
||||||||
|
Commercial construction and development |
94 | - | ||||||
|
Farmland |
153 | 153 | ||||||
|
Other loans: |
||||||||
|
Home equity |
19 | 20 | ||||||
|
Commercial |
74 | 74 | ||||||
|
Total nonperforming loans |
5,936 | 5,450 | ||||||
|
Real estate owned and other repossessed property, net |
60 | 26 | ||||||
|
Total nonperforming assets |
$ | 5,996 | $ | 5,476 | ||||
|
Total nonperforming loans to total loans |
0.72 | % | 0.70 | % | ||||
|
Total nonperforming loans to total assets |
0.51 | % | 0.52 | % | ||||
|
Total allowance for loan loss to nonperforming loans |
155.83 | % | 157.80 | % | ||||
|
Total nonperforming assets to total assets |
0.52 | % | 0.52 | % | ||||
Non-accrual loans as of March 31, 2020 and December 31, 2019 include $1.61 million and $1.05 million, respectively of acquired loans.
Financial Condition – continued
Deposits and Other Sources of Funds
The following table includes deposit accounts by category:
|
March 31, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Percent |
Percent |
|||||||||||||||
|
Amount |
of Total |
Amount |
of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
Noninterest checking |
$ | 223,723 | 25.19 | % | $ | 200,035 | 24.72 | % | ||||||||
|
Interest bearing checking |
133,493 | 15.03 | % | 116,397 | 14.39 | % | ||||||||||
|
Savings |
146,477 | 16.49 | % | 126,991 | 15.70 | % | ||||||||||
|
Money market |
155,996 | 17.56 | % | 132,506 | 16.38 | % | ||||||||||
|
Total |
659,689 | 74.27 | % | 575,929 | 71.19 | % | ||||||||||
|
Certificates of deposit accounts: |
||||||||||||||||
|
IRA certificates |
26,956 | 3.03 | % | 25,240 | 3.12 | % | ||||||||||
|
Brokered certificates |
3,808 | 0.43 | % | 10,180 | 1.26 | % | ||||||||||
|
Other certificates |
197,772 | 22.27 | % | 197,644 | 24.43 | % | ||||||||||
|
Total certificates of deposit |
228,536 | 25.73 | % | 233,064 | 28.81 | % | ||||||||||
|
Total deposits |
$ | 888,225 | 100.00 | % | $ | 808,993 | 100.00 | % | ||||||||
Deposits increased by $79.24 million, or 9.8%, to $888.23 million at March 31, 2020 from $808.99 million at December 31, 2019. The increase was due to increased deposits as a result of the WHC acquisition. Excluding acquired deposits, total deposits decreased by $10.04 million. Including acquired deposits, noninterest checking increased by $23.69 million, money market increased by $23.49 million, savings increased by $19.49 million and interest bearing checking increased by $17.10 million. Certificates of deposit decreased by $4.53 million. The decrease in time certificates of deposit was impacted by a decrease of $6.37 million in fixed rate brokered CDs.
The following table summarizes borrowing activity:
|
March 31, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Net |
Percent |
Net |
Percent |
|||||||||||||
|
Amount |
of Total |
Amount |
of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
FHLB advances and other borrowings |
$ | 94,585 | 79.12 | % | $ | 88,350 | 77.99 | % | ||||||||
|
Other long-term debt: |
||||||||||||||||
|
Senior notes fixed at 5.75%, due 2022 |
9,919 | 8.30 | % | 9,908 | 8.74 | % | ||||||||||
|
Subordinated debentures fixed at 6.75%, due 2025 |
9,883 | 8.27 | % | 9,878 | 8.72 | % | ||||||||||
|
Subordinated debentures variable, due 2035 |
5,155 | 4.31 | % | 5,155 | 4.55 | % | ||||||||||
|
Total other long-term debt |
24,957 | 20.88 | % | 24,941 | 22.01 | % | ||||||||||
|
Total borrowings |
119,542 | 100.00 | % | 113,291 | 100.00 | % | ||||||||||
FHLB advances and other borrowings increased by $6.24 million, or 7.1%, to $94.59 million at March 31, 2020 from $88.35 million at December 31, 2019. This increase was partially due to $2.50 million assumed in the acquisition of WHC.
Shareholders’ Equity
Total shareholders’ equity increased $12.05 million, or 9.9%, to $133.71 million at March 31, 2020 from $121.66 million at December 31, 2019. This was primarily the result of stock issued in connection with the WHC acquisition of $8.47 million and net income of $3.93 million. These increases were slightly offset by dividends paid of $648,000.
Analysis of Net Interest Income
The Bank’s earnings have historically depended primarily upon net interest income, which is the difference between interest income earned on loans and investments and interest paid on deposits and any borrowed funds. It is the single largest component of Eagle’s operating income. Net interest income is affected by (i) the difference between rates of interest earned on loans and investments and rates paid on interest bearing deposits and borrowings (the “interest rate spread”) and (ii) the relative amounts of loans and investments and interest bearing deposits and borrowings.
The following table includes average balances for balance sheet items, as well as, interest and dividends and average yields related to the average balances. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.
|
For the Three Months Ended March 31, |
||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
|
Daily |
and |
Yield/ |
Daily |
and |
Yield/ |
|||||||||||||||||||
|
Balance |
Dividends |
Cost(4) |
Balance |
Dividends |
Cost(4) |
|||||||||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||||||||||
|
Assets: |
||||||||||||||||||||||||
|
Interest earning assets: |
||||||||||||||||||||||||
|
Investment securities |
$ | 171,263 | $ | 1,027 | 2.41 | % | $ | 140,801 | $ | 958 | 2.76 | % | ||||||||||||
|
FHLB and FRB stock |
7,371 | 94 | 5.12 | % | 7,122 | 95 | 5.41 | % | ||||||||||||||||
|
Loans receivable(1) |
840,427 | 11,432 | 5.46 | % | 726,657 | 10,048 | 5.61 | % | ||||||||||||||||
|
Other earning assets |
19,973 | 1.57 | % | 4,092 | 20 | 1.98 | % | |||||||||||||||||
|
Total interest earning assets |
1,039,034 | 12,631 | 4.88 | % | 878,672 | 11,121 | 5.13 | % | ||||||||||||||||
|
Noninterest earning assets |
114,701 | 88,156 | ||||||||||||||||||||||
|
Total assets |
$ | 1,153,735 | 966,828 | |||||||||||||||||||||
|
Liabilities and equity: |
||||||||||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
|
Deposit accounts: |
||||||||||||||||||||||||
|
Checking |
$ | 133,829 | $ | 18 | 0.05 | % | $ | 117,568 | $ | 11 | 0.04 | % | ||||||||||||
|
Savings |
139,302 | 46 | 0.13 | % | 118,550 | 16 | 0.05 | % | ||||||||||||||||
|
Money market |
151,392 | 176 | 0.47 | % | 121,860 | 95 | 0.32 | % | ||||||||||||||||
|
Certificates of deposit |
254,512 | 1,099 | 1.73 | % | 195,667 | 665 | 1.38 | % | ||||||||||||||||
|
Advances from FHLB and other borrowings including long-term debt |
112,758 | 2.90 | % | 125,506 | 959 | 3.10 | % | |||||||||||||||||
|
Total interest bearing liabilities |
791,793 | 2,154 | 1.09 | % | 679,151 | 1,746 | 1.04 | % | ||||||||||||||||
|
Noninterest checking |
213,753 | 171,175 | ||||||||||||||||||||||
|
Other noninterest bearing liabilities |
15,837 | 8,380 | ||||||||||||||||||||||
|
Total liabilities |
1,021,383 | 858,706 | ||||||||||||||||||||||
|
Total equity |
132,352 | 108,122 | ||||||||||||||||||||||
|
Total liabilities and equity |
$ | 1,153,735 | 966,828 | |||||||||||||||||||||
|
Net interest income/interest rate spread(2) |
10,477 | 3.79 | % | $ | 9,375 | 4.09 | % | |||||||||||||||||
|
Net interest margin(3) |
4.04 | % | 4.33 | % | ||||||||||||||||||||
|
Total interest earning assets to interest bearing liabilities |
131.23 | % | 129.38 | % | ||||||||||||||||||||
|
(1) |
Includes loans held-for-sale. |
|
(2) |
Interest rate spread represents the difference between the average yield on interest earning assets and the average rate on interest bearing liabilities. |
|
(3) |
Net interest margin represents income before the provision for loan losses divided by average interest earning assets. |
|
(4) |
For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. |
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume, which have been allocated proportionately to the change due to volume and the change due to rate.
|
For the Three Months Ended March 31, |
||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Due to |
Due to |
|||||||||||||||||||||||
|
Volume |
Rate |
Net |
Volume |
Rate |
Net |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Interest earning assets: |
||||||||||||||||||||||||
|
Investment securities |
$ | 207 | $ | (138 | ) | $ | 69 | $ | (69 | ) | $ | 38 | $ | (31 | ) | |||||||||
|
FHLB and FRB stock |
3 | (4 | ) | (1 | ) | 15 | 1 | 16 | ||||||||||||||||
|
Loans receivable(1) |
1,573 | (189 | ) | 1,384 | 1,843 | 1,333 | 3,176 | |||||||||||||||||
|
Other earning assets |
78 | (20 | ) | 58 | (5 | ) | 8 | 3 | ||||||||||||||||
|
Total interest earning assets |
1,861 | (351 | ) | 1,510 | 1,784 | 1,380 | 3,164 | |||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
|
Checking, savings and money market accounts |
27 | 91 | 118 | 12 | 39 | 51 | ||||||||||||||||||
|
Certificates of deposit |
200 | 234 | 434 | 73 | 237 | 310 | ||||||||||||||||||
|
Advances from FHLB and other borrowings including long-term debt |
(97 | ) | (47 | ) | (144 | ) | 105 | 170 | 275 | |||||||||||||||
|
Total interest bearing liabilities |
130 | 278 | 408 | 190 | 446 | 636 | ||||||||||||||||||
|
Change in net interest income |
$ | 1,731 | $ | (629 | ) | $ | 1,102 | $ | 1,594 | $ | 934 | $ | 2,528 | |||||||||||
|
(1) |
Includes loans held-for-sale. |
Results of Operations for the Three Months Ended March 31, 2020 and 2019
Net Income. Eagle’s net income for the three months ended March 31, 2020 was $3.93 million compared to $1.18 million for the three months ended March 31, 2019. The increase of $2.75 million was due to an increase in net interest income after loan loss provision of $1.04 million and an increase in noninterest income of $4.61 million, offset by an increase in noninterest expense of $1.83 million and an increase in provision for income taxes of $1.08 million. Basic earnings per share was $0.58 and diluted earnings per share was $0.57 for the current period. Basic and diluted earnings per share were both $0.18 for the prior year comparable period.
Net Interest Income. Net interest income increased to $10.48 million for the three months ended March 31, 2020, from $9.38 million for the same quarter in the prior year. This increase of $1.10 million, or 11.7%, was the result of an increase in interest and dividend income of $1.51 million, partially offset by an increase in interest expense of $408,000.
Interest and Dividend Income. Interest and dividend income was $12.63 million for the three months ended March 31, 2020, compared to $11.12 million for the three months ended March 31, 2019, an increase of $1.51 million, or 13.6%. Interest and fees on loans increased to $11.43 million for the three months ended March 31, 2020 from $10.05 million for the three months ended March 31, 2019. This increase of $1.38 million, or 13.7%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended March 31, 2020. Average balances for loans receivable, including loans held-for-sale, for the three months ended March 31, 2020 were $840.43 million, compared to $726.66 million for the prior year period. This represents an increase of $113.77 million, or 15.7% and was impacted by the WHC acquisition. The average interest rate earned on loans receivable decreased by 15 basis points, from 5.61% to 5.46%. Interest accretion on purchased loans was $558,000 for the three months ended March 31, 2020 which resulted in a 22 basis point increase in net interest margin compared to $520,000 for the three months ended March 31, 2019 which resulted in a 24 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale increased by $69,000, or 7.2% period over period. Average balances for investments increased to $171.26 million for the three months ended March 31, 2020, from $140.80 million for the three months ended March 31, 2019. Average interest rates earned on investments decreased to 2.41% for the three months ended March 31, 2020 from 2.76% for the three months ended March 31, 2019.
Results of Operations for the Three Months Ended March 31, 2020 and 2019 – continued
Interest Expense. Total interest expense was $2.15 million for the three months ended March 31, 2020 compared to $1.75 million for the three months ended March 31, 2019. The increase of $408,000 or 23.4% was due to an increase in interest expense on deposits, partially offset by a decrease in total borrowings. The average balance for total deposits was $892.79 million for three months ended March 31, 2020 compared to $724.82 million for the three months ended March 31, 2019. This increase was impacted by the WHC acquisition. The overall average rate on total deposits was 0.60% for the three months ended March 31, 2020 compared to 0.44% for the three months ended March 31, 2019. The average balance for total borrowings decreased from $125.51 million for the three months ended March 31, 2019 to $112.76 million for the three months ended March 31, 2020. The average rate paid on total borrowings also decreased from 3.10% for the three months ended March 31, 2019, to 2.90% for the three months ended March 31, 2020.
Loan Loss Provision. Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank classifies loans if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. Using this methodology, the Bank recorded $450,000 in loan loss provisions for the three months ended March 31, 2020. Additionally, management considered the potential impact of COVID-19. Due to the Stay-at -Home Order and the closing of many businesses and resulting decline in business cash-flows, an increase in the related economic factors was included in the allowance for loan losses analysis and the loan loss reserves was increased by approximately $220,000. Therefore, the total loan loss provision for the three months ended March 31, 2020 was $670,000, Loan loss provisions were $604,000 for the three months ended March 31, 2019. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic forecast worsens relative to the assumptions we utilized in March our allowance for credit losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $5.94 million at March 31, 2020 compared to $5.45 million at December 31, 2019. The Bank had $60,000 in other real estate owned and other repossessed assets at March 31, 2020 compared to $26,000 at December 31, 2019.
Noninterest Income. Total noninterest income was $8.30 million for the three months ended March 31, 2020, compared to $3.69 million for the three months ended March 31, 2019. The increase of $4.61 million is largely due to an increase in net gain on sale of loans which increased to $5.41 million for the three months ended March 31, 2020 from $2.60 million for the three months ended March 31, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the three months ended March 31, 2020, $132.12 million residential mortgage loans were sold compared to $72.32 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the three months ended March 31, 2020 was 4.10% compared to 3.59% for the three months ended March 31, 2019.
Noninterest Expense. Noninterest expense was $12.85 million for the three months ended March 31, 2020 compared to $11.02 million for the three months ended March 31, 2019. The increase of $1.83 million or 16.6% is largely due to increased salaries and employee benefits expense of $1.69 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth and additional staff related to compliance with mortgage rules. Mortgage commission-based compensation was $2.25 million for the three months ended March 31, 2020 compared to $721,000 for the three months ended March 31, 2019. Salaries and employee benefits expense was also impacted by the addition of staff related to the WHC acquisition. Acquisition costs were $128,000 for three months ended March 31, 2020 compared to $1.17 million for the three months ended March 31, 2019.
To accommodate the immediate need for personnel to work from home, Eagle purchased additional laptop computers and docking stations. There were also extra supplies and equipment needed to provide each location with a clean, disinfected and safer work environment. Most of these unusual expenses will be incurred in the second quarter ending June 30, 2020 and will impact noninterest expense. These costs are estimated to be $100,000.
Provision for Income Taxes. Provision for income taxes was $1.34 million for the three months ended March 31, 2020, compared to $261,000 for the three months ended March 31, 2019 due to increased income before provision for income taxes. The effective tax rate for the three months ended March 31, 2020 was 25.4% compared to 18.1% for the three months ended March 31, 2019.
Liquidity and Capital Resources
Liquidity
The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations. The liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratios as of March 31, 2020 and December 31, 2019.
The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Des Moines and other borrowings. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable based in part on Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds.
Through the end of the first quarter ended March 31, 2020, the liquidity level remained relatively consistent with the prior quarters. However, subsequent to the end of the quarter, and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, a new funding facility through the FRB called Payroll Protection Program Loan Funding (“PPPLF”) was made available and the Bank has received approval to collateralize with pools of PPP loans for funding. As of April 30, 2020, the Bank had $24.06 million in PPPLF borrowings secured by 334 PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay Federal Reserve borrowings.
Capital Resources
As of March 31, 2020, the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, increased the economic value of equity (“EVE”) by 17.5% compared to an increase of 10.6% at December 31, 2019. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.
Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The rule established a new regulatory capital framework that incorporated revisions to the Basel capital framework, strengthened the definition of regulatory capital, increased risk-based capital requirements, and amended the methodologies for determining risk-weighted assets. These changes increased the amount of capital required by community banking organizations. Basel III included a multiyear transition period from January 1, 2015 through December 31, 2019.
The Banks’s Tier I leverage ratio, as measured under State of Montana and FRB rules, increased slightly from 11.08% as of December 31, 2019 to 11.88% as of March 31, 2020. The Bank’s capital position helps to mitigate its interest rate risk exposure.
As of March 31, 2020, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to State of Montana and FRB rules. As of March 31, 2020, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 15.45%, 14.39%, 14.39% and 11.88%, respectively, compared to regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50%, which was fully phased-in on January 1, 2019.
Liquidity and Capital Resources - continued
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March 31, 2020 |
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(Unaudited) |
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Dollar |
% of |
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Amount |
Assets |
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(Dollars in Thousands) |
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|
Total risk-based capital to risk weighted assets: |
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Actual capital level |
$ | 133,966 | 15.45 | % | ||||
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Minimum required for capital adequacy Basel III fully phased-in |
91,019 | 10.50 | % | |||||
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Excess capital |
$ | 42,947 | 4.95 | % | ||||
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Tier I capital to risk weighted assets: |
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Actual capital level |
$ | 124,716 | 14.39 | % | ||||
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Minimum required for capital adequacy Basel III fully phased-in |
73,682 | 8.50 | % | |||||
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Excess capital |
$ | 51,034 | 5.89 | % | ||||
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Common equity tier I capital to risk weighted assets: |
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Actual capital level |
$ | 124,716 | 14.39 | % | ||||
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Minimum required for capital adequacy Basel III fully phased-in |
60,680 | 7.00 | % | |||||
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Excess capital |
$ | 64,036 | 7.39 | % | ||||
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Tier I capital to adjusted total average assets: |
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Actual capital level |
$ | 124,716 | 11.88 | % | ||||
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Minimum required for capital adequacy Basel III fully phased-in |
41,991 | 4.00 | % | |||||
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Excess capital |
$ | 82,725 | 7.88 | % | ||||
Impact of Inflation and Changing Prices
Our consolidated financial statements and the accompanying notes, which are found in Part I, Item 1, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Interest rates have a greater impact on our performance than do the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Interest Rate Risk
Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates. Interest rate risk results from several factors and could have a significant impact on the Company’s net interest income, which is the Company primary source of net income. Net interest income is affected by changes in interest rates, the relationship between rates on interest bearing assets and liabilities, the impact of interest fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.
Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices in place to measure, monitor and control interest rate exposures. The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing interest rates.
The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability committee, which is governed by policies established by the Company’s Board that are reviewed and approved annually. The Board delegates responsibility for carrying out the asset/liability management policies to the Bank’s asset/liability committee. In this capacity, the asset/liability committee develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk. Our asset and liability policy and strategies are expected to continue as described so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.
The Bank has established acceptable levels of interest rate risk as follows for an instantaneous and permanent shock in rates: Projected net interest income over the next twelve months (i.e. year-1) and the subsequent twelve months (i.e. year-2) will not be reduced by more than 15.0% given an immediate increase in interest rates of up to 200 basis points or by more than 10.0% given an immediate decrease in interest rates of up to 100 basis points.
The following table includes the Bank’s net interest income sensitivity analysis.
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Changes in Market |
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Rate Sensitivity |
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Interest Rates |
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As of March 31, 2020 |
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Policy |
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(Basis Points) |
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Year 1 |
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Year 2 |
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Limits |
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+200 |
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0.50% |
4.40% |
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-15.00% |
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-100 |
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-1.20% |
-1.50% |
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-10.00% |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
This item has been omitted based on Eagle’s status as a smaller reporting company.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of March 31, 2020, our disclosure controls and procedures were not effective as of such date due to ongoing remediation of a material weakness in internal control over financial reporting as of December 31, 2019 as described below.
We identified a material weakness in internal control related to the review of manual journal entries. Specifically, the design of the manual journal entry review control did not ensure that all manual journal entries were captured and independently reviewed, thus management could not ensure that all entries were accurate and could not verify all manual journal entries contained sufficient supporting documentation. The material weakness did not result in any identified misstatement to the financial statements, and there were no changes to previously released financial results. However, the control deficiencies created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.
Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated so that these controls are designed, implemented and operating effectively. The remediation actions include: (i) restricting user access of individuals able to make manual journal entries, (ii) ensuring the completeness of manual journal entries included in the review through a review of a system generated file maintenance report over manual journal entries, (iii) ensuring accurate and appropriate documentation is retained to support the journal entry. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The remediation of this material weakness is still in process.
Except as noted above, during the last quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Legal Proceedings. |
Neither the Company nor the Bank is involved in any pending legal proceeding other than non-material legal proceedings occurring in the ordinary course of business.
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Risk Factors. |
Other than as set forth below, there have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment, negatively impacted consumer and business spending, and disrupted trade and supply chains. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
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● |
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, farming, ranching, retail and restaurant industries, but across other industries as well; |
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● |
declines in collateral values; |
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● |
in an effort to support our communities during the pandemic, we are participating in the PPP under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit; |
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● |
in response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers; |
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● |
third party disruptions, including outages at network providers and other suppliers; |
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increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and |
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● |
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions. |
Part II - OTHER INFORMATION - continued
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.
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Unregistered Sales of Equity Securities and Use of Proceeds. |
On July 18, 2019, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2019 or the first quarter of 2020. The plan expires on July 18, 2020.
On July 19, 2018, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2018. However, during the first quarter of 2019, 42,000 shares were purchased at an average price of $17.43 per share. In addition, 28,000 shares were purchased during the second quarter of 2019 at an average price of $17.09 per share. The plan expired on July 19, 2019.
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Defaults Upon Senior Securities. |
Not applicable.
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Mine Safety Disclosures |
Not applicable
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Other Information. |
None.
Part II - OTHER INFORMATION - continued
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Exhibits. |
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Exhibit Number |
Description |
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3.1 |
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3.2 |
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3.3 |
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10.1 |
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10.2 |
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31.1 |
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31.2 |
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32.1 |
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101.INS |
XBRL Instance Document |
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101.SCH |
XBRL Taxonomy Extension Schema Document |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EAGLE BANCORP MONTANA, INC. |
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Date: May 11, 2020 |
By: |
/s/ Peter J. Johnson |
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Peter J. Johnson |
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President/CEO |
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Date: May 11, 2020 |
By: |
/s/ Laura F. Clark |
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Laura F. Clark |
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Executive Vice President/CFO/COO |
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Exhibit 10.1
AMENDMENT NO. 3 TO THE
2011 STOCK INCENTIVE PLAN FOR DIRECTORS,
OFFICERS AND EMPLOYEES
This amendment shall be effective upon the approval of both the Board of Directors and Shareholders of Eagle Bancorp, Montana, Inc.
The Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers and Employees, as amended, is amended as follows:
1. The following sentence is added to the end of Section 1 of the Plan, Purpose:
The Extended Effective Date of the Plan is the date that Amendment No. 3 to the Plan, approved contingently by the Board on February 20, 2020, is approved by the stockholders of the Company.
2. The following definition of “Extended Effective Date” is inserted following Section 2.15 of the Plan and Sections 2.16 through 2.37, and all references thereto, are renumbered accordingly.
2.16 “Extended Effective Date” means the date that Amendment No. 3 to the Plan, approved contingently by the Board on February 20, 2020, is approved by the stockholders of the Company.
3. Section 3, Term of the Plan, is amended to read as follows:
3. Term of the Plan. Unless the Plan shall have been earlier amended by the Board, awards may be granted until the close of the day preceding the tenth anniversary of the Extended Effective Date. Awards granted pursuant to the Plan prior to the end of its term shall not expire solely by reason of expiration of the term of the Plan.
4. The first two sentences of Section 4, Stock Subject to the Plan, are amended to read as follows:
4. Stock Subject to the Plan. Subject to Section 8, the maximum aggregate number of shares of Restricted Stock which may be issued under the Plan on or after the Extended Effective Date is 293,571. The maximum aggregate number of shares of Stock which may be issued pursuant to or subject to Options granted under the Plan (either Incentive or Nonstatutory Options) on or after the Extended Effective Date is 246,427.
5. Section 8.1, Adjustment for Corporate Actions, is amended to read as follows:
8.1 Adjustment for Corporate Actions. All of the share numbers set forth in Section 4 reflect the capital structure of the Company as of the Extended Effective Date. Subject to Section 8.2, if subsequent to the Extended Effective Date the outstanding number of shares of Stock (or any other securities covered by the Plan by reason of the prior application of this Section 8.1) are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such outstanding Stock, through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, combination, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar distribution of the Company’s equity securities without the receipt of consideration by the Company, an appropriate and proportionate adjustment will be made in (i) the maximum numbers and kinds of shares provided in Section 4, (ii) the numbers and kinds of shares or other securities subject to the then outstanding Awards, and (iii) the Exercise Price for each share or other unit of any other securities subject to then outstanding Awards (without change in the aggregate purchase price as to which such Awards remain exercisable).
Approved by the Board of Directors on February 20, 2020
Approved by the Shareholders on April 23, 2020
Exhibit 10.2
2020 NON-EMPLOYEE DIRECTOR AWARD PLAN
Section 1 Establishment and Purposes of the Plan.
(a) Purpose. The purposes of this Eagle Bancorp Montana, Inc. (the “Company”) 2020 Non-Employee Director Award Plan (the “Plan”) are to attract, retain and compensate for service as members of the Board of Directors of the Company, highly qualified individuals who are not current employees of the Company and to enable them to increase their ownership in the Company’s Common Stock. The Plan will be beneficial to the Company and its shareholders since it will allow these Directors to have a greater personal financial stake in the Company through the ownership of Common Stock, in addition to underscoring their common interest with shareholders in increasing the long-term value of the Common Stock.
(b) Effective Date; Shareholder Approval. The Plan shall be effective April 23, 2020, subject to the approval by the Company’s shareholders at its 2020 Annual Meeting of Shareholders.
Section 2 Definitions.
As used herein, the following definitions shall apply:
“Affiliate” shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee.
“Applicable Laws” means the requirements relating to the administration of equity plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Restricted Shares are, or will be, granted under the Plan.
“Board” means the Board of Directors of the Company.
“Change in Control” means the occurrence of any of the following events with respect to the Company:
(i) the consummation of any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger own more than fifty percent (50%) of the outstanding common stock of the surviving corporation immediately after the merger; or
(ii) the consummation of any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, other than to a subsidiary or affiliate; or
(iii) any action pursuant to which any person (as such term is defined in Section 13(d) of the Exchange Act), corporation or other entity shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of shares of capital stock entitled to vote generally for the election of directors of the Company (“Voting Securities”) representing more than fifty (50%) percent of the combined voting power of the Company’s then outstanding Voting Securities (calculated as provided in Rule 13d-3(d) in the case of rights to acquire any such securities); or
(iv) the individuals (x) who, as of the Effective Date, constitute the Board (the “Original Directors”) and (y) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of a majority of the Original Directors then still in office (such Directors being called “Additional Original Directors”) and (z) who thereafter are elected to the Board and whose election or nomination for election to the Board was approved by a vote of a majority of the Original Directors and Additional Original Directors then still in office, cease for any reason to constitute a majority of the members of the Board; or
(v) the dissolution or liquidation of the Company.
“Code” means the Internal Revenue Code of 1986, as amended.
“Committee” means a committee designated by the Board and composed of not less than two “Non-Employee Directors” as defined in Rule 16b-3 under the Exchange Act, or any successor rule or definition adopted by the Securities and Exchange Commission.
“Common Stock” means the common stock, par value $0.01 per share, of the Company.
“Director” means a member of the Board.
“Disability” means any illness or other physical or mental condition of a Participant that renders the Participant incapable of performing his or her customary and usual duties for the Company (with or without a reasonable accommodation as required by law) and that in the judgment of the Committee is permanent and continuous in nature. The Committee may establish any process or procedure it deems appropriate for determining whether a Participant has a “Disability”.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
(i) if the Common Stock is listed on any established stock exchange or a national market system the fair market value of a share of Common Stock shall be the closing sales price of a share of Common Stock as quoted on such exchange or system for such date (or the most recent trading day preceding such date if there were no trades on such date), as reported in such source as the Committee deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized securities dealer but is not listed in the manner contemplated by clause (i) above, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in such source as the Committee deems reliable; or
(iii) if neither clause (i) above nor clause (ii) above applies, the fair market value of a share of Common Stock shall be determined in good faith by the Committee based on the reasonable application of a reasonable valuation method that complies with Code Section 409A and Code Section 422 if and to the extent required.
“Outside Director” means any Director who, on the date such person is to receive a grant of Restricted Shares hereunder is not a current employee of the Company or any of the Company’s subsidiaries.
“Participant” shall mean any Outside Director who holds a Restricted Stock Award granted or issued pursuant to the Plan.
“Plan” means this Eagle Bancorp Montana, Inc. 2020 Non-Employee Director Award Plan.
“Restricted Shares” means Shares subject to a Restricted Stock Award.
“Restricted Stock Agreement” means any written agreement, contract, or other instrument or document, including an electronic communication, evidencing the terms and conditions of a Restricted Stock Award.
“Restricted Stock Award” means a grant of Restricted Shares pursuant to Section 7 of the Plan.
“Share” means a share of Common Stock, as adjusted in accordance with Section 9 of the Plan.
Section 3 Share Limits.
(a) Aggregate Share Limit Subject to the provisions of Section 9 of the Plan, the maximum aggregate number of Shares that may be issued as Restricted Shares under the Plan is 13,000 shares. The Shares may be authorized, but unissued, or treasury Shares. Restricted Shares that have been transferred back to the Company shall be available for future grants of Restricted Shares under the Plan.
(b) Individual Share Limit. Subject to the provisions of Section 9 of the Plan, the maximum, aggregate number of Shares that may be issued as Restricted Shares to anyone Outside Director in any one calendar year under Section 7 of this Plan, shall not in total exceed $25,000
Section 4 Administration of the Plan.
(a) Administration. The Plan shall be administered by the Committee. The Committee shall have the authority, in its discretion:
(i) to determine the Fair Market Value of Common Stock;
(ii) to approve forms of agreement for use under the Plan;
(iii) to determine the number of Shares that may be issued as Restricted Shares and the terms and conditions of such Restricted Shares;
(iv) to construe and interpret the terms of the Plan;
(v) to prescribe, amend and rescind rules and regulations that it deems necessary for the proper operation and administration of the Plan;
(vi) to waive or amend any terms, conditions, restrictions or limitations on an Award, to the extent permissible under applicable law;
(vii) to instruct a corporate officer to execute on behalf of the Company any instrument required to effect the grant of a Restricted Stock Award granted by the Committee; and
(viii) to make all other determinations deemed necessary or advisable for administering the Plan.
(b) Effect of Committee’s Decision. The Committee’s decisions, determinations and interpretations shall be final and binding on all Participants and anyone else who may claim an interest in Restricted Shares.
(c) No Liability. No member of the Committee shall be liable for any losses resulting from any action, interpretation or construction made in good faith with respect to the Plan, any Restricted Stock Agreement, or any Award granted under the Plan. The Company shall indemnify, to the fullest extent permitted by law, each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that the person, or the executor or administrator of the person’s estate, is or was a member of the Committee or a delegate of the Committee.
Section 5 Eligibility.
The only persons who shall be eligible to receive Restricted Stock Awards under the Plan shall be persons who, on the date such Awards are granted, are Outside Directors.
Section 6 Term of the Plan.
The term of the Plan shall be ten (10) years but unless extended by the Committee and approved by the Board of Directors and Shareholders no Restricted Stock Award may be granted under the Plan after November 1, 2024, or the next following business day if November 1st is not a business day.
Section 7 Grants of Restricted Stock Awards.
On November 1st of each year, beginning with November 1, 2020, or the next following business day if November 1st is not a business day, each Outside Director shall automatically be granted a number of Restricted Shares, on the terms and conditions set forth in Section 8 below, having a Fair Market Value on the date of grant (determined without regard to the restrictions applicable thereto) equal to Five Thousand Dollars ($5,000); provided, however, that no fractional Shares shall be granted and such grant shall be rounded down accordingly as needed. Subject to the provisions of Section 6 permitting additional grants after five (5) years, no additional grants shall be awarded to any Outside Directors after the grant given on November 1, 2024, or the next following business day if November 1st is not a business day. The Restricted Shares shall vest in accordance with the vesting criteria set forth in Section 8 and any such Shares that do not vest (and any dividends or other distributions related to such Shares) shall be forfeited and transferred back to the Company.
Section 8 Terms of Restricted Stock Awards.
Except as provided herein, Restricted Shares granted pursuant to Sections 7(a) and 7(b) of the Plan shall be subject to restrictions (“Restrictions”) prohibiting such Restricted Shares from being sold, transferred, assigned, pledged or otherwise encumbered or disposed of. The Restrictions with respect to each award of Restricted Shares shall lapse on the one-year anniversary date of the grant of such award; provided, however, that the Restrictions with respect to such Restricted Shares shall lapse immediately in the event that (i) the Participant is nominated for a new term as an Outside Director but is not elected by shareholders of the Company, or (ii) the Participant ceases to be a member of the Board due to death, Disability or mandatory retirement (if any). Notwithstanding the foregoing, the Restrictions with respect to all of a Participant’s Restricted Shares shall lapse immediately prior to a Change in Control provided that the Participant is a member of the Board immediately prior to such Change in Control.
The Company shall issue, in the name of each Participant to whom Restricted Shares have been granted, stock certificates (in tangible or electronic form) representing the total number of Restricted Shares granted to such Participant as soon as reasonably practicable after the grant. However, the Company or its transfer agent shall hold such certificates, properly endorsed for transfer, for the Participant’s benefit until such time as the Restriction Period applicable to such Restricted Shares lapses. Upon the expiration or termination of the Restricted Period, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Restricted Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, to the Participant or his or her beneficiary or estate, as the case may be. Except as described in the above paragraph, in the event that a Participant ceases to be a member of the Board before the applicable Restriction Period has expired or under circumstances in which the Restriction Period does not otherwise lapse, the Restricted Shares granted to such Participant shall thereupon be forfeited and transferred back to the Company. During the Restriction Period, a Participant shall have the right to vote his or her Restricted Shares. At the end of the Restriction Period, the Participant shall have the right to receive any cash dividends, with respect to such Restricted Shares, that were paid during the Restriction Period. All distributions, if any, received by a Participant with respect to Restricted Shares as a result of any stock split, stock distribution, combination of shares, or other similar transaction shall be subject to the same restrictions as are applicable to the Restricted Shares to which such distributions relate.
Section 9 Adjustments Upon Changes in Capitalization.
Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Restricted Stock Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Restricted Stock Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of a Restricted Stock Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to a Restricted Stock Award.
Section 10 Grant Agreement.
Each grant of a Restricted Stock Award under the Plan may be evidenced by a Restricted Stock Agreement. Such document may contain such provisions as the Committee may in its discretion deem advisable, provided that such provisions are not inconsistent with any of the provisions of the Plan.
Section 11 Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary to comply with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant with respect to previously granted Awards, unless mutually agreed otherwise between the Participant and the Committee, which agreement must be in writing and signed by the Participant and the Company. After the termination of the Plan, any previously granted Awards shall remain in effect and shall continue to be governed by the terms of the Plan and the applicable Restricted Stock Agreement. Termination of the Plan shall not affect the Committee’s ability to exercise the powers granted to it hereunder with respect to Restricted Shares granted under the Plan prior to the date of such termination.
Section 12 Conditions Upon Issuance of Shares.
(a) Legal Compliance. Grants of Restricted Shares under this Plan shall not be made unless the issuance and delivery of such Shares shall comply with Applicable Laws and shall not be made until a Form S-8 registration statement in respect of the Shares is filed with, and declared effective by, the Securities and Exchange Commission.
(b) Investment Representations. As a condition to the issuance of Restricted Shares, the Company may require the Participant to represent and warrant at the time of any such issuance that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. Not in limitation of any of the foregoing, in any such case referred to in the preceding sentence the Committee may also require the Participant to execute and deliver documents containing such representations (including the investment representations described in this Section 12(b) of the Plan), warranties and agreements as the Committee or counsel to the Company shall deem necessary or advisable to comply with any exemption from registration under the Securities Act of 1933, as amended, any applicable State securities laws, and any other applicable law, regulation or rule.
(c) Additional Conditions. The Committee shall have the authority to condition the grant of any Restricted Shares in such other manner that the Committee determines to be appropriate, provided that such condition is not inconsistent with the terms of the Plan.
Section 13 Inability to Obtain Authority.
The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
Section 14 Reservation of Shares.
The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.
Section 15 Shareholder Approval.
The Plan shall be subject to approval by the shareholders of the Company. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws.
Section 16 Taxes.
Each Participant shall be solely responsible for calculation and payment of his or her tax liability in respect of the grant and/or vesting of any Restricted Stock Award pursuant to this Plan; provided, however, that the Committee may establish procedures for withholding or payment of any such tax liability if the Company should become subject to withholding or tax payment requirements under Applicable Law.
Section 17 Code Section 83(b) Elections
Neither the Company, any Affiliate, nor the Committee shall have any responsibility in connection with a Participant’s election, or attempt to elect, under Code section 83(b) to include the value of a Restricted Stock Award in the Participant’s gross income for the year of payment. Any Participant who makes a Code section 83(b) election with respect to any such Restricted Stock Award shall promptly notify the Committee of such election and provide the Committee with a copy thereof.
Section 18 No Right to Continue as a Director
Neither this Plan, nor the granting of a Restricted Stock Award under this Plan, nor any other action taken pursuant to this Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation.
Section 19 Successors.
All obligations of the Company under the Plan with respect to Restricted Stock Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business, stock and/or assets of the Company.
Section 20 Governing Law.
This Plan shall be governed by the internal laws of the State of Delaware.
Approved by the Board of Directors on December 12, 2019
Approved by the Shareholders on April 23, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302(a) OF THE
SARBANES-OXLEY ACT OF 2002
I, Peter J. Johnson certify that:
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I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp Montana, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 11, 2020
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/s/ Peter J. Johnson |
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Peter J. Johnson |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302(a) OF THE
SARBANES-OXLEY ACT OF 2002
I, Laura F. Clark certify that:
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I have reviewed this quarterly report on Form 10-Q of Eagle Bancorp Montana, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 11, 2020
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/s/ Laura F. Clark |
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Laura F. Clark |
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Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eagle Bancorp Montana, Inc. (the ‘Company’) on Form 10-Q for the period ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the ‘Report’), we, Peter J. Johnson, Chief Executive Officer of the Company, and Laura F. Clark, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s best knowledge and belief:
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(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Peter J. Johnson |
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/s/ Laura F. Clark |
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Peter J. Johnson |
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Laura F. Clark |
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Chief Executive Officer (Principal Executive Officer) May 11, 2020 |
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Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) May 11, 2020 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission and shall not be considered filed as part of the Report.