Eagle Bancorp Montana(EBMT) - 2020 Q4 - Annual Report

Part I Item 1. Description of Business Eagle Bancorp Montana, Inc. is a bank holding company for Opportunity Bank of Montana, offering diversified lending services to small businesses and individuals in Montana, with 2020 operations impacted by COVID-19 and subject to extensive regulation Overview and Recent Events Eagle Bancorp Montana, Inc., holding company for Opportunity Bank of Montana, operates 23 branches, focusing on diversified loans, with 2020 operations impacted by COVID-19 and supported by strategic acquisitions - Eagle Bancorp Montana, Inc. is the holding company for Opportunity Bank of Montana, a Montana-chartered commercial bank with 23 full-service branches[16] - The company's operations in 2020 were substantially influenced by the COVID-19 pandemic, leading to the closure of branch lobbies and a shift to drive-through and appointment-based services[19][20] - In January 2020, the Company acquired Western Holding Company of Wolf Point (WHC) and its subsidiary, Western Bank of Wolf Point, for a total consideration of $14.97 million[24] Business Strategy, Market Areas, and Competition The company's strategy emphasizes operating as a full-service community bank, diversifying its loan portfolio with a focus on commercial real estate and business loans, while attracting low-cost deposits and pursuing acquisitions in Montana's competitive banking market - The company's business strategy emphasizes diversifying its loan portfolio, with a focus on growing commercial real estate and commercial business loans, which comprised approximately 72.27% of total loans as of December 31, 2020[26] - The bank conducts business through its headquarters and 22 other branches across Montana, serving a state with a population of approximately 1.07 million[28][29] Deposit Market Share by County (as of June 30, 2020) | County | Deposit Market Share | Rank | | :--- | :--- | :--- | | Broadwater, MT | 100.00% | 1 | | Madison, MT | 40.59% | 2 | | Roosevelt, MT | 33.17% | 2 | | Sweet Grass, MT | 29.61% | 2 | | Teton, MT | 17.27% | 2 | - The company faces intense competition from 39 commercial banks and 46 credit unions in Montana as of December 31, 2020[31][32] Lending and Investment Activities The bank's lending activities are diversified across various loan categories, with commercial real estate being the largest, while investment policy focuses on high-credit-quality instruments to manage earnings and liquidity Loan Portfolio Composition (as of Dec 31, 2020) | Loan Category | Amount (Millions USD) | % of Total Loans | | :--- | :--- | :--- | | Commercial Real Estate | $316.67 | 37.56% | | Commercial Business | $109.21 | 12.95% | | Residential 1-4 Family | $110.80 | 13.14% | | Farmland | $65.92 | 7.82% | | Commercial Construction | $65.28 | 7.74% | | Home Equity | $56.56 | 6.71% | | Agricultural Production | $52.24 | 6.20% | | Residential Construction | $46.29 | 5.49% | | Consumer | $20.17 | 2.39% | - The bank derives significant fee income from originating and servicing sold mortgage loans, with fees net of amortization of mortgage servicing rights increasing to $5.66 million in 2020 from $2.32 million in 2019[35] - As of December 31, 2020, the bank serviced $1.47 billion in residential 1-4 family mortgage loans sold with servicing retained[37] - The bank's investment policy permits investments in high credit quality instruments like U.S. government obligations, municipal securities, and mortgage-backed securities, but prohibits high-risk mortgage derivatives without prior Board approval[60][61] Sources of Funds and Human Capital Deposits are the company's primary source of funds, supplemented by borrowings and subordinated notes, while human capital strategy focuses on employee retention through competitive benefits and professional development - The company's primary source of funds is deposits, supplemented by borrowings from the FHLB of Des Moines and other credit lines[64][70] - In June 2020, the company issued $15.00 million in subordinated notes due 2030 with a fixed rate of 5.50% until July 2025, after which it becomes a floating rate based on SOFR[71] - As of December 31, 2020, the company had 335 full-time and 19 part-time employees, who are not represented by a collective bargaining unit[74] - The company promotes employee retention through competitive benefits and an Employee Stock Ownership Plan (ESOP), in which nearly all employees participate[75] Regulation The company and its bank subsidiary are extensively regulated by federal and state authorities, adhering to strict capital requirements and other banking laws, and were considered "well capitalized" as of December 31, 2020 - The Bank is regulated and supervised by the Federal Reserve Bank of Minneapolis (FRB) and the Montana Division of Banking and Financial Institutions, with deposits insured by the FDIC[82] - The Dodd-Frank Act and the Economic Growth, Regulatory Relief and Consumer Protection Act have significantly influenced the bank's regulatory structure, compliance costs, and operating activities[83][84] Minimum Capital Requirements (Fully Phased-In Basel III) | Ratio | Minimum Requirement | | :--- | :--- | | Common Equity Tier 1 to RWA | 7.0% | | Tier 1 Capital to RWA | 8.5% | | Total Capital to RWA | 10.5% | | Tier 1 Leverage Ratio | 4.0% | - To be considered "well capitalized" under prompt corrective action rules, an institution must meet higher thresholds, including a total capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%, which the Bank met as of December 31, 2020[104][105] Item 1A. Risk Factors The company faces significant risks related to economic conditions, business operations, and the regulatory environment, including the ongoing impact of the COVID-19 pandemic, potential goodwill impairment, cybersecurity threats, and credit risk from commercial real estate lending - The COVID-19 pandemic is a primary risk factor, adversely affecting customers and the economy, which could lead to increased credit losses, impairment of goodwill, and reduced demand for products and services[117][118][125] - The company's concentration in Montana makes it highly dependent on local economic conditions, which could be adversely affected by declines in home values, changes in interest rates, and intense competition[131][133][134] - Business risks include potential impairment of goodwill from acquisitions, system failures or cybersecurity breaches, and an allowance for loan losses that may be insufficient to cover actual losses[143][144][148] - The increased emphasis on commercial real estate and business loans elevates credit risk, as repayment is dependent on the successful operation of the borrower's business[157][158] - A significant portion of noninterest income is derived from selling residential mortgages in the secondary market, creating reliance on purchasers like FNMA and FHLMC and exposing the company to market and regulatory changes[162][163] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[186] Item 2. Properties As of December 31, 2020, the company conducted business through 26 locations, including its executive office in Helena, Montana, with 19 properties owned and 7 leased, all deemed in good condition Property Ownership Summary (as of Dec 31, 2020) | Status | Number of Locations | | :--- | :--- | | Owned | 19 | | Leased | 7 | | Total | 26 | - The net book value of premises and equipment owned by the Bank totaled $58.76 million as of December 31, 2020[188] Item 3. Legal Proceedings The company is party to routine litigation arising in the normal course of business, which management does not expect to have a material adverse effect on its operations - The Bank is involved in routine litigation incidental to its business, which management believes will not have a material adverse effect on the Company's financial results[189] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[191] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Market under "EBMT," with 6,775,447 shares outstanding as of December 31, 2020, and an active share repurchase program under which 62,776 shares were repurchased in 2020 - The company's common stock is traded on the Nasdaq Global Market under the symbol "EBMT" As of December 31, 2020, there were 6,775,447 shares outstanding[196] - On July 23, 2020, the Board authorized a new plan to repurchase up to 100,000 shares of common stock, under which 41,337 shares were purchased in Q3 2020 at an average price of $15.75[198] - Under a prior plan that expired in July 2020, the company purchased 21,439 shares during 2020[199] Item 6. Selected Financial Data This item has been omitted as the company qualifies as a smaller reporting company - This item has been omitted based on Eagle's status as a smaller reporting company[201] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2020 financial performance was strong, driven by higher mortgage banking operations and asset growth to $1.26 billion, with net income surging to $21.21 million due to increased noninterest income, despite a decreased net interest margin Overview and COVID-19 Impact The company's earnings are primarily driven by net interest income, with a strategy to diversify its loan portfolio, while 2020 operations were significantly impacted by the COVID-19 pandemic, leading to PPP participation and loan modifications - As of December 31, 2020, the company had originated $45.71 million in SBA PPP loans for 764 customers, with $29.58 million remaining outstanding[212] - As of December 31, 2020, loan modifications related to COVID-19 for 40 nonresidential borrowers represented $29.00 million, or 3.5% of total loans[214] - Key industry exposures as a percentage of total loans include hotels and lodging (4.1%), health and social assistance (2.6%), and bars and restaurants (2.6%)[213] Financial Condition Analysis Total assets increased by 19.3% to $1.26 billion at year-end 2020, driven by loan growth and increased cash, while deposits grew by 27.7% to $1.03 billion, and shareholders' equity rose by 25.7% to $152.94 million Financial Condition Summary (December 31) | Metric | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $1.26 billion | $1.05 billion | +19.3% | | Loans Receivable, Net | $829.5 million | $770.6 million | +7.6% | | Total Deposits | $1.03 billion | $809.0 million | +27.7% | | FHLB Advances & Borrowings | $17.1 million | $88.4 million | -80.7% | | Total Shareholders' Equity | $152.9 million | $121.7 million | +25.7% | - Nonperforming assets increased to $8.50 million (0.68% of total assets) at year-end 2020, up from $5.48 million (0.52% of total assets) at year-end 2019[260] - The allowance for loan losses increased to $11.60 million, or 1.38% of total loans, at December 31, 2020, from $8.60 million, or 1.10% of total loans, at December 31, 2019[271][276] Results of Operations Analysis (2020 vs. 2019) Net income for 2020 significantly increased to $21.21 million, primarily driven by a surge in noninterest income from mortgage loan sales, despite a decrease in net interest margin due to the low-rate environment and PPP loans Results of Operations (Year Ended December 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $43.17 million | $38.79 million | | Loan Loss Provision | $3.13 million | $2.63 million | | Noninterest Income | $49.07 million | $23.84 million | | Noninterest Expense | $60.67 million | $46.03 million | | Net Income | $21.21 million | $10.87 million | | Diluted EPS | $3.11 | $1.69 | - The increase in net income was primarily driven by a surge in noninterest income, with net gain on sale of mortgage loans increasing to $36.39 million in 2020 from $16.68 million in 2019[300] - Net interest margin decreased by 31 basis points to 3.94% in 2020 from 4.25% in 2019, pressured by the low interest rate environment and low-yielding PPP loans[289] - The loan loss provision for 2020 included an additional $1.40 million specifically to address the potential economic impact of COVID-19[299] Liquidity, Capital, and Market Risk The company maintained stable liquidity and was deemed "well capitalized" in 2020, exceeding all regulatory capital requirements, while actively managing interest rate risk with a positive impact on economic value of equity from a simulated rate increase - The Bank is deemed "well capitalized" and exceeded all minimum regulatory capital requirements as of December 31, 2020[314] Bank Capital Ratios (as of Dec 31, 2020) | Ratio | Actual Ratio | Minimum Required | | :--- | :--- | :--- | | Total Capital to RWA | 16.71% | 10.50% | | Tier 1 Capital to RWA | 15.46% | 8.50% | | Common Equity Tier 1 to RWA | 15.46% | 7.00% | | Tier 1 Leverage Ratio | 11.72% | 4.00% | - Interest rate sensitivity analysis at year-end 2020 showed that a 200 basis point increase in rates would increase the Economic Value of Equity (EVE) by 15.0%, which is within the Board's established risk limits[312][322] - Commitments to extend credit increased to $173.87 million at year-end 2020 from $142.79 million at year-end 2019[324] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item has been omitted as the company qualifies as a smaller reporting company - This item has been omitted based on Eagle's status as a smaller reporting company[325] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements, accompanying notes, and the independent auditor's report, which identified the allowance for loan losses as a critical audit matter due to significant management judgment - This item includes the audited consolidated financial statements, notes, and the independent auditor's report[326] - The independent auditor, Moss Adams LLP, identified the Allowance for Loan Losses as a critical audit matter, highlighting the subjective and complex judgments required by management, particularly regarding qualitative factors[394][396][397] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[327] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2020, with no material changes identified during the fourth quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[329] - Management assessed internal control over financial reporting and concluded that it was effective as of December 31, 2020[332] Item 9B. Other Information The company reports no other information for this item - None[335] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, board committees, and the code of ethics is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the Company's 2021 Proxy Statement[337][338] Item 11. Executive Compensation Information regarding director and executive compensation is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the Company's 2021 Proxy Statement[337][341] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding the beneficial ownership of the company's common stock is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the Company's 2021 Proxy Statement[337][342] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding transactions with related persons and director independence is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the Company's 2021 Proxy Statement[337][343] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the Company's 2021 Proxy Statement[337][344] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and various exhibits filed as part of the Form 10-K report, including merger agreements, corporate governance documents, and debt instruments - This section lists all documents filed as part of the report, including the consolidated financial statements and various exhibits[346] - Exhibits include merger agreements, certificates of incorporation, forms of debt securities, and numerous management contracts and compensatory plans[350][351] Item 16. Form 10-K Summary The company has not provided a summary for this item - None[377]