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 September 30, 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 |
Nasdaq Global Market |
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 |
6,756,107 shares outstanding |
As of October 30, 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 September 30, 2020 and December 31, 2019 |
1 |
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Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 |
3 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the nine months ended September 30, 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. |
51 |
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Item 4. |
52 |
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PART II. |
OTHER INFORMATION |
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Item 1. |
53 |
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| Item 1A. | Risk Factors | 53 |
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Item 2. |
53 |
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Item 3. |
53 |
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Item 4. |
53 |
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Item 5. |
54 |
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Item 6. |
54 |
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55 |
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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 continuing outbreak of the novel coronavirus, or COVID-19, and the steps taken by governmental and other authorities to contain, mitigate and combat the pandemic, 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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September 30, |
December 31, |
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2020 |
2019 |
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ASSETS: |
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Cash and due from banks |
$ | 19,879 | $ | 18,094 | ||||
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Interest bearing deposits in banks |
7,672 | 4,284 | ||||||
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Federal funds sold |
45,260 | 2,540 | ||||||
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Total cash and cash equivalents |
72,811 | 24,918 | ||||||
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Securities available-for-sale, at fair value |
165,353 | 126,875 | ||||||
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Federal Home Loan Bank ("FHLB") stock |
2,817 | 4,683 | ||||||
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Federal Reserve Bank ("FRB") stock |
2,974 | 2,526 | ||||||
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Mortgage loans held-for-sale, at fair value |
41,484 | 25,612 | ||||||
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Loans receivable, net of allowance for loan losses of $11,300 at September 30, 2020 and $8,600 at December 31, 2019 |
837,178 | 770,635 | ||||||
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Accrued interest and dividends receivable |
6,615 | 4,577 | ||||||
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Mortgage servicing rights, net |
9,518 | 8,739 | ||||||
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Premises and equipment, net |
54,450 | 40,082 | ||||||
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Cash surrender value of life insurance, net |
27,064 | 23,608 | ||||||
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Goodwill |
20,798 | 15,836 | ||||||
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Core deposit intangible, net |
2,505 | 2,786 | ||||||
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Other assets |
11,461 | 3,383 | ||||||
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Total assets |
$ | 1,255,028 | $ | 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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September 30, |
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 |
$ | 295,058 | $ | 200,035 | ||||
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Interest bearing |
703,272 | 608,958 | ||||||
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Total deposits |
998,330 | 808,993 | ||||||
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Accrued expenses and other liabilities |
18,419 | 9,825 | ||||||
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Deferred tax liability, net |
1,367 | 492 | ||||||
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FHLB advances and other borrowings |
59,777 | 88,350 | ||||||
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Other long-term debt: |
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Principal amount |
30,155 | 25,155 | ||||||
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Unamortized debt issuance costs |
(383 | ) | (214 | ) | ||||
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Total other long-term debt, net |
29,772 | 24,941 | ||||||
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Total liabilities |
1,107,665 | 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; 6,756,107 and 6,423,033 shares outstanding at September 30, 2020 and December 31, 2019, respectively) |
71 | 67 | ||||||
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Additional paid-in capital |
77,612 | 68,826 | ||||||
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Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") |
(185 | ) | (311 | ) | ||||
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Treasury stock, at cost |
(4,630 | ) | (3,643 | ) | ||||
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Retained earnings |
69,478 | 55,391 | ||||||
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Accumulated other comprehensive income, net of tax |
5,017 | 1,329 | ||||||
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Total shareholders' equity |
147,363 | 121,659 | ||||||
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Total liabilities and shareholders' equity |
$ | 1,255,028 | $ | 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 |
Nine Months Ended |
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September 30, |
September 30, |
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2020 |
2019 |
2020 |
2019 |
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INTEREST AND DIVIDEND INCOME: |
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Interest and fees on loans |
$ | 11,340 | $ | 10,731 | $ | 33,832 | $ | 31,378 | ||||||||
| Securities available-for-sale | 874 | 916 | 2,853 | 2,802 | ||||||||||||
| FHLB and FRB dividends | 95 | 107 | 284 | 297 | ||||||||||||
| Other interest income | 30 | 19 | 134 | 55 | ||||||||||||
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Total interest and dividend income |
12,339 | 11,773 | 37,103 | 34,532 | ||||||||||||
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INTEREST EXPENSE: |
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Deposits |
779 | 1,022 | 3,063 | 2,733 | ||||||||||||
| FHLB advances and other borrowings | 261 | 692 | 1,066 | 1,942 | ||||||||||||
| Other long-term debt | 521 | 360 | 1,296 | 1,089 | ||||||||||||
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Total interest expense |
1,561 | 2,074 | 5,425 | 5,764 | ||||||||||||
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NET INTEREST INCOME |
10,778 | 9,699 | 31,678 | 28,768 | ||||||||||||
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Loan loss provision |
854 | 694 | 2,751 | 1,995 | ||||||||||||
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NET INTEREST INCOME AFTER LOAN LOSS PROVISION |
9,924 | 9,005 | 28,927 | 26,773 | ||||||||||||
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NONINTEREST INCOME: |
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Service charges on deposit accounts |
282 | 329 | 814 | 882 | ||||||||||||
| Net gain on sale of loans | 11,101 | 5,492 | 24,432 | 11,451 | ||||||||||||
| Mortgage banking, net | 2,204 | 1,390 | 7,164 | 2,477 | ||||||||||||
| Interchange and ATM fees | 407 | 364 | 1,123 | 977 | ||||||||||||
| Appreciation in cash surrender value of life insurance | 160 | 254 | 480 | 571 | ||||||||||||
| Net gain on sale of available-for-sale securities | - | - | 1,068 | 49 | ||||||||||||
| Net gain on sale/disposal of premises and equipment | - | 438 | 4 | 438 | ||||||||||||
| Other noninterest income | 817 | 153 | 1,888 | 772 | ||||||||||||
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Total noninterest income |
14,971 | 8,420 | 36,973 | 17,617 | ||||||||||||
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 |
Nine Months Ended |
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September 30, |
September 30, |
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2020 |
2019 |
2020 |
2019 |
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NONINTEREST EXPENSE: |
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Salaries and employee benefits |
$ | 11,325 | $ | 7,555 | $ | 28,274 | $ | 20,057 | ||||||||
| Occupancy and equipment expense | 1,280 | 1,152 | 3,677 | 3,229 | ||||||||||||
| Data processing | 1,168 | 933 | 3,507 | 2,715 | ||||||||||||
| Advertising | 208 | 320 | 624 | 800 | ||||||||||||
| Amortization | 165 | 254 | 495 | 761 | ||||||||||||
| Loan costs | 566 | 242 | 1,211 | 554 | ||||||||||||
| Federal Deposit Insurance Corporation ("FDIC") insurance premiums | 75 | (36 | ) | 147 | 79 | |||||||||||
| Postage | 76 | 90 | 260 | 237 | ||||||||||||
| Professional and examination fees | 389 | 182 | 1,081 | 767 | ||||||||||||
| Acquisition costs | - | 517 | 157 | 1,693 | ||||||||||||
| Other noninterest expense | 1,093 | 1,015 | 4,893 | 2,826 | ||||||||||||
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Total noninterest expense |
16,345 | 12,224 | 44,326 | 33,718 | ||||||||||||
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INCOME BEFORE PROVISION FOR INCOME TAXES |
8,550 | 5,201 | 21,574 | 10,672 | ||||||||||||
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Provision for income taxes |
2,170 | 1,096 | 5,532 | 2,137 | ||||||||||||
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NET INCOME |
$ | 6,380 | $ | 4,105 | $ | 16,042 | $ | 8,535 | ||||||||
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BASIC EARNINGS PER COMMON SHARE |
$ | 0.94 | $ | 0.64 | $ | 2.36 | $ | 1.33 | ||||||||
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DILUTED EARNINGS PER COMMON SHARE |
$ | 0.94 | $ | 0.63 | $ | 2.35 | $ | 1.32 | ||||||||
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 |
Nine Months Ended |
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September 30, |
September 30, |
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2020 |
2019 |
2020 |
2019 |
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NET INCOME |
$ | 6,380 | $ | 4,105 | $ | 16,042 | $ | 8,535 | ||||||||
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OTHER COMPREHENSIVE INCOME (LOSS): |
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| Change in fair value of investment securities available-for-sale | 1,263 | 1,166 | 6,074 | 4,617 | ||||||||||||
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Reclassification for net realized gains on investment securities available-for-sale |
- | - | (1,068 | ) | (49 | ) | ||||||||||
| Change in fair value of loans held-for-sale | - | - | - | 296 | ||||||||||||
| Reclassification for net realized gains on loans held-for-sale | - | - | - | (605 | ) | |||||||||||
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Total other comprehensive income |
1,263 | 1,166 | 5,006 | 4,259 | ||||||||||||
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Income tax (provision) benefit related to: |
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| Investment securities | (332 | ) | (307 | ) | (1,318 | ) | (1,203 | ) | ||||||||
| Loans held-for-sale | - | - | - | 82 | ||||||||||||
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Total income tax provision |
(332 | ) | (307 | ) | (1,318 | ) | (1,121 | ) | ||||||||
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COMPREHENSIVE INCOME |
$ | 7,311 | $ | 4,964 | $ | 19,730 | $ | 11,673 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three and Nine Months Ended September 30, 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, July, 1 2020 |
$ | - | $ | 71 | $ | 77,506 | $ | (227 | ) | $ | (3,664 | ) | $ | 63,757 | $ | 4,086 | $ | 141,529 | ||||||||||||||
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Net income |
- | - | - | - | - | 6,380 | - | 6,380 | ||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | 931 | 931 | ||||||||||||||||||||||||
| Dividends paid ($0.0975 per share) | - | - | - | - | - | (659 | ) | - | (659 | ) | ||||||||||||||||||||||
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Stock compensation expense |
- | - | 78 | - | - | - | - | 78 | ||||||||||||||||||||||||
| ESOP shares allocated (4,154 shares) | - | - | 28 | 42 | - | - | - | 70 | ||||||||||||||||||||||||
| Treasury stock purchased (61,495 shares at $15.70 average cost per share) | - | - | - | - | (966 | ) | - | - | (966 | ) | ||||||||||||||||||||||
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Balance, September 30, 2020 |
$ | - | $ | 71 | $ | 77,612 | $ | (185 | ) | $ | (4,630 | ) | $ | 69,478 | $ | 5,017 | $ | 147,363 | ||||||||||||||
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Balance, July, 1 2019 |
$ | - | $ | 67 | $ | 68,535 | $ | (393 | ) | $ | (3,850 | ) | $ | 50,167 | $ | 1,168 | $ | 115,694 | ||||||||||||||
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Net income |
- | - | - | - | - | 4,105 | - | 4,105 | ||||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | - | 859 | 859 | ||||||||||||||||||||||||
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Dividends paid ($0.095 per share) |
- | - | - | - | - | (608 | ) | - | (608 | ) | ||||||||||||||||||||||
| Stock compensation expense | - | - | 330 | - | - | - | - | 330 | ||||||||||||||||||||||||
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ESOP shares allocated (4,154 shares) |
- | - | 29 | 41 | - | - | - | 70 | ||||||||||||||||||||||||
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Balance, September 30, 2019 |
$ | - | $ | 67 | $ | 68,894 | $ | (352 | ) | $ | (3,850 | ) | $ | 53,664 | $ | 2,027 | $ | 120,450 | ||||||||||||||
| Balance, January 1, 2020 | $ | - | $ | 67 | $ | 68,826 | $ | (311 | ) | $ | (3,643 | ) | $ | 55,391 | $ | 1,329 | $ | 121,659 | ||||||||||||||
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Net income |
- | - | - | - | - | 16,042 | - | 16,042 | ||||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | - | 3,688 | 3,688 | ||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | (1,955 | ) | - | (1,955 | ) | ||||||||||||||||||||||
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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 |
- | - | 226 | - | - | - | - | 226 | ||||||||||||||||||||||||
| ESOP shares allocated (12,462 shares) | - | - | 97 | 126 | - | - | - | 223 | ||||||||||||||||||||||||
| Treasury stock purchased (62,776 shares at $15.73 average cost per share) | - | - | - | - | (987 | ) | - | - | (987 | ) | ||||||||||||||||||||||
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Balance, September 30, 2020 |
$ | - | $ | 71 | $ | 77,612 | $ | (185 | ) | $ | (4,630 | ) | $ | 69,478 | $ | 5,017 | $ | 147,363 | ||||||||||||||
| Balance, January 1, 2019 | $ | - | $ | 57 | $ | 52,051 | $ | (477 | ) | $ | (2,640 | ) | $ | 46,926 | $ | (1,111 | ) | $ | 94,806 | |||||||||||||
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Net income |
- | - | - | - | - | 8,535 | - | 8,535 | ||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | 3,138 | 3,138 | ||||||||||||||||||||||||
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Dividends paid |
- | - | - | - | - | (1,797 | ) | - | (1,797 | ) | ||||||||||||||||||||||
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Stock issued in connection with Big Muddy Bancorp, Inc. acquisition |
- | 10 | 16,425 | - | - | - | - | 16,435 | ||||||||||||||||||||||||
| Stock compensation expense | - | - | 330 | - | - | - | - | 330 | ||||||||||||||||||||||||
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ESOP shares allocated (12,462 shares) |
- | - | 88 | 125 | - | - | - | 213 | ||||||||||||||||||||||||
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Treasury stock purchased (70,000 shares at $17.29 average cost per share) |
- | - | - | - | (1,210 | ) | - | - | (1,210 | ) | ||||||||||||||||||||||
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Balance, September 30, 2019 |
$ | - | $ | 67 | $ | 68,894 | $ | (352 | ) | $ | (3,850 | ) | $ | 53,664 | $ | 2,027 | $ | 120,450 | ||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
|
Nine Months Ended |
||||||||
|
September 30, |
||||||||
|
2020 |
2019 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
|
Net income |
$ | 16,042 | $ | 8,535 | ||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
|
Loan loss provision |
2,751 | 1,995 | ||||||
|
Impairment of servicing rights |
878 | - | ||||||
|
Depreciation |
1,813 | 1,308 | ||||||
|
Net amortization of investment securities premiums and discounts |
749 | 704 | ||||||
|
Amortization of mortgage servicing rights |
2,476 | 1,113 | ||||||
|
Amortization of right-of-use assets |
347 | 354 | ||||||
|
Amortization of core deposit intangible and tax credits |
495 | 761 | ||||||
|
Compensation expense related to restricted stock awards |
226 | 330 | ||||||
|
ESOP compensation expense for allocated shares |
223 | 213 | ||||||
|
Deferred income tax provision |
22 | 417 | ||||||
|
Net gain on sale of loans |
(24,432 | ) | (11,451 | ) | ||||
| Originations of loans held-for-sale | (636,767 | ) | (345,699 | ) | ||||
|
Proceeds from sales of loans held-for-sale |
645,327 | 339,245 | ||||||
|
Net gain on sale of available-for-sale securities |
(1,068 | ) | (49 | ) | ||||
|
Net loss on sale of real estate owned and other repossessed assets |
9 | 18 | ||||||
|
Net gain on sale/disposal of premises and equipment |
(4 | ) | (438 | ) | ||||
|
Net appreciation in cash surrender value of life insurance |
(480 | ) | (572 | ) | ||||
|
Net change in: |
||||||||
|
Accrued interest and dividends receivable |
(1,030 | ) | (583 | ) | ||||
|
Other assets |
(7,807 | ) | (571 | ) | ||||
|
Accrued expenses and other liabilities |
3,936 | 741 | ||||||
|
Net cash provided by (used in) operating activities |
3,706 | (3,629 | ) | |||||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
|
Activity in available-for-sale securities: |
||||||||
|
Sales |
18,149 | 53,257 | ||||||
|
Maturities, principal payments and calls |
32,553 | 9,998 | ||||||
|
Purchases |
(40,145 | ) | (51,464 | ) | ||||
|
FHLB stock redeemed |
2,081 | 1,108 | ||||||
|
FRB stock purchased |
(373 | ) | (493 | ) | ||||
|
Net cash received from acquisitions |
5,044 | 6,901 | ||||||
|
Loan origination and principal collection, net |
(30,040 | ) | (50,189 | ) | ||||
| Proceeds from bank owned life insurance | - | 519 | ||||||
| Purchases of bank owned life insurance | (845 | ) | - | |||||
|
Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans |
28 | 352 | ||||||
| Proceeds from sale of premises and equipment | 13 | 2,500 | ||||||
|
Purchases of premises and equipment, net |
(15,693 | ) | (8,389 | ) | ||||
|
Net cash used in investing activities |
(29,228 | ) | (35,900 | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
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 nine-month period ended September 30, 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. WFS was a wholly owned subsidiary of WB and was acquired through the 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 September 30, 2020 for recognition and/or disclosure.
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 |
$ | 11,544 | $ | 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 |
$ | 103,631 | $ | 107,516 | ||||
|
Liabilities assumed: |
||||||||
|
Deposits |
$ | 86,572 | $ | 92,706 | ||||
|
Accrued expenses and other liabilities |
4,554 | 1,960 | ||||||
|
Other borrowings |
2,500 | - | ||||||
|
Total liabilities assumed |
$ | 93,626 | $ | 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 $4,962,000. 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 and nine months ended September 30, 2020, accretion of the loan discount was $264,000 and $512,000, respectively. The remaining accretable loan discount was $654,000 as of September 30, 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 and nine months ended September 30, 2020, accretion of the loan discount was $182,000 and $513,000, respectively. The remaining accretable loan discount was $820,000 as of September 30, 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 remaining balance of the acquired impaired loans as of September 30, 2020 was $129,000.
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 from date of acquisition. 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 from date of acquisition.
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. There were no acquisition costs recorded during the three months ended September 30, 2020. The Company recorded acquisition costs related to WHC of $157,000 during the nine months ended September 30, 2020 and $818,000 during the year ended December 31, 2019. The Company recorded acquisition costs related to BMB of $1,380,000 during the year ended December 31, 2019. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.
Operations of acquired entities have been included in the consolidated financial statements since date of acquisition. The Company does not consider them as separate reporting segments and does not track the amount of revenues and net income attributable since acquisition. As such, it is impracticable to determine such amounts for the period from acquisition date through September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 2019.
|
Three Months Ended |
Nine Months Ended |
|||||||
|
September 30, 2019 |
September 30, 2019 |
|||||||
|
(Dollars in Thousands, Except Per Share Data) |
(Dollars in Thousands, Except Per Share Data) |
|||||||
|
Pro forma net income(1) |
||||||||
|
Net interest income after loan loss provision |
$ | 9,720 | $ | 28,918 | ||||
| Noninterest income | 8,709 | 18,484 | ||||||
| Noninterest expense | 12,913 | 35,785 | ||||||
|
Income before provision for income taxes |
5,516 | 11,617 | ||||||
| Income tax provision | 1,103 | 2,323 | ||||||
|
Net income |
$ | 4,413 | $ | 9,294 | ||||
|
Pro forma earnings per share(1) |
||||||||
| Basic earnings per share | $ | 0.69 | $ | 1.45 | ||||
| Diluted earnings per share | $ | 0.68 | $ | 1.44 | ||||
|
Basic weighted average shares outstanding |
6,403,693 | 6,420,711 | ||||||
|
Diluted weighted average shares outstanding |
6,425,380 | 6,442,934 | ||||||
(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:
|
September 30, 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 obligations |
$ | 2,269 | $ | 39 | $ | - | $ | 2,308 | $ | 686 | $ | 9 | $ | - | $ | 695 | ||||||||||||||||
| U.S. treasury obligations | 5,144 | 544 | - | 5,688 | 12,632 | 270 | - | 12,902 | ||||||||||||||||||||||||
|
Municipal obligations |
90,182 | 5,495 | (6 | ) | 95,671 | 50,699 | 1,616 | (93 | ) | 52,222 | ||||||||||||||||||||||
|
Corporate obligations |
10,586 | 87 | (9 | ) | 10,664 | 8,356 | 40 | (8 | ) | 8,388 | ||||||||||||||||||||||
|
Mortgage-backed securities |
8,156 | 146 | (6 | ) | 8,296 | 9,460 | 56 | (21 | ) | 9,495 | ||||||||||||||||||||||
|
Collateralized mortgage obligations |
25,041 | 884 | (3 | ) | 25,922 | 33,129 | 297 | (92 | ) | 33,334 | ||||||||||||||||||||||
|
Asset-backed securities |
17,166 | 15 | (377 | ) | 16,804 | 10,110 | - | (271 | ) | 9,839 | ||||||||||||||||||||||
|
Total |
$ | 158,544 | $ | 7,210 | $ | (401 | ) | $ | 165,353 | $ | 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 |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Proceeds from sale of available-for-sale securities |
$ | - | $ | - | $ | 18,149 | $ | 53,257 | ||||||||
|
Gross realized gain on sale of available-for-sale securities |
$ | - | $ | - | $ | 1,068 | $ | 549 | ||||||||
| Gross realized loss on sale of available-for-sale securities | - | - | - | (500 | ) | |||||||||||
|
Net realized gain on sale of available-for-sale securities |
$ | - | $ | - | $ | 1,068 | $ | 49 | ||||||||
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.
|
September 30, 2020 |
||||||||
|
Amortized |
Fair |
|||||||
|
Cost |
Value |
|||||||
|
(In Thousands) |
||||||||
|
Due in one year or less |
$ | 1,976 | $ | 1,987 | ||||
|
Due from one to five years |
16,793 | 17,517 | ||||||
|
Due from five to ten years |
17,892 | 18,572 | ||||||
|
Due after ten years |
88,686 | 93,059 | ||||||
| 125,347 | 131,135 | |||||||
|
Mortgage-backed securities |
8,156 | 8,296 | ||||||
|
Collateralized mortgage obligations |
25,041 | 25,922 | ||||||
|
Total |
$ | 158,544 | $ | 165,353 | ||||
As of September 30, 2020 and December 31, 2019 securities with a fair value of $21,238,000 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:
|
September 30, 2020 |
||||||||||||||||
|
Less Than 12 Months |
12 Months or Longer |
|||||||||||||||
|
Gross |
Gross |
|||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||
|
Value |
Losses |
Value |
Losses |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
| U.S. government obligations | $ | - | $ | - | $ | - | $ | - | ||||||||
| U.S. treasury obligations | - | - | - | - | ||||||||||||
|
Municipal obligations |
950 | (6 | ) | - | - | |||||||||||
|
Corporate obligations |
3,241 | (9 | ) | - | - | |||||||||||
|
Mortgage-backed securities and collateralized mortgage obligations |
1,748 | (3 | ) | 1,614 | (6 | ) | ||||||||||
|
Asset-backed securities |
2,476 |
(14 |
) | 9,555 | (363 | ) | ||||||||||
|
Total |
$ | 8,415 | $ | (32 | ) | $ | 11,169 | $ | (369 | ) | ||||||
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) |
||||||||||||||||
| U.S. government obligations | $ | - | $ | - | $ | - | $ | - | ||||||||
| U.S. treasury obligations | - | - | - | - | ||||||||||||
|
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 and nine months ended September 30, 2020, or 2019. As of September 30, 2020 and December 31, 2019, there were, respectively, 21 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 September 30, 2020 and December 31, 2019, there were no U.S. government or U.S. treasury obligations with unrealized losses. As of September 30, 2020, 8 municipal obligations had unrealized losses of approximately 0.63% of the amortized cost associated with these securities. At December 31, 2019, 10 municipal obligations had unrealized losses of approximately 0.83% of the amortized cost associated with these securities. As of September 30, 2020, 3 corporate obligations had unrealized losses of approximately 0.28% of the amortized cost associated with these securities. At December 31, 2019, 1 corporate obligation had an unrealized loss of approximately 0.80% of the amortized cost 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 September 30, 2020, 2 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses of approximately 0.27% of the amortized cost associated with these securities. At December 31, 2019, 12 MBSs and CMOs had unrealized losses of approximately 0.63% of the amortized cost 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 September 30, 2020, 8 asset-backed securities (“ABSs”) had unrealized losses of approximately 3.04% of the amortized cost associated with these securities. At December 31, 2019, 5 ABSs had unrealized losses of approximately 2.68% of the amortized cost 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:
|
September 30, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
$ | 152,835 | $ | 157,898 | ||||
|
Commercial real estate |
432,473 | 434,025 | ||||||
|
Other loans: |
||||||||
|
Home equity |
61,460 | 56,414 | ||||||
|
Consumer |
20,694 | 18,882 | ||||||
|
Commercial |
183,611 | 113,319 | ||||||
|
Total |
851,073 | 780,538 | ||||||
|
Deferred loan fees, net |
(2,595 | ) | (1,303 | ) | ||||
|
Allowance for loan losses |
(11,300 | ) | (8,600 | ) | ||||
|
Total loans, net |
$ | 837,178 | $ | 770,635 | ||||
Within the loan categories above, $11,274,000 and $13,602,000 was guaranteed by the United States Department of Agriculture Rural Development at September 30, 2020 and December 31, 2019, respectively. Also within the loan categories above, $9,460,000 and $5,701,000 was guaranteed by the United States Department of Agriculture Farm Service Agency at September 30, 2020 and December 31, 2019, respectively. In addition, $45,216,000 was guaranteed by the Small Business Administration ("SBA") under their Payroll Protection Program ("PPP") at September 30, 2020. Deferred loan fees, net includes $1,207,000 of remaining deferred fees related to the PPP at September 30, 2020.
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: |
||||||||||||||||||||||||
|
Balance, July, 1 2020 |
$ | 1,369 | $ | 6,096 | $ | 491 | $ | 371 | $ | 2,173 | $ | 10,500 | ||||||||||||
| Charge-offs | - | - | - | (14 | ) | (67 | ) | (81 | ) | |||||||||||||||
| Recoveries | - | 2 | - | 2 | 23 | 27 | ||||||||||||||||||
| Provision | 92 | 623 | 13 | 9 | 117 | 854 | ||||||||||||||||||
|
Balance, September 30, 2020 |
$ | 1,461 | $ | 6,721 | $ | 504 | $ | 368 | $ | 2,246 | $ | 11,300 | ||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Balance, January 1, 2020 | $ | 1,301 | $ | 4,826 | $ | 477 | $ | 284 | $ | 1,712 | $ | 8,600 | ||||||||||||
|
Charge-offs |
- | (18 | ) | - | (25 | ) | (85 | ) | (128 | ) | ||||||||||||||
|
Recoveries |
- | 10 | - | 13 | 54 | 77 | ||||||||||||||||||
|
Provision |
160 | 1,903 | 27 | 96 | 565 | 2,751 | ||||||||||||||||||
|
Balance, September 30, 2020 |
$ | 1,461 | $ | 6,721 | $ | 504 | $ | 368 | $ | 2,246 | $ | 11,300 | ||||||||||||
|
Balance, September 30, 2020 allocated to loans individually evaluated for impairment |
$ | 296 | $ | - | $ | - | $ | - | $ | - | $ | 296 | ||||||||||||
|
Balance, September 30, 2020 allocated to loans collectively evaluated for impairment |
$ | 1,165 | $ | 6,721 | $ | 504 | $ | 368 | $ | 2,246 | $ | 11,004 | ||||||||||||
|
Loans receivable: |
||||||||||||||||||||||||
|
Balance, September 30, 2020 |
$ | 152,835 | $ | 432,473 | $ | 61,460 | $ | 20,694 | $ | 183,611 | $ | 851,073 | ||||||||||||
| Balance, September 30, 2020 of loans individually evaluated for impairment | $ | 1,128 | $ | 3,998 | $ | 115 | $ | 163 | $ | 2,118 | $ | 7,522 | ||||||||||||
|
Balance, September 30, 2020 of loans collectively evaluated for impairment |
$ | 151,707 | $ | 428,475 | $ | 61,345 | $ | 20,531 | $ | 181,493 | $ | 843,551 | ||||||||||||
|
Residential |
Commercial |
Home |
||||||||||||||||||||||
|
1-4 Family |
Real Estate |
Equity |
Consumer |
Commercial |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||
|
Balance, July, 1 2019 |
$ | 1,301 | $ | 4,276 | $ | 477 | $ | 224 | $ | 1,472 | $ | 7,750 | ||||||||||||
|
Charge-offs |
- | - | - | (44 | ) | (208 | ) | (252 | ) | |||||||||||||||
|
Recoveries |
- | 4 | - | 3 | 1 | 8 | ||||||||||||||||||
|
Provision |
- | 380 | - | 44 | 270 | 694 | ||||||||||||||||||
|
Balance, September 30, 2019 |
$ | 1,301 | $ | 4,660 | $ | 477 | $ | 227 | $ | 1,535 | $ | 8,200 | ||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||
| Balance, January 1, 2019 | $ | 1,301 | $ | 3,593 | $ | 477 | $ | 190 | $ | 1,039 | $ | 6,600 | ||||||||||||
| Charge-offs | - | (20 | ) | (75 | ) | (57 | ) | (305 | ) | (457 | ) | |||||||||||||
| Recoveries | - | 13 | - | 18 | 31 | 62 | ||||||||||||||||||
| Provision | - | 1,074 | 75 | 76 | 770 | 1,995 | ||||||||||||||||||
|
Balance, September 30, 2019 |
$ | 1,301 | $ | 4,660 | $ | 477 | $ | 227 | $ | 1,535 | $ | 8,200 | ||||||||||||
|
Balance, September 30, 2019 allocated to loans individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Balance, September 30, 2019 allocated to loans collectively evaluated for impairment |
$ | 1,301 | $ | 4,660 | $ | 477 | $ | 227 | $ | 1,535 | $ | 8,200 | ||||||||||||
|
Loans receivable: |
||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | 143,067 | $ | 416,157 | $ | 56,537 | $ | 19,012 | $ | 119,952 | $ | 754,725 | ||||||||||||
|
Balance, September 30, 2019 of loans individually evaluated for impairment |
$ | 795 | $ | 1,370 | $ | 99 | $ | 142 | $ | 1,305 | $ | 3,711 | ||||||||||||
|
Balance, September 30, 2019 of loans collectively evaluated for impairment |
$ | 142,272 | $ | 414,787 | $ | 56,438 | $ | 18,870 | $ | 118,647 | $ | 751,014 | ||||||||||||
NOTE 4. LOANS RECEIVABLE – continued
Internal classification of the loan portfolio was as follows:
|
September 30, 2020 |
||||||||||||||||||||||||
|
Special |
||||||||||||||||||||||||
|
Pass |
Mention |
Substandard |
Doubtful |
Loss |
Total |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Real estate loans: |
||||||||||||||||||||||||
| Residential 1-4 family | $ | 108,957 | $ | - | $ | 865 | $ | 199 | $ | - | $ | 110,021 | ||||||||||||
| Residential 1-4 family construction | 42,477 | - | 337 | - | - | 42,814 | ||||||||||||||||||
| Commercial real estate | 304,205 | 1,633 | 2,647 | - | - | 308,485 | ||||||||||||||||||
| Commercial construction and development | 56,913 | 14 | - | - | - | 56,927 | ||||||||||||||||||
| Farmland | 65,399 | 136 | 1,473 | 53 | - | 67,061 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
| Home equity | 61,345 | - | 115 | - | - | 61,460 | ||||||||||||||||||
| Consumer | 20,531 | - | 163 | - | - | 20,694 | ||||||||||||||||||
| Commercial | 121,769 | 829 | 705 | - | - | 123,303 | ||||||||||||||||||
| Agricultural | 58,617 | 446 | 814 | 431 | - | 60,308 | ||||||||||||||||||
|
Total |
$ | 840,213 | $ | 3,058 | $ | 7,119 | $ | 683 | $ | - | $ | 851,073 | ||||||||||||
|
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.
|
September 30, 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 |
$ | 115 | $ | - | $ | 115 | $ | 694 | $ | 109,212 | $ | 110,021 | ||||||||||||
|
Residential 1-4 family construction |
952 | - | 952 | 337 | 41,525 | 42,814 | ||||||||||||||||||
|
Commercial real estate |
919 | 57 | 976 | 916 | 306,593 | 308,485 | ||||||||||||||||||
|
Commercial construction and development |
- | - | - | - | 56,927 | 56,927 | ||||||||||||||||||
|
Farmland |
41 | - | 41 | 1,435 | 65,585 | 67,061 | ||||||||||||||||||
|
Other loans: |
||||||||||||||||||||||||
|
Home equity |
67 | - | 67 | 115 | 61,278 | 61,460 | ||||||||||||||||||
|
Consumer |
43 | - | 43 | 163 | 20,488 | 20,694 | ||||||||||||||||||
|
Commercial |
57 | - | 57 | 668 | 122,578 | 123,303 | ||||||||||||||||||
|
Agricultural |
29 | - | 29 | 1,290 | 58,989 | 60,308 | ||||||||||||||||||
|
Total |
$ | 2,223 | $ | 57 | $ | 2,280 | $ | 5,618 | $ | 843,175 | $ | 851,073 | ||||||||||||
|
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.
|
September 30, 2020 |
||||||||||||
|
Unpaid |
||||||||||||
|
Recorded |
Principal |
Related |
||||||||||
|
Investment |
Balance |
Allowance |
||||||||||
|
(In Thousands) |
||||||||||||
|
Real estate loans: |
||||||||||||
|
Residential 1-4 family |
$ | 791 | $ | 850 | $ | 296 | ||||||
|
Residential 1-4 family construction |
337 | 387 | - | |||||||||
|
Commercial real estate |
2,549 | 2,789 | - | |||||||||
|
Commercial construction and development |
14 | 14 | - | |||||||||
|
Farmland |
1,435 | 1,451 | - | |||||||||
|
Other loans: |
||||||||||||
|
Home equity |
115 | 138 | - | |||||||||
|
Consumer |
163 | 191 | - | |||||||||
|
Commercial |
668 | 796 | - | |||||||||
|
Agricultural |
1,450 | 1,707 | - | |||||||||
|
Total |
$ | 7,522 | $ | 8,323 | $ | 296 | ||||||
|
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 |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Average Recorded Investment |
Average Recorded Investment |
|||||||||||||||
|
(In Thousands) |
(In Thousands) |
|||||||||||||||
|
Real estate loans: |
||||||||||||||||
|
Residential 1-4 family |
$ | 860 | $ | 401 | $ | 704 | $ | 355 | ||||||||
| Residential 1-4 family construction | 337 | 337 | 337 | 486 | ||||||||||||
| Commercial real estate | 2,561 | 787 | 1,565 | 663 | ||||||||||||
| Commercial construction and development | 54 | - | 32 | 7 | ||||||||||||
| Farmland | 1,345 | 476 | 956 | 238 | ||||||||||||
|
Other loans: |
||||||||||||||||
| Home equity | 153 | 149 | 107 | 295 | ||||||||||||
| Consumer | 181 | 137 | 160 | 134 | ||||||||||||
| Commercial | 731 | 768 | 746 | 551 | ||||||||||||
| Agricultural | 1,470 | 615 | 975 | 272 | ||||||||||||
|
Total |
$ | 7,692 | $ | 3,670 | $ | 5,582 | $ | 3,001 | ||||||||
Interest income recognized on impaired loans for the three and nine months ended September 30, 2020 and 2019 is considered insignificant. Interest payments received on a cash basis related to impaired loans were $485,000 and $394,000 for September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020 and December 31, 2019, there were troubled debt restructured (“TDR”) loans of $1,825,000 and $246,000, respectively.
During the three months ended September 30, 2020, there were no new TDR loans. During the nine months ended September 30, 2020 there were a total of three new TDR loans. The recorded investment at time of restructure was $94,000 for a commercial construction and development loan, $1,633,000 for a commercial real estate loan and $160,000 for an agricultural loan. No charge-offs were incurred and the loans are on accrual status. The recorded investments were $14,000, $1,633,000 and $160,000, respectively at September 30, 2020. There were no new TDR loans during the three or nine months ended September 30, 2019.
There was one loan modified as a TDR that defaulted during the three and nine months ended September 30, 2020 where the default occurred within 12 months of restructuring. As a result, a charge-off of $67,000 was incurred on this loan during the third quarter bringing the net book balance to $0. 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 September 30, 2020, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in troubled debt restructures.
The Company has offered borrowers accommodations due to the impact from COVID-19, including 90-day deferrals, interest only payments and forbearances, which are not considered TDR's as they met the criteria established in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). In addition, during the three months ended September 30, 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to 26 qualified borrowers. As of September 30, 2020, loan modifications for 90-day deferrals, interest only payments and the MBOI program included 66 borrowers representing $55,210,000 in loans compared to 315 borrowers representing $125,713,000 as of June 30, 2020. As of September 30, 2020, there were approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced.
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 $1,395,326,000 and $1,169,869,000 at September 30, 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 $815,000 and $671,000 for the three months ended September 30, 2020 and 2019, respectively. Mortgage loan servicing fees were $2,320,000 and $1,918,000 for the nine months ended September 30, 2020 and 2019, respectively. These fees, net of amortization, are included in 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 $16,253,000 and $8,402,000 at September 30, 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 |
||||||||
|
September 30, |
||||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Mortgage servicing rights: |
||||||||
|
Beginning balance |
$ | 9,550 | $ | 7,666 | ||||
|
Mortgage servicing rights capitalized |
1,700 | 1,030 | ||||||
|
Amortization of mortgage servicing rights |
(854 | ) | (478 | ) | ||||
|
Ending balance |
$ | 10,396 | $ | 8,218 | ||||
| Valuation allowance: | ||||||||
| Beginning balance | (1,216 | ) | - | |||||
| Recovery of servicing rights | 338 | - | ||||||
| Ending balance | (878 | ) | - | |||||
| Mortgage servicing rights, net | $ | 9,518 | $ | 8,218 | ||||
|
As of or For the |
||||||||
|
Nine Months Ended |
||||||||
|
September 30, |
||||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Mortgage servicing rights: |
||||||||
|
Beginning balance |
$ | 8,739 | $ | 7,100 | ||||
|
Mortgage servicing rights capitalized |
4,133 | 2,231 | ||||||
|
Amortization of mortgage servicing rights |
(2,476 | ) | (1,113 | ) | ||||
|
Ending balance |
$ | 10,396 | $ | 8,218 | ||||
|
Valuation allowance: |
||||||||
|
Beginning balance |
- | - | ||||||
|
Impairment of servicing rights |
(878 | ) | - | |||||
|
Ending balance |
(878 | ) | - | |||||
|
Mortgage servicing rights, net |
$ | 9,518 | $ | 8,218 | ||||
After an impairment expense on mortgage servicing rights assets of $1,216,000 was recorded for the six months ended June 30, 2020, a recovery of $338,000 was recorded for the three months ended September 30, 2020 as a result of slower than expected prepayment speed assumptions. Impairment of servicing rights is included in other noninterest expense on the consolidated statements of income.
The fair values of these rights were $9,518,000 and $9,835,000 at September 30, 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:
|
September 30, |
December 31, |
|||||
|
2020 |
2019 |
|||||
|
Key assumptions: |
||||||
|
Discount rate |
12% | 12% | ||||
|
Prepayment speed range |
234 - 337% | 110 - 246% | ||||
|
Weighted average prepayment speed |
289% | 171% |
NOTE 6. DEPOSITS
Deposits are summarized as follows:
|
September 30, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(In Thousands) |
||||||||
|
Noninterest checking |
$ | 295,058 | $ | 200,035 | ||||
|
Interest bearing checking |
155,671 | 116,397 | ||||||
|
Savings |
169,981 | 126,991 | ||||||
|
Money market |
187,245 | 132,506 | ||||||
|
Time certificates of deposit |
190,375 | 233,064 | ||||||
|
Total |
$ | 998,330 | $ | 808,993 | ||||
Time certificates of deposits include $495,000 and $10,180,000 related to fixed rate brokered CDs at September 30, 2020 and December 31, 2019, respectively. In addition, time certificates of deposits include $0 and $16,000,000 related to fixed rate brokered certificates through the Certificate of Deposit Account Registry Service (“CDARS”) at September 30, 2020 and December 31, 2019, respectively.
NOTE 7. OTHER LONG-TERM DEBT
Other long-term debt consisted of the following:
|
September 30, 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 | $ | (59 | ) | $ | 10,000 | $ | (92 | ) | ||||||
|
Subordinated debentures fixed at 6.75%, due 2025 |
- | - | 10,000 | (122 | ) | |||||||||||
| Subordinated debentures fixed at 5.50% to floating, due 2030 | 15,000 | (324 | ) | - | - | |||||||||||
|
Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035 |
5,155 | - | 5,155 | - | ||||||||||||
|
Total other long-term debt |
$ | 30,155 | $ | (383 | ) | $ | 25,155 | $ | (214 | ) | ||||||
In June 2020, the Company completed the issuance of $15,000,000 in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction to certain qualified institutional accredited investors. The notes will bear interest at an annual fixed rate of 5.50% payable semi-annually. Starting July 1, 2025, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term Secured Overnight Financing Rate ("SOFR") plus a spread of 509.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after July 1, 2025.
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 had an annual fixed interest rate of 6.75% and interest was paid quarterly through redemption. The notes were subject to redemption at the option of the Company on or after June 19, 2020. The notes were redeemed on July 10, 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 three-month LIBOR plus 1.42%, making the rate 1.654% and 3.328% as of September 30, 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.
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 |
- | 4,811 | 4,811 | |||||||||
|
Amounts reclassified from accumulated other comprehensive income, before income taxes |
- | (1,068 | ) | (1,068 | ) | |||||||
|
Income tax provision |
- | (986 | ) | (986 | ) | |||||||
|
Total other comprehensive income |
- | 2,757 | 2,757 | |||||||||
| Balance, June 30, 2020 | - | 4,086 | 4,086 | |||||||||
| Other comprehensive income, before reclassifications and income taxes | - | 1,263 | 1,263 | |||||||||
| Amounts reclassified from accumulated other comprehensive income, before income taxes | - | - | - | |||||||||
| Income tax provision | - | (332 | ) | (332 | ) | |||||||
| Total other comprehensive income | - | 931 | 931 | |||||||||
|
Balance, September 30, 2020 |
$ | - | $ | 5,017 | $ | 5,017 | ||||||
|
Balance, January 1, 2019 |
$ | 227 | $ | (1,338 | ) | $ | (1,111 | ) | ||||
|
Other comprehensive income, before reclassifications and income taxes |
296 | 3,451 | 3,747 | |||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), before income taxes | (605 | ) | (49 | ) | (654 | ) | ||||||
| Income tax benefit (provision) | 82 | (896 | ) | (814 | ) | |||||||
| Total other comprehensive (loss) income | (227 | ) | 2,506 | 2,279 | ||||||||
| Balance, June 30, 2019 | - | 1,168 | 1,168 | |||||||||
| Other comprehensive income, before reclassifications and income taxes | - | 1,166 | 1,166 | |||||||||
| Amounts reclassified from accumulated other comprehensive income, before income taxes | - | - | - | |||||||||
| Income tax provision | - | (307 | ) | (307 | ) | |||||||
| Total other comprehensive income | - | 859 | 859 | |||||||||
|
Balance, September 30, 2019 |
$ | - | $ | 2,027 | $ | 2,027 | ||||||
NOTE 9. EARNINGS PER SHARE
The computations of basic and diluted earnings per share are as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
(Dollars in Thousands, Except Per Share Data) |
||||||||||||||||
| Basic weighted average shares outstanding | 6,776,417 | 6,403,693 | 6,804,495 | 6,420,711 | ||||||||||||
|
Dilutive effect of stock compensation |
37,322 | 21,687 | 29,434 | 22,223 | ||||||||||||
| Diluted weighted average shares outstanding | 6,813,739 | 6,425,380 | 6,833,929 | 6,442,934 | ||||||||||||
|
Net income available to common shareholders |
$ | 6,380 | $ | 4,105 | $ | 16,042 | $ | 8,535 | ||||||||
| Basic earnings per common share | $ | 0.94 | $ | 0.64 | $ | 2.36 | $ | 1.33 | ||||||||
| Diluted earnings per common share | $ | 0.94 | $ | 0.63 | $ | 2.35 | $ | 1.32 | ||||||||
There were no anti-dilutive shares at September 30, 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 $0.0950 per share for the quarters ended September 30 and December 31, 2019. A dividend of $0.0950 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 $0.0950 per share was declared on April 23, 2020 and paid on June 5, 2020 to shareholders of record on May 15, 2020. A dividend of $0.0975 per share was declared on July 23, 2020 and paid on September 4, 2020 to shareholders of record on August 14, 2020. A dividend of $0.0975 per share was declared on October 22, 2020, payable on December 4, 2020 to shareholders of record on November 13, 2020.
Stock Repurchase Program
On July 23, 2020, Eagle's Board of Directors (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. During the third quarter of 2020, the Company purchased 41,337 shares at an average price of $15.75 under this repurchase plan. The plan expires on July 23, 2021.
On July 18, 2019, 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, 2019 or the first quarter of 2020. However, during the second quarter of 2020, 1,281 shares were purchased at an average price of $16.95 per share. In addition, during the third quarter of 2020, 20,158 shares were purchased at an average price of $15.60 per share. This plan expired 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. This 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:
|
September 30, 2020 |
December 31, 2019 |
|||||||||||||||||||||||
|
Notional |
Fair Value |
Notional |
Fair Value |
|||||||||||||||||||||
|
Amount |
Asset |
Liability |
Amount |
Asset |
Liability |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Interest rate lock commitments |
$ | 280,492 | $ | 7,148 | $ | - | $ | 48,303 | $ | 554 | $ | - | ||||||||||||
|
Forward TBA mortgage-backed securities |
226,000 | - | 432 | 67,000 | - | 201 | ||||||||||||||||||
Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the consolidated statements of income. Net gains of $2,961,000 and $1,393,000 were recorded for the three months ended September 30, 2020 and 2019, respectively. Net gains of $6,363,000 and $864,000 were recorded for the nine months ended September 30, 2020 and 2019, respectively.
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 judgment 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.
|
September 30, 2020 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Financial assets: |
||||||||||||||||
|
Available-for-sale securities |
||||||||||||||||
|
U.S. government obligations |
- | $ | 2,308 | $ | - | $ | 2,308 | |||||||||
| U.S. treasury obligations | 5,688 | - | - | 5,688 | ||||||||||||
|
Municipal obligations |
- | 95,671 | - | 95,671 | ||||||||||||
|
Corporate obligations |
- | 10,664 | - | 10,664 | ||||||||||||
|
Mortgage-backed securities |
- | 8,296 | - | 8,296 | ||||||||||||
|
Collateralized mortgage obligations |
- | 25,922 | - | 25,922 | ||||||||||||
|
Asset-backed securities |
- | 16,804 | - | 16,804 | ||||||||||||
|
Loans held-for-sale |
- | 41,484 | - | 41,484 | ||||||||||||
|
Interest rate lock commitments |
- | - | 7,148 | 7,148 | ||||||||||||
|
Financial liabilities: |
||||||||||||||||
|
Forward TBA mortgage-backed securities |
- | 432 | - | 432 | ||||||||||||
|
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 obligations |
- | $ | 695 | $ | - | $ | 695 | |||||||||
| U.S. treasury obligations | 12,902 | - | - | 12,902 | ||||||||||||
|
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 | ||||||||||||
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:
|
September 30, 2020 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total Fair |
|||||||||||||
|
Inputs |
Inputs |
Inputs |
Value |
|||||||||||||
|
(In Thousands) |
||||||||||||||||
|
Impaired loans |
$ | - | $ | - | $ | 482 | $ | 482 | ||||||||
|
Real estate and other repossessed assets |
- | - | - | - | ||||||||||||
|
Mortgage servicing rights |
- | - | 9,518 | 9,518 | ||||||||||||
|
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 |
10 - 15% |
|||
|
Prepayment speeds |
100 - 350% |
|||||
|
Interest rate lock commitments |
Internal pricing model |
Pull-through expectations |
80 - 90% |
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS – continued
The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2020.
|
Interest |
||||
|
Rate Lock |
||||
|
Commitments |
||||
|
(In Thousands) |
||||
|
Balance, July, 1 2020 |
$ | 5,501 | ||
|
Purchases and issuances |
8,360 | |||
|
Sales and settlements |
(6,713 | ) | ||
|
Balance, September 30, 2020 |
$ | 7,148 | ||
|
Net change in unrealized gains relating to items held at end of period |
$ | 1,647 | ||
|
Interest |
||||
|
Rate Lock |
||||
|
Commitments |
||||
|
(In Thousands) |
||||
|
Balance, January 1, 2020 |
$ | 554 | ||
|
Purchases and issuances |
21,061 | |||
|
Sales and settlements |
(14,467 | ) | ||
|
Balance, September 30, 2020 |
$ | 7,148 | ||
|
Net change in unrealized gains relating to items held at end of period |
$ | 6,594 | ||
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.
|
September 30, 2020 |
||||||||||||||||||||
|
Total |
||||||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Estimated |
Carrying |
||||||||||||||||
|
Inputs |
Inputs |
Inputs |
Fair Value |
Amount |
||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 72,811 | $ | - | $ | - | $ | 72,811 | $ | 72,811 | ||||||||||
|
FHLB stock |
2,817 | - | - | 2,817 | 2,817 | |||||||||||||||
|
FRB stock |
2,974 | - | - | 2,974 | 2,974 | |||||||||||||||
|
Loans receivable, gross |
- | - | 857,472 | 857,472 | 848,478 | |||||||||||||||
|
Accrued interest and dividends receivable |
6,615 | - | - | 6,615 | 6,615 | |||||||||||||||
|
Mortgage servicing rights |
- | - | 9,518 | 9,518 | 9,518 | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Non-maturing interest bearing deposits |
- | 512,897 | - | 512,897 | 512,897 | |||||||||||||||
|
Noninterest bearing deposits |
295,058 | - | - | 295,058 | 295,058 | |||||||||||||||
|
Time certificates of deposit |
- | - | 191,384 | 191,384 | 190,375 | |||||||||||||||
|
Accrued expenses and other liabilities |
17,987 | - | - | 17,987 | 17,987 | |||||||||||||||
|
FHLB advances and other borrowings |
- | - | 59,998 | 59,998 | 59,777 | |||||||||||||||
|
Other long-term debt |
- | - | 29,323 | 29,323 | 30,155 | |||||||||||||||
|
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, gross |
- | - | 778,923 | 778,923 | 779,235 | |||||||||||||||
|
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 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 being evaluated to assess the 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 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 nine months ended September 30, 2020. The rate reductions add continued pressure on loan yields.
Recent Events
COVID-19
The third quarter performance was strong due to higher mortgage banking operations, as a result of a historically low interest rate environment, and substantial gains from loan sales. However, the Company also continues to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. The Bank is focused on supporting our customers, communities and employees while prudently managing risk. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.
Health care and social assistance, hotels and lodging, bars and restaurants, schools and childcare, farmers and ranchers, casinos, and nursing homes, among others, have seen dramatic changes in revenues for their business. The Bank evaluates exposure in the most affected industries. The Bank continues to reach out to specific borrowers to assess the risks and understand their needs.
Recent Events– continued
COVID-19 – continued
The Bank has offered multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. In addition, during the three months ended September 30, 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to qualified borrowers. As of September 30, 2020, loan modifications for 66 borrowers represented $55.21 million in loans compared to 315 borrowers representing $125.71 million as of June 30, 2020. The Bank qualified 26 borrowers for the MBOI program representing $23.68 million in loans, which are included in the third quarter modifications. As of September 30, 2020 there were approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced. 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 credit lines were 83.4% at the end of the third quarter and were consistent with the previous quarter and historical usage. The Paycheck Protection Program has provided 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 September 30, 2020, had helped 758 customers receive $45.22 million in SBA PPP loans. The Bank has started to process applications for PPP loan forgiveness for customers, with 569 loans representing $9.92 million of the total SBA PPP loans qualifying for the streamlined PPP loan forgiveness application.
As of September 30, 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.
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 September 30, 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 September 30, 2020 we had goodwill of $20.80 million.
While all industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following impacted industries, as a percentage of loans as of September 30, 2020: health and social assistance (2.9%), hotels and lodging (4.2%), bars and restaurants (2.5%), casinos (1.2%) and nursing homes (0.4%).
The Company is committed to assisting our customers and communities in this time of need. The State of Montana entered its Phase 2 reopening on June 1, 2020 and Eagle reopened branch lobbies. However, due to increased COVID-19 cases throughout the state, branch lobbies were closed again. In addition, effective July 16, 2020, a mandatory mask directive for indoor areas open to the public was implemented for the State of Montana. Accommodations have been made for employees to work from home when feasible while keeping drive-ups open and scheduling in-person appointments.
Recent Events– continued
Acquisitions
The Bank has used growth through mergers or acquisition in addition to its strategy of organic growth. 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 September 30, 2020 and December 31, 2019.
Total assets were $1.26 billion at September 30, 2020, an increase of $200.77 million, or 19.0% from $1.05 billion at December 31, 2019. The increase was largely due to the change in securities available-for sale and loans receivable. Securities available-for-sale increased by $38.47 million from December 31, 2019. Loans receivable increased by $66.54 million from December 31, 2019. In addition, total cash and cash equivalents increased by $47.89 from December 31, 2019 and has been impacted by PPP funds deposited by borrowers and FRB's Payroll Protection Program Loan Funding ("PPPLF") facility. Total liabilities were $1.11 billion at September 30, 2020, an increase of $175.07 million, or 18.8%, from $932.60 million at December 31, 2019. The increase was largely due to an increase in deposits partially offset by a reduction in FHLB advances and other borrowings. Total deposits increased by $189.34 million from December 31, 2019. Total shareholders’ equity increased by $25.70 million from December 31, 2019.
Financial Condition Details
Investment Activities
The following table summarizes investment activities:
|
September 30, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Fair Value |
Percentage of Total |
Fair Value |
Percentage of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
Securities available-for-sale: |
||||||||||||||||
|
U.S. government obligations |
$ | 2,308 | 1.40 | % | $ | 695 | 0.55 | % | ||||||||
| U.S. treasury obligations | 5,688 | 3.44 | % | 12,902 | 10.17 | % | ||||||||||
|
Municipal obligations |
95,671 | 57.85 | % | 52,222 | 41.17 | % | ||||||||||
|
Corporate obligations |
10,664 | 6.45 | % | 8,388 | 6.61 | % | ||||||||||
|
Mortgage-backed securities |
8,296 | 5.02 | % | 9,495 | 7.48 | % | ||||||||||
|
Collateralized mortgage obligations |
25,922 | 15.68 | % | 33,334 | 26.27 | % | ||||||||||
|
Asset-backed securities |
16,804 | 10.16 | % | 9,839 | 7.75 | % | ||||||||||
|
Total securities available-for-sale |
$ | 165,353 | 100.00 | % | $ | 126,875 | 100.00 | % | ||||||||
Securities available-for-sale were $165.35 million at September 30, 2020, an increase of $38.47 million, or 30.3%, from $126.88 million at December 31, 2019. Securities increased during the period due to the WHC acquisition, which included acquired securities of $43.71 million. Excluding securities acquired, securities decreased by $5.23 million. Sales and maturities of securities were largely offset by purchases during the period.
Financial Condition – continued
Lending Activities
The following table includes the composition of the Bank’s loan portfolio by loan category:
|
September 30, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Amount |
Percent of Total |
Amount |
Percent of Total |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||
|
Real estate loans: |
||||||||||||||||
|
Residential 1-4 family (1) |
$ | 110,021 | 12.93 | % | $ | 119,296 | 15.28 | % | ||||||||
|
Residential 1-4 family construction |
42,814 | 5.03 | % | 38,602 | 4.95 | % | ||||||||||
|
Total residential 1-4 family |
152,835 | 17.96 | % | 157,898 | 20.23 | % | ||||||||||
|
Commercial real estate |
308,485 | 36.24 | % | 331,062 | 42.41 | % | ||||||||||
|
Commercial construction and development |
56,927 | 6.69 | % | 52,670 | 6.75 | % | ||||||||||
|
Farmland |
67,061 | 7.88 | % | 50,293 | 6.44 | % | ||||||||||
|
Total commercial real estate |
432,473 | 50.81 | % | 434,025 | 55.60 | % | ||||||||||
|
Total real estate loans |
585,308 | 68.77 | % | 591,923 | 75.83 | % | ||||||||||
|
Other loans: |
||||||||||||||||
|
Home equity |
61,460 | 7.22 | % | 56,414 | 7.23 | % | ||||||||||
|
Consumer |
20,694 | 2.43 | % | 18,882 | 2.42 | % | ||||||||||
|
Commercial |
123,303 | 14.49 | % | 72,797 | 9.33 | % | ||||||||||
|
Agricultural |
60,308 | 7.09 | % | 40,522 | 5.19 | % | ||||||||||
|
Total commercial |
183,611 | 21.58 | % | 113,319 | 14.52 | % | ||||||||||
|
Total other loans |
265,765 | 31.23 | % | 188,615 | 24.17 | % | ||||||||||
|
Total loans |
851,073 | 100.00 | % | 780,538 | 100.00 | % | ||||||||||
|
Deferred loan fees |
(2,595 | ) | (1,303 | ) | ||||||||||||
|
Allowance for loan losses |
(11,300 | ) | (8,600 | ) | ||||||||||||
|
Total loans, net |
$ | 837,178 | $ | 770,635 | ||||||||||||
|
|
(1) |
Excludes loans held-for-sale. |
Loans receivable, net increased $66.54 million, or 8.6%, to $837.18 million at September 30, 2020 from $770.64 million at December 31, 2019. The increase was impacted by the WHC acquisition. The WHC acquisition included $43.42 million of acquired loans. Excluding acquired loans, loans receivable increased by $23.12 million. Including acquired loans, total commercial loans increased $70.29 million, total commercial real estate loans decreased $1.56 million, total residential loans decreased $5.06 million, home equity loans increased $5.05 million and consumer loans increased $1.81 million.
Financial Condition – continued
Lending Activities– continued
Total loan originations were $928.87 million for the nine months ended September 30, 2020. Total residential 1-4 family originations were $678.24 million, which includes $636.77 million of loans held-for-sale originations. Total commercial real estate originations were $101.58 million. Total commercial originations were $115.63 million, which includes $45.71 million of SBA PPP loans. Home equity loan originations totaled $23.93 million. Consumer loan originations totaled $9.49 million. Loans held-for-sale increased by $15.87 million to $41.48 million at September 30, 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. As of September 30, 2020 and December 31, 2019, the Bank had $25,000 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:
|
September 30, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
(Dollars in Thousands) |
||||||||
|
Non-accrual loans |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
$ | 694 | $ | 618 | ||||
|
Residential 1-4 family construction |
337 | 337 | ||||||
|
Commercial real estate |
916 | 583 | ||||||
|
Commercial construction and development |
- | 50 | ||||||
|
Farmland |
1,435 | 323 | ||||||
|
Other loans: |
||||||||
|
Home equity |
97 | 78 | ||||||
|
Consumer |
163 | 156 | ||||||
|
Commercial |
668 | 750 | ||||||
|
Agricultural |
1,290 | 499 | ||||||
|
Accruing loans delinquent 90 days or more |
||||||||
|
Real estate loans: |
||||||||
|
Residential 1-4 family |
- | 4 | ||||||
|
Commercial real estate |
57 | - | ||||||
|
Other loans: |
||||||||
|
Agricultural |
- | 1,805 | ||||||
|
Restructured loans: |
||||||||
|
Real estate loans: |
||||||||
| Commercial real estate | 1,633 | - | ||||||
|
Commercial construction and development |
14 | - | ||||||
|
Farmland |
- | 153 | ||||||
|
Other loans: |
||||||||
|
Home equity |
18 | 20 | ||||||
|
Commercial |
- | 74 | ||||||
|
Agricultural |
160 | - | ||||||
|
Total nonperforming loans |
7,482 | 5,450 | ||||||
|
Real estate owned and other repossessed property, net |
25 | 26 | ||||||
|
Total nonperforming assets |
$ | 7,507 | $ | 5,476 | ||||
|
Total nonperforming loans to total loans |
0.88 | % | 0.70 | % | ||||
|
Total nonperforming loans to total assets |
0.60 | % | 0.52 | % | ||||
|
Total allowance for loan loss to nonperforming loans |
151.03 | % | 157.80 | % | ||||
|
Total nonperforming assets to total assets |
0.60 | % | 0.52 | % | ||||
Non-accrual loans as of September 30, 2020 and December 31, 2019 include $1.97 million and $1.05 million, respectively of acquired loans that deteriorated subsequent to the acquisition date.
As of September 30, 2020, loan modifications for 66 borrowers represented $55.21 million in loans compared to 315 borrowers representing $125.71 million as of June 30, 2020. As of September 30, 2020 there are approximately 76 forbearances approved for residential mortgage loans, of which 68 are sold and serviced.
Financial Condition – continued
Deposits and Other Sources of Funds
The following table includes deposit accounts by category:
|
September 30, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Percent |
Percent |
|||||||||||||||
|
Amount |
of Total |
Amount |
of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
Noninterest checking |
$ | 295,058 | 29.55 | % | $ | 200,035 | 24.72 | % | ||||||||
|
Interest bearing checking |
155,671 | 15.59 | % | 116,397 | 14.39 | % | ||||||||||
|
Savings |
169,981 | 17.03 | % | 126,991 | 15.70 | % | ||||||||||
|
Money market |
187,245 | 18.76 | % | 132,506 | 16.38 | % | ||||||||||
|
Total |
807,955 | 80.93 | % | 575,929 | 71.19 | % | ||||||||||
|
Certificates of deposit accounts: |
||||||||||||||||
|
IRA certificates |
24,756 | 2.48 | % | 25,240 | 3.12 | % | ||||||||||
|
Brokered certificates |
495 | 0.05 | % | 10,180 | 1.26 | % | ||||||||||
|
Other certificates |
165,124 | 16.54 | % | 197,644 | 24.43 | % | ||||||||||
|
Total certificates of deposit |
190,375 | 19.07 | % | 233,064 | 28.81 | % | ||||||||||
|
Total deposits |
$ | 998,330 | 100.00 | % | $ | 808,993 | 100.00 | % | ||||||||
Deposits increased by $189.34 million, or 23.4%, to $998.33 million at September 30, 2020 from $808.99 million at December 31, 2019. The increase was due in part to the WHC acquisition. Excluding acquired deposits, total deposits increased by $102.77 million. Including acquired deposits, noninterest checking increased by $95.02 million, money market increased by $54.74 million, savings increased by $42.99 million and interest bearing checking increased by $39.27 million. Certificates of deposit decreased by $42.68 million. The decrease in time certificates of deposit was impacted by a decrease of $9.68 million in fixed rate brokered CDs, as well as a decrease in other certificates of $32.52 million.
The following table summarizes borrowing activity:
|
September 30, |
December 31, |
|||||||||||||||
|
2020 |
2019 |
|||||||||||||||
|
Net |
Percent |
Net |
Percent |
|||||||||||||
|
Amount |
of Total |
Amount |
of Total |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||
|
FHLB advances and other borrowings |
$ | 59,777 | 66.75 | % | $ | 88,350 | 77.99 | % | ||||||||
|
Other long-term debt: |
||||||||||||||||
|
Senior notes fixed at 5.75%, due 2022 |
9,941 | 11.10 | % | 9,908 | 8.74 | % | ||||||||||
|
Subordinated debentures fixed at 6.75%, due 2025 |
- | 0.00 | % | 9,878 | 8.72 | % | ||||||||||
| Subordinated debentures fixed at 5.50% to floating, due 2030 | 14,676 | 16.39 | % | - | 0.00 | % | ||||||||||
|
Subordinated debentures variable, due 2035 |
5,155 | 5.76 | % | 5,155 | 4.55 | % | ||||||||||
|
Total other long-term debt |
29,772 | 33.25 | % | 24,941 | 22.01 | % | ||||||||||
|
Total borrowings |
$ | 89,549 | 100.00 | % | $ | 113,291 | 100.00 | % | ||||||||
FHLB advances and other borrowings decreased by $28.57 million, or 32.3%, to $59.78 million at September 30, 2020 from $88.35 million at December 31, 2019. The FHLB advances and other borrowings at September 30, 2020 include $23.79 million of FRB borrowings as Eagle used the FRB's "PPPLF" facility as a partial source of funding for its SBA PPP loans. Excluding FRB borrowings, FHLB advances decreased by $52.36 million from December 31, 2019. This decrease is due to slower than expected loan growth coupled with increased liquidity resulting from the WHC acquisition and growth in non-maturity deposits fueled by PPP funding and economic stimulus. Total other long-term debt increased by $4.83 million primarily due to the issuance in June 2020 of $15.00 million in subordinated notes due 2030, partially offset by the redemption in July 2020 of $10.00 million, 6.75% subordinated notes due 2025.
Shareholders’ Equity
Total shareholders’ equity increased $25.70 million, or 21.1%, to $147.36 million at September 30, 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, net income of $16.04 million and other comprehensive income of $3.69 million. These increases were slightly offset by dividends paid of $1.96 million and stock repurchases of $987,000.
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 September 30, |
||||||||||||||||||||||||
|
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 |
$ | 163,102 | $ | 874 | 2.13 | % | $ | 134,980 | $ | 916 | 2.69 | % | ||||||||||||
|
FHLB and FRB stock |
6,299 | 95 | 5.98 | % | 8,049 | 107 | 5.27 | % | ||||||||||||||||
|
Loans receivable(1) |
902,543 | 11,340 | 4.98 | % | 779,770 | 10,731 | 5.46 | % | ||||||||||||||||
|
Other earning assets |
43,662 | 30 | 0.27 | % | 4,188 | 19 | 1.80 | % | ||||||||||||||||
|
Total interest earning assets |
1,115,606 | 12,339 | 4.39 | % | 926,987 | 11,773 | 5.04 | % | ||||||||||||||||
|
Noninterest earning assets |
129,312 | 100,911 | ||||||||||||||||||||||
|
Total assets |
$ | 1,244,918 | $ | 1,027,898 | ||||||||||||||||||||
|
Liabilities and equity: |
||||||||||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
|
Deposit accounts: |
||||||||||||||||||||||||
|
Checking |
$ | 157,542 | $ | 13 | 0.03 | % | $ | 114,820 | $ | 11 | 0.04 | % | ||||||||||||
|
Savings |
160,118 | 33 | 0.08 | % | 119,555 | 24 | 0.08 | % | ||||||||||||||||
|
Money market |
176,276 | 102 | 0.23 | % | 121,588 | 109 | 0.36 | % | ||||||||||||||||
|
Certificates of deposit |
200,527 | 631 | 1.25 | % | 213,073 | 878 | 1.63 | % | ||||||||||||||||
|
Advances from FHLB and other borrowings including long-term debt |
108,427 | 782 | 2.86 | % | 136,306 | 1,052 | 3.06 | % | ||||||||||||||||
|
Total interest bearing liabilities |
802,890 | 1,561 | 0.77 | % | 705,342 | 2,074 | 1.17 | % | ||||||||||||||||
|
Noninterest checking |
276,580 | 188,291 | ||||||||||||||||||||||
|
Other noninterest bearing liabilities |
21,840 | 15,753 | ||||||||||||||||||||||
|
Total liabilities |
1,101,310 | 909,386 | ||||||||||||||||||||||
|
Total equity |
143,608 | 118,512 | ||||||||||||||||||||||
|
Total liabilities and equity |
$ | 1,244,918 | $ | 1,027,898 | ||||||||||||||||||||
|
Net interest income/interest rate spread(2) |
$ | 10,778 | 3.62 | % | $ | 9,699 | 3.87 | % | ||||||||||||||||
|
Net interest margin(3) |
3.83 | % | 4.15 | % | ||||||||||||||||||||
|
Total interest earning assets to interest bearing liabilities |
138.95 | % | 131.42 | % | ||||||||||||||||||||
|
(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. |
Analysis of Net Interest Income – continued
|
For the Nine Months Ended September 30, |
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|
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 |
$ | 168,170 | $ | 2,853 | 2.26 | % | $ | 137,533 | $ | 2,802 | 2.72 | % | ||||||||||||
| FHLB and FRB stock | 6,934 | 284 | 5.46 | % | 7,582 | 297 | 5.24 | % | ||||||||||||||||
| Loans receivable(1) | 870,114 | 33,832 | 5.18 | % | 753,541 | 31,378 | 5.57 | % | ||||||||||||||||
|
Other earning assets |
34,309 | 134 | 0.52 | % | 3,984 | 55 | 1.85 | % | ||||||||||||||||
|
Total interest earning assets |
1,079,527 | 37,103 | 4.58 | % | 902,640 | 34,532 | 5.11 | % | ||||||||||||||||
| Noninterest earning assets | 124,192 | 95,835 | ||||||||||||||||||||||
|
Total assets |
$ | 1,203,719 | $ | 998,475 | ||||||||||||||||||||
|
Liabilities and equity: |
||||||||||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
|
Deposit accounts: |
||||||||||||||||||||||||
| Checking | $ | 147,054 | $ | 47 | 0.04 | % | $ | 115,549 | $ | 33 | 0.04 | % | ||||||||||||
| Savings | 149,129 | 118 | 0.11 | % | 118,972 | 61 | 0.07 | % | ||||||||||||||||
| Money market | 160,477 | 362 | 0.30 | % | 121,907 | 305 | 0.33 | % | ||||||||||||||||
| Certificates of deposit | 224,251 | 2,536 | 1.51 | % | 205,396 | 2,334 | 1.52 | % | ||||||||||||||||
|
Advances from FHLB and other borrowings including long-term debt |
115,861 | 2,362 | 2.72 | % | 131,011 | 3,031 | 3.09 | % | ||||||||||||||||
|
Total interest bearing liabilities |
796,772 | 5,425 | 0.91 | % | 692,835 | 5,764 | 1.11 | % | ||||||||||||||||
| Noninterest checking | 250,132 | 179,539 | ||||||||||||||||||||||
| Other noninterest bearing liabilities | 18,935 | 12,487 | ||||||||||||||||||||||
|
Total liabilities |
1,065,839 | 884,861 | ||||||||||||||||||||||
|
Total equity |
137,880 | 113,614 | ||||||||||||||||||||||
|
Total liabilities and equity |
$ | 1,203,719 | $ | 998,475 | ||||||||||||||||||||
|
Net interest income/interest rate spread(2) |
$ | 31,678 | 3.67 | % | $ | 28,768 | 4.00 | % | ||||||||||||||||
| Net interest margin(3) | 3.91 | % | 4.26 | % | ||||||||||||||||||||
|
Total interest earning assets to interest bearing liabilities |
135.49 | % | 130.28 | % | ||||||||||||||||||||
|
(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 September 30, |
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|
2020 |
2019 |
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|
Due to |
Due to |
|||||||||||||||||||||||
|
Volume |
Rate |
Net |
Volume |
Rate |
Net |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Interest earning assets: |
||||||||||||||||||||||||
|
Investment securities |
$ | 191 | $ | (233 | ) | $ | (42 | ) | $ | (114 | ) | $ | (6 | ) | $ | (120 | ) | |||||||
|
FHLB and FRB stock |
(24 | ) | 12 | (12 | ) | 19 | 8 | 27 | ||||||||||||||||
|
Loans receivable(1) |
1,690 | (1,081 | ) | 609 | 2,452 | 578 | 3,030 | |||||||||||||||||
|
Other earning assets |
179 | (168 | ) | 11 | 25 | (14 | ) | 11 | ||||||||||||||||
|
Total interest earning assets |
2,036 | (1,470 | ) | 566 | 2,382 | 566 | 2,948 | |||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
|
Checking, savings and money market accounts |
61 | (57 | ) | 4 | 11 | 60 | 71 | |||||||||||||||||
|
Certificates of deposit |
(52 | ) | (195 | ) | (247 | ) | 142 | 275 | 417 | |||||||||||||||
|
Advances from FHLB and other borrowings including long-term debt |
(215 | ) | (55 | ) | (270 | ) | 156 | 82 | 238 | |||||||||||||||
|
Total interest bearing liabilities |
(206 | ) | (307 | ) | (513 | ) | 309 | 417 | 726 | |||||||||||||||
|
Change in net interest income |
$ | 2,242 | $ | (1,163 | ) | $ | 1,079 | $ | 2,073 | $ | 149 | $ | 2,222 | |||||||||||
|
(1) |
Includes loans held-for-sale. |
Rate/Volume Analysis – continued
|
For the Nine Months Ended September 30, |
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|
2020 |
2019 |
|||||||||||||||||||||||
|
Due to |
Due to |
|||||||||||||||||||||||
|
Volume |
Rate |
Net |
Volume |
Rate |
Net |
|||||||||||||||||||
|
(In Thousands) |
||||||||||||||||||||||||
|
Interest earning assets: |
||||||||||||||||||||||||
|
Investment securities |
$ | 624 | $ | (573 | ) | $ | 51 | $ | (300 | ) | $ | 56 | $ | (244 | ) | |||||||||
| FHLB and FRB stock | (25 | ) | 12 | (13 | ) | 54 | 10 | 64 | ||||||||||||||||
| Loans receivable(1) | 4,854 | (2,400 | ) | 2,454 | 6,549 | 2,394 | 8,943 | |||||||||||||||||
| Other earning assets | 419 | (340 | ) | 79 | 7 | 4 | 11 | |||||||||||||||||
|
Total interest earning assets |
5,872 | (3,301 | ) | 2,571 | 6,310 | 2,464 | 8,774 | |||||||||||||||||
|
Interest bearing liabilities: |
||||||||||||||||||||||||
| Savings, money market and checking accounts | 121 | 7 | 128 | 29 | 147 | 176 | ||||||||||||||||||
| Certificates of deposit | 214 | (12 | ) | 202 | 311 | 792 | 1,103 | |||||||||||||||||
| Advances from FHLB and other borrowings including long-term debt | (351 | ) | (318 | ) | (669 | ) | 451 | 410 | 861 | |||||||||||||||
|
Total interest bearing liabilities |
(16 | ) | (323 | ) | (339 | ) | 791 | 1,349 | 2,140 | |||||||||||||||
|
Change in net interest income |
$ | 5,888 | $ | (2,978 | ) | $ | 2,910 | $ | 5,519 | $ | 1,115 | $ | 6,634 | |||||||||||
|
(1) |
Includes loans held-for-sale. |
Results of Operations for the Three Months Ended September 30, 2020 and 2019
Net Income. Eagle’s net income for the three months ended September 30, 2020 was $6.38 million compared to $4.11 million for the three months ended September 30, 2019. The increase of $2.27 million was due to an increase in noninterest income of $6.55 million, partially offset by an increase in noninterest expense of $4.13 million and an increase in provision for income taxes of $1.07 million. Basic and diluted earnings per share were both $0.94 for the current period. Basic earnings per share was $0.64 and diluted earnings per share was $0.63 for the prior year comparable period.
Net Interest Income. Net interest income increased to $10.78 million for the three months ended September 30, 2020, from $9.70 million for the same quarter in the prior year. The increase of $1.08 million, or 11.1%, was the result of an increase in interest and dividend income of $566,000 and a decrease in interest expense of $513,000.
Interest and Dividend Income. Interest and dividend income was $12.34 million for the three months ended September 30, 2020, compared to $11.77 million for the three months ended September 30, 2019, an increase of $566,000, or 4.8%. Interest and fees on loans increased to $11.34 million for the three months ended September 30, 2020 from $10.73 million for the three months ended September 30, 2019. This increase of $609,000, or 5.7%, 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 September 30, 2020. Net fee income of $431,000 earned on PPP loans for the three months ended September 30, 2020, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. Average balances for loans receivable, including loans held-for-sale, for the three months ended September 30, 2020 were $902.54 million, compared to $779.77 million for the prior year period. This represents an increase of $122.77 million, or 15.7% and was impacted by the WHC acquisition, as well as organic growth. The average interest rate earned on loans receivable decreased by 48 basis points, from 5.46% to 4.98%. Interest accretion on purchased loans was $468,000 for the three months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin compared to $289,000 for the three months ended September 30, 2019 which resulted in a 12 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale decreased by $42,000, or 4.6% period over period. Average balances for investments increased to $163.10 million for the three months ended September 30, 2020, from $134.98 million for the three months ended September 30, 2019. The increase in average investments is primarily due to the WHC acquisition. However, average interest rates earned on investments decreased to 2.13% for the three months ended September 30, 2020 from 2.69% for the three months ended September 30, 2019.
Results of Operations for the Three Months Ended September 30, 2020 and 2019 – continued
Interest Expense. Total interest expense was $1.56 million for the three months ended September 30, 2020 compared to $2.07 million for the three months ended September 30, 2019. The decrease of $513,000 or 24.7% was due to a decrease in interest expense on deposits of $243,000, as well as a decrease in interest expense on total borrowings of $270,000. The average balance for total deposits was $971.04 million for three months ended September 30, 2020 compared to $757.33 million for the three months ended September 30, 2019. This increase was impacted by the WHC acquisition. However, the overall average rate on total deposits was 0.32% for the three months ended September 30, 2020 compared to 0.54% for the three months ended September 30, 2019. The average balance for total borrowings decreased from $136.31 million for the three months ended September 30, 2019 to $108.43 million for the three months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.06% for the three months ended September 30, 2019, to 2.86% for the three months ended September 30, 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 September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, 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 $404,000. Therefore, the total loan loss provision for the three months ended September 30, 2020 was $854,000. Loan loss provisions were $694,000 for the three months ended September 30, 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, our allowance for credit losses will increase accordingly in future periods
Noninterest Income. Total noninterest income was $14.97 million for the three months ended September 30, 2020, compared to $8.42 million for the three months ended September 30, 2019. The increase of $6.55 million is largely due to an increase in net gain on sale of loans which increased to $11.10 million for the three months ended September 30, 2020 from $5.49 million for the three months ended September 30, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the three months ended September 30, 2020, $266.76 million residential mortgage loans were sold compared to $155.37 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the three months ended September 30, 2020 was 4.17% compared to 3.53% for the three months ended September 30, 2019.
Noninterest Expense. Noninterest expense was $16.35 million for the three months ended September 30, 2020 compared to $12.22 million for the three months ended September 30, 2019. The increase of $4.13 million or 33.8% is primarily due to increased salaries and employee benefits expense of $3.77 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 compensation and benefits increased $1.64 million for the three months ended September 30, 2020 compared to the same period in the prior year. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition.
Provision for Income Taxes. Provision for income taxes was $2.17 million for the three months ended September 30, 2020, compared to $1.10 million for the three months ended September 30, 2019 due to increased income before provision for income taxes. The effective tax rate for the three months ended September 30, 2020 was 25.4% compared to 21.1% for the three months ended September 30, 2019.
Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Net Income. Eagle’s net income for the nine months ended September 30, 2020 was $16.04 million compared to $8.54 million for the nine months ended September 30, 2019. The increase of $7.50 million was due to an increase in net interest income after loan loss provision of $2.16 million and noninterest income of $17.62 million, partially offset by an increase in noninterest expense of $10.61 million and an increase in provision for income taxes of $3.39 million. Basic earnings per share was $2.36 and diluted earnings per share was $2.35 for the current period. Basic earnings per share was $1.33 and diluted earnings per share was $1.32 for the prior year comparable period.
Net Interest Income. Net interest income increased to $31.68 million for the nine months ended September 30, 2020, from $28.77 million for the same period in the prior year. The increase of $2.91 million, or 10.1%, was the result of an increase in interest and dividend income of $2.57 million and a decrease in interest expense of $339,000.
Interest and Dividend Income. Interest and dividend income was $37.10 million for the nine months ended September 30, 2020, compared to $34.53 million for the nine months ended September 30, 2019, an increase of $2.57 million, or 7.4%. Interest and fees on loans increased to $33.83 million for the nine months ended September 30, 2020 from $31.38 million for the nine months ended September 30, 2019. This increase of $2.45 million, or 7.8%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the nine months ended September 30, 2020. Net fee income of $509,000 earned on PPP loans for the nine months ended September 30, 2020, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. Average balances for loans receivable, including loans held-for-sale, for the nine months ended September 30, 2020 were $870.11 million, compared to $753.54 million for the prior year period. This represents an increase of $116.57 million, or 15.5% and was impacted by the WHC acquisition, as well as organic growth and PPP funding. However, the average interest rate earned on loans receivable decreased by 39 basis points, from 5.57% for the nine months ended September 30, 2019 to 5.18% for the nine months ended September 30, 2020. Interest accretion on purchased loans was $1.38 million for the nine months ended September 30, 2020 which resulted in a 17 basis point increase in net interest margin compared to $1.35 million for the nine months ended September 30, 2019 which resulted in a 20 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale increased by $51,000, or 1.8% period over period. Average balances for investments increased to $168.17 million for the nine months ended September 30, 2020, from $137.53 million for the nine months ended September 30, 2019. The increase in average investments is primarily due to the WHC acquisition. However, average interest rates earned on investments decreased to 2.26% for the nine months ended September 30, 2020 from 2.72% for the nine months ended September 30, 2019.
Results of Operations for the Nine Months Ended September 30, 2020 and 2019 – continued
Interest Expense. Total interest expense was $5.43 million for the nine months ended September 30, 2020 compared to $5.76 million for the nine months ended September 30, 2019. The decrease of $339,000 or 5.9% was due to a decrease in interest expense on total borrowings of $669,000, partially offset by an increase in interest expense on deposits of $330,000. The average balance for total deposits was $931.04 million for nine months ended September 30, 2020 compared to $741.36 million for the nine months ended September 30, 2019. This increase was impacted by the WHC acquisition and also increased non-maturing deposits due to PPP funding and economic stimulus. However, the overall average rate on total deposits decreased to 0.44% for the nine months ended September 30, 2020 compared to 0.49% for the nine months ended September 30, 2019. The average balance for total borrowings decreased from $131.01 million for the nine months ended September 30, 2019 to $115.86 million for the nine months ended September 30, 2020. The average rate paid on total borrowings also decreased from 3.09% for the nine months ended September 30, 2019, to 2.72% for the nine months ended September 30, 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 $1.35 million in loan loss provisions for the nine months ended September 30, 2020. Additionally, management considered the potential impact of COVID-19. Due to the economic slowdown, 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 $1.40 million. Therefore, the total loan loss provision for the nine months ended September 30, 2020 was $2.75 million. Loan loss provisions were $2.00 million for the nine months ended September 30, 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, our allowance for credit losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was $7.48 million at September 30, 2020 compared to $5.45 million at December 31, 2019. The Bank had $25,000 in other real estate owned and other repossessed assets at September 30, 2020 compared to $26,000 at December 31, 2019.
Noninterest Income. Total noninterest income was $36.97 million for the nine months ended September 30, 2020, compared to $17.62 million for the nine months ended September 30, 2019. The increase of $19.35 million is largely due to an increase in net gain on sale of loans which increased to $24.43 million for the nine months ended September 30, 2020 from $11.45 million for the nine months ended September 30, 2019. This increase was impacted by increased mortgage originations and higher margins on mortgage loans sold. During the nine months ended September 30, 2020, $621.11 million residential mortgage loans were sold compared to $329.05 million in the same period in the prior year. In addition, gross margin on sale of mortgage loans for the nine months ended September 30, 2020 was 3.93% compared to 3.48% for the nine months ended September 30, 2019. The increase in noninterest income was also impacted by mortgage banking activity of $7.16 million for the nine months ended September 30, 2020 compared to $2.48 million for the nine months ended September 30, 2019.
Noninterest Expense. Noninterest expense was $44.33 million for the nine months ended September 30, 2020 compared to $33.72 million for the nine months ended September 30, 2019. The increase of $10.61 million or 31.5% is largely due to increased salaries and employee benefits expense of $8.21 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 compensation and benefits increased $4.28 million for the nine months ended September 30, 2020 compared to the same period in the prior year. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition. Other noninterest expense includes $878,000 of impairment of servicing rights incurred during the nine months ended September 30, 2020.
Provision for Income Taxes. Provision for income taxes was $5.53 million for the nine months ended September 30, 2020, compared to $2.14 million for the nine months ended September 30, 2019 due to increased income before provision for income taxes. The effective tax rate for the nine months ended September 30, 2020 was 25.6% compared to 20.0% for the nine months ended September 30, 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 September 30, 2020 and December 31, 2019.
Liquidity and Capital Resources - continued
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 quarter ended September 30, 2020, liquidity levels remained relatively consistent with the prior quarters. Despite significant liquidity events during the quarter ended September 30, 2020, liquidity levels remained stable. Elevated cash levels from deposit growth sparked by PPP funds deposited, tax refunds, economic stimulus money and flight to quality was only partially offset by the increase in PPP loans. Subsequent to the end of the first 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, Eagle has utilized the FRB's PPPLF facility as a partial source for its SBA PPP loans. As of September 30, 2020, the Bank had $23.79 million in PPPLF borrowings secured by $23.79 million PPP loans at a rate of 0.35%. As the PPP loans are repaid, it is currently anticipated Eagle will repay Federal Reserve borrowings. The Company closed a $15.00 million subordinated debt offering in June of 2020, adding to borrowings. In July, $10.00 million in callable subordinated debt was paid off, reducing overall borrowings.
Capital Resources
As of September 30, 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 34.0% 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.
The Banks’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 September 30, 2020. The Bank's Tier I leverage ratio increased slightly from 11.08% as of December 31, 2019 to 11.54% as of September 30, 2020, compared to a regulatory requirement of 4.00%. The Bank’s total capital, Tier 1 capital and common equity Tier 1 capital leverage ratios were 16.17%, 14.93% and 14.93%, respectively, compared to regulatory requirements of 10.50%, 8.50% and 7.00%, respectively. All of these ratios with the exception of the Tier 1 leverage ratio include the capital conservation buffer of 2.50%. The Bank’s capital position helps to mitigate its interest rate risk exposure.
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September 30, 2020 |
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(Unaudited) |
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Dollar |
% of |
|||||||
|
Amount |
Assets |
|||||||
|
(Dollars in Thousands) |
||||||||
|
Total risk-based capital to risk weighted assets: |
||||||||
|
Actual capital level |
$ | 147,332 | 16.17 | % | ||||
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Minimum required for capital adequacy purposes |
95,660 | 10.50 | % | |||||
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Excess capital |
$ | 51,672 | 5.67 | % | ||||
|
Tier I capital to risk weighted assets: |
||||||||
|
Actual capital level |
$ | 136,032 | 14.93 | % | ||||
|
Minimum required for capital adequacy purposes |
77,439 | 8.50 | % | |||||
|
Excess capital |
$ | 58,593 | 6.43 | % | ||||
|
Common equity tier I capital to risk weighted assets: |
||||||||
|
Actual capital level |
$ | 136,032 | 14.93 | % | ||||
|
Minimum required for capital adequacy purposes |
63,773 | 7.00 | % | |||||
|
Excess capital |
$ | 72,259 | 7.93 | % | ||||
|
Tier I capital to adjusted total average assets: |
||||||||
|
Actual capital level |
$ | 136,032 | 11.54 | % | ||||
|
Minimum required for capital adequacy purposes |
47,138 | 4.00 | % | |||||
|
Excess capital |
$ | 88,894 | 7.54 | % | ||||
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.
|
Changes in Market |
Rate Sensitivity |
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|
Interest Rates |
As of September 30, 2020 |
Policy |
||||
|
(Basis Points) |
Year 1 |
Year 2 |
Limits |
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+200 |
4.70% |
9.20% |
-15.00% |
|||
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-100 |
-1.10% |
-3.00% |
-10.00% |
|||
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 September 30, 2020, our disclosure controls and procedures were effective. 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.
|
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.
|
Risk Factors |
There have not been any material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and any subsequently filed Quarterly Reports on Form 10-Q.
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Unregistered Sales of Equity Securities and Use of Proceeds. |
On July 23, 2020, Eagle's Board of Directors (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. The plan expires on July 23, 2021. The following table summarizes the Company's purchase of its common stock for the three months ended September 30, 2020 under this plan.
|
Total Number |
Maximum |
|||||||||||||||
|
of Shares |
Number of |
|||||||||||||||
|
Purchased |
Shares that |
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|
Total |
as Part of |
May Yet Be |
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Number of |
Average |
Publicly |
Purchased |
|||||||||||||
|
Shares |
Price Paid |
Announced Plans |
Under the Plans |
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|
Purchased |
Per Share |
or Programs |
or Programs |
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|
July 1, 2020 through July 31, 2020 |
1,696 | $ | 16.00 | 1,696 | 98,304 | |||||||||||
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August 1, 2020 through August 31, 2020 |
39,041 | 15.72 | 39,041 | 59,263 | ||||||||||||
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September 1, 2020 through September 30, 2020 |
600 | 16.95 | 600 | 58,663 | ||||||||||||
|
Total |
41,337 | $ | 15.75 | 41,337 | ||||||||||||
On July 18, 2019, 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, 2019 or the first quarter of 2020. However, during the second quarter of 2020, 1,281 shares were purchased at an average price of $16.95 per share. The following table summarizes the Company's purchase of its common stock for the three months ended September 30, 2020 under this plan. The plan expired on July 18, 2020.
|
Total Number |
Maximum |
|||||||||||||||
|
of Shares |
Number of |
|||||||||||||||
|
Purchased |
Shares that |
|||||||||||||||
|
Total |
as Part of |
May Yet Be |
||||||||||||||
|
Number of |
Average |
Publicly |
Purchased |
|||||||||||||
|
Shares |
Price Paid |
Announced Plans |
Under the Plans |
|||||||||||||
|
Purchased |
Per Share |
or Programs |
or Programs |
|||||||||||||
|
July 1, 2020 through July 31, 2020 |
20,158 | $ | 15.60 | 20,158 | 78,561 | |||||||||||
| August 1, 2020 through August 31, 2020 | - | - | - | 78,561 | ||||||||||||
| September 1, 2020 through September 30, 2020 | - | - | - | 78,561 | ||||||||||||
|
Total |
20,158 | $ | 15.60 | 20,158 | ||||||||||||
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.
Part II - OTHER INFORMATION - continued
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Other Information. |
None.
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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 | Salary Continuation Agreement between Opportunity Bank of Montana and Linda Chilton (filed herewith). |
| 10.2 | Third Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Laura F. Clark, dated September 21, 2020 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September 22, 2020). |
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31.1 |
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31.2 |
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32.1 |
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| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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: November 5, 2020 |
By: |
/s/ Peter J. Johnson |
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Peter J. Johnson |
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President/CEO |
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Date: November 5, 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
Failure to accurately document your arrangement could result in significant losses, from claims of those participating in the arrangement, from their heirs and beneficiaries, or from federal or state governmental bodies including the Internal Revenue Service, the Department of Labor or bank examiners.
For companies subject to SEC regulation, implementation of an executive or director compensation program may trigger rules requiring disclosures on Form 8-K within four days of implementing the program. Consult with your SEC attorney to determine your responsibilities under those rules.
Salary continuation Agreement
This Salary Continuation Agreement (the “Agreement”), by and between Opportunity Bank of Montana, located in Helena Montana (the “Employer”), and Linda Chilton (the “Executive”), made this 1st day of October, 2020, formalizes the agreements and understanding between the Employer and the Executive.
WITNESSETH:
WHEREAS, the Executive is employed by the Employer;
WHEREAS, the Employer recognizes the valuable services the Executive has performed for the Employer and wishes to encourage the Executive’s continued employment and to provide the Executive with additional incentive to achieve corporate objectives;
WHEREAS, the Employer wishes to provide the terms and conditions upon which the Employer shall pay additional retirement benefits to the Executive;
WHEREAS, the Employer and the Executive intend this Agreement shall at all times be administered and interpreted in compliance with Code Section 409A; and
WHEREAS, the Employer intends this Agreement shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation arrangement, maintained primarily to provide supplemental retirement benefits for the Executive, a member of select group of management or highly compensated employee of the Employer.
NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Employer and the Executive agree as follows:
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, the following phrases or terms shall have the indicated meanings:
1.1 “Accrued Benefit” means the dollar value of the liability that should be accrued by the Employer, under Generally Accepted Accounting Principles, for the Employer’s obligation to the Executive under this Agreement, calculated by applying Accounting Standards Codification 710-10 and the Discount Rate.
1.2 “Administrator” means the Board or its designee.
1.3 “Affiliate” means any business entity with whom the Employer would be considered a single employer under Section 414(b) and 414(c) of the Code. Such term shall be interpreted in a manner consistent with the definition of “service recipient” contained in Code Section 409A.
1.4 “Beneficiary” means the person or persons designated in writing by the Executive to receive benefits hereunder in the event of the Executive’s death.
1.5 “Board” means the Board of Directors of the Employer.
1.6 “Cause” means any of the following acts or circumstances: gross negligence or gross neglect of duties to the Employer; conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive’s employment with the Employer; or fraud, disloyalty, dishonesty or willful violation of any law or significant Employer policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Employer.
1.7 “Change in Control” means a change in the ownership or effective control of the Employer, or in the ownership of a substantial portion of the assets of the Employer, as such change is defined in Code Section 409A and regulations thereunder.
1.8 “Claimant” means a person who believes that he or she is being denied a benefit to which he or she is entitled hereunder.
1.9 “Code” means the Internal Revenue Code of 1986, as amended.
1.10 “Disability” means a condition of the Executive whereby the Executive either: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer. The Administrator will determine whether the Executive has incurred a Disability based on its own good faith determination and may require the Executive to submit to reasonable physical and mental examinations for this purpose. The Executive will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the initial sentence of this Section.
1.11 “Discount Rate” means the rate used by the Administrator for determining the Accrued Benefit. The Administrator may adjust the Discount Rate to maintain the rate within reasonable standards according to Generally Accepted Accounting Principles and applicable bank regulatory guidance.
1.12 “Early Retirement” means Separation from Service after Early Retirement Age and before Normal Retirement Age.
1.13 “Early Retirement Age” means the date the Executive attains age sixty (60) and completes twenty (20) Years of Service.
1.14 “Early Involuntary Termination” means a Separation from Service (other than a termination for Cause) prior to Early Retirement Age due to the independent exercise of the unilateral authority of the Employer to terminate the Executive’s employment, other than due to the Executive’s implicit or explicit request, where the Executive was willing and able to continue performing services.
1.15 “Effective Date” means October 1, 2020.
1.16 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
1.17 “Normal Retirement Age” means the date the Executive attains age sixty-five (65).
1.18 “Plan Year” means each twelve (12) month period commencing on November 1 and ending on October 31 of each year. The initial Plan Year shall commence on the Effective Date and end on the following October 31.
1.19 “Schedule A” means the schedule attached hereto and made a part hereof. Schedule A shall be updated upon a change to any of the benefits described in Article 2 hereof.
1.20 “Separation from Service” means a termination of the Executive’s employment with the Employer and its Affiliates for reasons other than death or Disability. A Separation from Service may occur as of a specified date for purposes of the Agreement even if the Executive continues to provide some services for the Employer or its Affiliates after that date, provided that the facts and circumstances indicate that the Employer and the Executive reasonably anticipated at that date that either no further services would be performed after that date, or that the level of bona fide services the Executive would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period (or the full period during which the Executive performed services for the Employer, if that is less than thirty-six (36) months). A Separation from Service will not be deemed to have occurred while the Executive is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months or, if longer, the period for which a statute or contract provides the Executive with the right to reemployment with the Employer. If the Executive’s leave exceeds six (6) months but the Executive is not entitled to reemployment under a statute or contract, the Executive incurs a Separation from Service on the next day following the expiration of such six (6) month period. In determining whether a Separation from Service occurs the Administrator shall take into account, among other things, the definition of “service recipient” and “employer” set forth in Treasury regulation §1.409A-1(h)(3). The Administrator shall have full and final authority, to determine conclusively whether a Separation from Service occurs, and the date of such Separation from Service.
1.21 “Specified Employee” means an individual that satisfies the definition of a “key employee” of the Employer as such term is defined in Code §416(i) (without regard to Code §416(i)(5)), provided that the stock of the Employer is publicly traded on an established securities market or otherwise, as defined in Code §1.897-1(m). If the Executive is a key employee at any time during the twelve (12) months ending on December 31, the Executive is a Specified Employee for the twelve (12) month period commencing on the first day of the following April.
ARTICLE 2
PAYMENT OF BENEFITS
2.1 Normal Retirement Benefit. Upon Separation from Service after Normal Retirement Age, the Employer shall pay the Executive an annual benefit of Twenty-Two Thousand Dollars ($22,000) in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following Separation from Service and continuing until the Executive’s death.
2.2 Early Retirement Benefit. If Early Retirement occurs, the Employer shall pay the Executive the annual benefit shown on Schedule A for the Plan Year ending immediately prior to Separation from Service in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following Separation from Service and continuing until the Executive’s death.
2.3 Early Involuntary Termination Benefit. If Early Involuntary Termination occurs, the Employer shall pay the Executive the amount shown on Schedule A for the Plan Year ending immediately prior to Separation from Service in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following Separation from Service and continuing until the Executive’s death. If a Separation from Service other than an Early Involuntary Termination occurs prior to Early Retirement Age, the Executive shall not be entitled to any benefit hereunder.
2.4 Disability Benefit. In the event the Executive suffers a Disability prior to Early Retirement Age the Employer shall pay the Executive the annual benefit shown on Schedule A for the Plan Year ending immediately prior to Disability in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following Disability and continuing until the Executive’s death.
2.5 Death Prior to Commencement of Benefit Payments. In the event the Executive dies prior to Separation from Service and Disability, the Employer shall pay the Beneficiary an annual benefit of Twenty-Two Thousand Dollars ($22,000) in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following the Executive’s death and continuing for fifteen (15) years.
2.6 Death Subsequent to Commencement of Benefit Payments. If the Executive dies after benefit distributions have begun and the Executive has received less than one hundred eighty (180) monthly benefit installments, the Beneficiary shall continue to receive the same amounts the Executive would have received at the same times the Executive would have received them until the sum of the number of installments to the Beneficiary and the Executive totals one hundred eighty (180).
2.7 Termination for Cause. If the Employer terminates the Executive’s employment for Cause, then the Executive shall not be entitled to any benefits under the terms of this Agreement.
2.8 Restriction on Commencement of Distributions. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at the time of Separation from Service, the provisions of this Section shall govern all distributions hereunder. Distributions which would otherwise be made to the Executive due to Separation from Service shall not be made during the first six (6) months following Separation from Service. Rather, any distribution which would otherwise be paid to the Executive during such period shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following Separation from Service, or if earlier, upon the Executive’s death. All subsequent distributions shall be paid as they would have had this Section not applied.
2.9 Acceleration of Payments. Except as specifically permitted herein, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated, in accordance with the provisions of Treasury Regulation §1.409A-3(j)(4) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in compliance with ethics agreements with the federal government; (iii) in compliance with the ethics laws or conflicts of interest laws; (iv) in limited cashouts (but not in excess of the limit under Code §402(g)(1)(B)); (v) to pay employment-related taxes; or (vi) to pay any taxes that may become due at any time that the Agreement fails to meet the requirements of Code Section 409A.
2.10 Delays in Payment by Employer. A payment may be delayed to a date after the designated payment date under any of the circumstances described below, and the provision will not fail to meet the requirements of establishing a permissible payment event. The delay in the payment will not constitute a subsequent deferral election, so long as the Employer treats all payments to similarly situated participants on a reasonably consistent basis.
(a) Payments subject to Code Section 162(m). If the Employer reasonably anticipates that the Employer’s deduction with respect to any distribution under this Agreement would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution from this Agreement is deductible, the Employer may delay payment of any amount that would otherwise be distributed under this Agreement. The delayed amounts shall be distributed to the Executive (or the Beneficiary in the event of the Executive’s death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m).
(b) Payments that would violate Federal securities laws or other applicable law. A payment may be delayed where the Employer reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law provided that the payment is made at the earliest date at which the Employer reasonably anticipates that the making of the payment will not cause such violation. The making of a payment that would cause inclusion in gross income or the application of any penalty provision of the Internal Revenue Code is not treated as a violation of law.
(c) Solvency. Notwithstanding the above, a payment may be delayed where the payment would jeopardize the ability of the Employer to continue as a going concern.
2.11 Treatment of Payment as Made on Designated Payment Date. Solely for purposes of determining compliance with Code Section 409A, any payment under this Agreement made after the required payment date shall be deemed made on the required payment date provided that such payment is made by the latest of: (i) the end of the calendar year in which the payment is due; (ii) the 15th day of the third calendar month following the payment due date; (iii) if Employer cannot calculate the payment amount on account of administrative impracticality which is beyond the Executive’s control, the end of the first calendar year which payment calculation is practicable; and (iv) if Employer does not have sufficient funds to make the payment without jeopardizing the Employer’s solvency, in the first calendar year in which the Employer’s funds are sufficient to make the payment.
2.12 Facility of Payment. If a distribution is to be made to a minor, or to a person who is otherwise incompetent, then the Administrator may make such distribution: (i) to the legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his or her residence; or (ii) to the conservator or administrator or, if none, to the person having custody of an incompetent payee. Any such distribution shall fully discharge the Employer and the Administrator from further liability on account thereof.
2.13 Excise Tax Limitation. Notwithstanding any provision of this Agreement to the contrary, if any benefit payment hereunder would be treated as an “excess parachute payment” under Code Section 280G, the Employer shall reduce such benefit payment to the extent necessary to avoid treating such benefit payment as an excess parachute payment. The Executive shall be entitled to only the reduced benefit and shall forfeit any amount over and above the reduced amount.
2.14 Changes in Form or Timing of Benefit Payments. The Employer and the Executive may, subject to the terms hereof, amend this Agreement to delay the timing or change the form of payments. Any such amendment:
(a) must take effect not less than twelve (12) months after the amendment is made;
(b) must, for benefits distributable due solely to the arrival of a specified date, or on account of Separation from Service or Change in Control, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made;
(c) must, for benefits distributable due solely to the arrival of a specified date, be made not less than twelve (12) months before distribution is scheduled to begin; and
(d) may not accelerate the time or schedule of any distribution.
ARTICLE 3
BENEFICIARIES
3.1 Designation of Beneficiaries. The Executive may designate any person to receive any benefits payable under the Agreement upon the Executive’s death, and the designation may be changed from time to time by the Executive by filing a new designation. Each designation will revoke all prior designations by the Executive, shall be in the form prescribed by the Administrator, and shall be effective only when filed in writing with the Administrator during the Executive’s lifetime. If the Executive names someone other than the Executive’s spouse as a Beneficiary, the Administrator may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Administrator, executed by the Executive’s spouse and returned to the Administrator. The Executive’s beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.
3.2 Absence of Beneficiary Designation. In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Executive, the Employer shall pay the benefit payment to the Executive’s spouse. If the spouse is not living then the Employer shall pay the benefit payment to the Executive’s living descendants per stirpes, and if there are no living descendants, to the Executive’s estate. In determining the existence or identity of anyone entitled to a benefit payment, the Employer may rely conclusively upon information supplied by the Executive’s personal representative, executor, or administrator.
ARTICLE 4
ADMINISTRATION
4.1 Administrator Duties. The Administrator shall be responsible for the management, operation, and administration of the Agreement. When making a determination or calculation, the Administrator shall be entitled to rely on information furnished by the Employer, Executive or Beneficiary. No provision of this Agreement shall be construed as imposing on the Administrator any fiduciary duty under ERISA or other law, or any duty similar to any fiduciary duty under ERISA or other law.
4.2 Administrator Authority. The Administrator shall enforce this Agreement in accordance with its terms, shall be charged with the general administration of this Agreement, and shall have all powers necessary to accomplish its purposes.
4.3 Binding Effect of Decision. The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation or application of this Agreement and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in this Agreement.
4.4 Compensation, Expenses and Indemnity. The Administrator shall serve without compensation for services rendered hereunder. The Administrator is authorized at the expense of the Employer to employ such legal counsel and/or recordkeeper as it may deem advisable to assist in the performance of its duties hereunder. Expense and fees in connection with the administration of this Agreement shall be paid by the Employer.
4.5 Employer Information. The Employer shall supply full and timely information to the Administrator on all matters relating to the Executive’s compensation, death, Disability or Separation from Service, and such other information as the Administrator reasonably requires.
4.6 Termination of Participation. If the Administrator determines in good faith that the Executive no longer qualifies as a member of a select group of management or highly compensated employees, as determined in accordance with ERISA, the Administrator shall have the right, in its sole discretion, to cease further benefit accruals hereunder.
4.7 Compliance with Code Section 409A. The Employer and the Executive intend that the Agreement comply with the provisions of Code Section 409A to prevent the inclusion in gross income of any amounts deferred hereunder in a taxable year prior to the year in which amounts are actually paid to the Executive or Beneficiary. This Agreement shall be construed, administered and governed in a manner that affects such intent, and the Administrator shall not take any action that would be inconsistent therewith.
ARTICLE 5
Claims and Review Procedures
5.1 Claims Procedure. A Claimant who has not received benefits under this Agreement that he or she believes should be distributed shall make a claim for such benefits as follows.
(a) Initiation – Written Claim. The Claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.
(b) Timing of Administrator Response. The Administrator shall respond to such Claimant within forty-five (45) days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional thirty (30) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The extension notice shall specifically explain the standards on which entitlement to a disability benefit is based, the unresolved issues that prevent a decision on the claim and the additional information needed from the Claimant to resolve those issues, and the Claimant shall be afforded at least forty-five (45) days within which to provide the specified information.
(c) Notice of Decision. If the Administrator denies all or a part of the claim, the Administrator shall notify the Claimant in writing of such denial in a culturally and linguistically appropriate manner. The Administrator shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) a notice that the Claimant has a right to request a review of the claim denial and an explanation of the Plan’s review procedures and the time limits applicable to such procedures; (iv) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review, and a description of any time limit for bringing such an action; (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist; and (viii) for any Disability claim, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by Department of Labor Regulation Section 2560.503-1(m)(8).
5.2 Review Procedure. If the Administrator denies all or a part of the claim, the Claimant shall have the opportunity for a full and fair review by the Administrator of the denial as follows.
(a) Additional Evidence. Prior to the review of the denied claim, the Claimant shall be given, free of charge, any new or additional evidence considered, relied upon, or generated by the Administrator, or any new or additional rationale, as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided, to give the Claimant a reasonable opportunity to respond prior to that date.
(b) Initiation – Written Request. To initiate the review, the Claimant, within sixty (60) days after receiving the Administrator’s notice of denial, must file with the Administrator a written request for review.
(c) Additional Submissions – Information Access. After such request the Claimant may submit written comments, documents, records and other information relating to the claim. The Administrator shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.
(d) Considerations on Review. In considering the review, the Administrator shall consider all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for Disability benefits. The claim shall be reviewed by an individual or committee who did not make the initial determination that is subject of the appeal and who is not a subordinate of the individual who made the determination. Additionally, the review shall be made without deference to the initial adverse benefit determination. If the initial adverse benefit determination was based in whole or in part on a medical judgment, the Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination and will not be the subordinate of such individual. If the Administrator obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Administrator will identify such experts.
(e) Timing of Administrator Response. The Administrator shall respond in writing to such Claimant within forty-five (45) days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional forty-five (45) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
(f) Notice of Decision. The Administrator shall notify the Claimant in writing of its decision on review. The Administrator shall write the notification in a culturally and linguistically appropriate manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; (iv) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a); (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration; and (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist;.
5.3 Exhaustion of Remedies. The Claimant must follow these claims review procedures and exhaust all administrative remedies before taking any further action with respect to a claim for benefits.
5.4 Failure of Plan to Follow Procedures. In the case of a claim for Disability benefits, if the Administrator fails to strictly adhere to all the requirements of this claims procedure with respect to a Disability claim, the Claimant is deemed to have exhausted the administrative remedies available under the Agreement, and shall be entitled to pursue any available remedies under ERISA Section 502(a) on the basis that the Administrator has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim, except where the violation was: (a) de minimis; (b) non-prejudicial; (c) attributable to good cause or matters beyond the Administrator’s control; (d) in the context of an ongoing good-faith exchange of information; and (e) not reflective of a pattern or practice of noncompliance. The Claimant may request a written explanation of the violation from the Administrator, and the Administrator must provide such explanation within ten (10) days, including a specific description of its basis, if any, for asserting that the violation should not cause the administrative remedies to be deemed exhausted. If a court rejects the Claimant’s request for immediate review on the basis that the Administrator met the standards for the exception, the claim shall be considered as re-filed on appeal upon the Administrator’s receipt of the decision of the court. Within a reasonable time after the receipt of the decision, the Administrator shall provide the claimant with notice of the resubmission.
ARTICLE 6
AMENDMENT AND TERMINATION
6.1 Agreement Amendment Generally. Except as provided in Section 6.2, this Agreement may be amended only by a written agreement signed by both the Employer and the Executive.
6.2 Amendment to Insure Proper Characterization of Agreement. Notwithstanding anything in this Agreement to the contrary, the Agreement may be amended by the Employer at any time, if found necessary in the opinion of the Employer, i) to ensure that the Agreement is characterized as plan of deferred compensation maintained for a select group of management or highly compensated employees as described under ERISA, ii) to conform the Agreement to the requirements of any applicable law or iii) to comply with the written instructions of the Employer’s auditors or banking regulators.
6.3 Agreement Termination Generally. The Employer may terminate this Agreement at any time by providing written notice of such termination to the Executive. The benefit upon such termination shall be the Accrued Benefit as of the date of termination. Except as provided in Section 6.4, such termination shall not cause a distribution of benefits under this Agreement. Rather, benefit distributions will be made at the earliest distribution event permitted under Article 2.
6.4 Effect of Complete Termination. Notwithstanding anything to the contrary in Section 6.3, and subject to the requirements of Code Section 409A and Treasury Regulations §1.409A-3(j)(4)(ix), at certain times the Employer may completely terminate and liquidate the Agreement. In the event of such a complete termination, the Employer shall pay the Accrued Benefit to the Executive. Such complete termination of the Agreement shall occur only under the following circumstances and conditions.
(a) Corporate Dissolution or Bankruptcy. The Employer may terminate and liquidate this Agreement within twelve (12) months of a corporate dissolution taxed under Code Section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that all benefits paid under the Agreement are included in the Executive’s gross income in the latest of: (i) the calendar year which the termination occurs; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b) Change in Control. The Employer may terminate and liquidate this Agreement by taking irrevocable action to terminate and liquidate within the thirty (30) days preceding or the twelve (12) months following a Change in Control. This Agreement will then be treated as terminated only if all substantially similar arrangements sponsored by the Employer which are treated as deferred under a single plan under Treasury Regulations §1.409A-1(c)(2) are terminated and liquidated with respect to each participant who experienced the Change in Control so that the Executive and any participants in any such similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the date the Employer takes the irrevocable action to terminate the arrangements.
(c) Discretionary Termination. The Employer may terminate and liquidate this Agreement provided that: (i) the termination does not occur proximate to a downturn in the financial health of the Employer; (ii) all arrangements sponsored by the Employer and Affiliates that would be aggregated with any terminated arrangements under Treasury Regulations §1.409A-1(c) are terminated; (iii) no payments, other than payments that would be payable under the terms of this Agreement if the termination had not occurred, are made within twelve (12) months of the date the Employer takes the irrevocable action to terminate this Agreement; (iv) all payments are made within twenty-four (24) months following the date the Employer takes the irrevocable action to terminate and liquidate this Agreement; and (v) neither the Employer nor any of its Affiliates adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulations §1.409A-1(c) if the Executive participated in both arrangements, at any time within three (3) years following the date the Employer takes the irrevocable action to terminate this Agreement.
ARTICLE 7
MISCELLANEOUS
7.1 No Effect on Other Rights. This Agreement constitutes the entire agreement between the Employer and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. Nothing contained herein will confer upon the Executive the right to be retained in the service of the Employer nor limit the right of the Employer to discharge or otherwise deal with the Executive without regard to the existence hereof.
7.2 State Law. To the extent not governed by ERISA, the provisions of this Agreement shall be construed and interpreted according to the internal law of the State of Montana without regard to its conflicts of laws principles.
7.3 Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
7.4 Nonassignability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
7.5 Unsecured General Creditor Status. Payment to the Executive or any Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be part of the general, unrestricted assets of the Employer and no person shall have any interest in any such asset by virtue of any provision of this Agreement. The Employer’s obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. In the event that the Employer purchases an insurance policy insuring the life of the Executive to recover the cost of providing benefits hereunder, neither the Executive nor the Beneficiary shall have any rights whatsoever in said policy or the proceeds therefrom.
7.6 Life Insurance. If the Employer chooses to obtain insurance on the life of the Executive in connection with its obligations under this Agreement, the Executive hereby agrees to take such physical examinations and to truthfully and completely supply such information as may be required by the Employer or the insurance company designated by the Employer.
7.7 Unclaimed Benefits. The Executive shall keep the Employer informed of the Executive’s current address and the current address of the Beneficiary. If the location of the Executive is not made known to the Employer within three years after the date upon which any payment of any benefits may first be made, the Employer shall delay payment of the Executive’s benefit payment(s) until the location of the Executive is made known to the Employer; however, the Employer shall only be obligated to hold such benefit payment(s) for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Beneficiary. If the location of the Beneficiary is not made known to the Employer by the end of an additional two (2) month period following expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Executive’s estate. If there is no estate in existence at such time or if such fact cannot be determined by the Employer, the Executive and Beneficiary shall thereupon forfeit all rights to any benefits provided under this Agreement.
7.8 Suicide or Misstatement. No benefit shall be distributed hereunder if the Executive commits suicide within two (2) years after the Effective Date, or if an insurance company which issued a life insurance policy covering the Executive and owned by the Employer denies coverage (i) for material misstatements of fact made by the Executive on an application for life insurance, or (ii) for any other reason.
7.9 Removal. Notwithstanding anything in this Agreement to the contrary, the Employer shall not distribute any benefit under this Agreement if the Executive is subject to a final removal or prohibition order issued pursuant to Section 8(e) of the Federal Deposit Insurance Act. Furthermore, any payments made to the Executive pursuant to this Agreement shall, if required, comply with 12 U.S.C. 1828, FDIC Regulation 12 CFR Part 359 and any other regulations or guidance promulgated thereunder.
7.10 Notice. Any notice, consent or demand required or permitted to be given to the Employer or Administrator under this Agreement shall be sufficient if in writing and hand-delivered or sent by registered or certified mail to the Employer’s principal business office. Any notice or filing required or permitted to be given to the Executive or Beneficiary under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to the last known address of the Executive or Beneficiary, as appropriate. Any notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification.
7.11 Headings and Interpretation. Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed part of this Agreement. Wherever the fulfillment of the intent and purpose of this Agreement requires and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.
7.12 Alternative Action. In the event it becomes impossible for the Employer or the Administrator to perform any act required by this Agreement due to regulatory or other constraints, the Employer or Administrator may perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Employer, provided that such alternative act does not violate Code Section 409A.
7.13 Coordination with Other Benefits. The benefits provided for the Executive or the Beneficiary under this Agreement are in addition to any other benefits available to the Executive under any other plan or program for employees of the Employer. This Agreement shall supplement and shall not supersede, modify, or amend any other such plan or program except as may otherwise be expressly provided herein.
7.14 Inurement. This Agreement shall be binding upon and shall inure to the benefit of the Employer, its successor and assigns, and the Executive, the Executive’s successors, heirs, executors, administrators, and the Beneficiary.
7.15 Tax Withholding. The Employer may make such provisions and take such action as it deems necessary or appropriate for the withholding of any taxes which the Employer is required by any law or regulation to withhold in connection with any benefits under the Agreement. The Executive shall be responsible for the payment of all individual tax liabilities relating to any benefits paid hereunder.
7.16 Aggregation of Agreement. If the Employer offers other non-qualified deferred compensation plans, this Agreement and those plans shall be treated as a single plan to the extent required under Code Section 409A.
IN WITNESS WHEREOF, the Executive and a representative of the Employer have executed this Agreement document as indicated below:
| Executive: | Employer: Opportunity Bank of Montana |
| /s/ Linda Chilton, SVP/Chief Retail Officer | By: /s/ Peter J. Johnson |
| Its: President/CEO |
Salary continuation Agreement
Beneficiary Designation
I, Linda Chilton, designate the following as Beneficiary under this Agreement:
Primary
____________________________________________________________________________________ _______%
____________________________________________________________________________________ _______%
Contingent
____________________________________________________________________________________ _______%
____________________________________________________________________________________ _______%
I understand that I may change this beneficiary designation by delivering a new written designation to the Administrator, which shall be effective only upon receipt by the Administrator prior to my death. I further understand that the designation will be automatically revoked if the Beneficiary predeceases me or if I have named my spouse as Beneficiary and our marriage is subsequently dissolved.
Signature: _______________________________ Date: _______
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SPOUSAL CONSENT (Required only if Administrator requests and someone other than spouse is named Beneficiary)
I consent to the beneficiary designation above. I also acknowledge that if I am named Beneficiary and my marriage is subsequently dissolved, the beneficiary designation will be automatically revoked.
Spouse Name: _______________________________
Signature: _______________________________ Date: |
Received by the Administrator this ________ day of ___________________, 20__
By: _________________________________
Title: _________________________________
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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1. |
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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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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b) |
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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5. |
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: November 5, 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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1. |
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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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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b) |
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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5. |
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: November 5, 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 September 30, 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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(2) |
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) November 5, 2020 |
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Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) November 5, 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.