Earnings of Eagle Bancorp Montana, Inc. (NASDAQ:EBMT) increased to $0.57 per share in the first quarter of 2020, up 58% from the last quarter of 2019. Gains on sales of loans and acquisition of a bank were the major drivers of earnings during the quarter. Earnings will likely remain elevated in the last three quarters of the year due to loan growth from the acquisition and the Paycheck Protection Program. On the other hand, the provision expense will likely increase in the remainder of the year, which will limit net income growth. Overall, I’m expecting earnings to increase by 4% year over year to $1.76 per share. The year-end target price is just 12% above the current market price, which shows that the market has already incorporated most of the benefits of loan growth in EBMT’s stock price. The impact of the COVID-19 pandemic on future provision expense is unknown, which poses risks to the company’s earnings and valuation. Due to the limited price upside and a high level of risk, I’m adopting a neutral rating on EBMT.

Acquisition and Paycheck Protection Program to Drive Earnings This Year

EBMT’s loans increased by 5.5% in the first quarter, on a linked-quarter basis, due to the acquisition of Western Holding Company of Wolf Point. As mentioned in the first quarter’s earnings release, EBMT completed the acquisition on January 1, 2020, which added $43 million in loans and $89 million in deposits to EBMT’s balance sheet. The growth in average earning assets through the acquisition will increase net interest income this year compared to last year.

Moreover, EBMT’s participation in the Paycheck Protection Program, PPP, will likely boost revenues this year. As mentioned in the first quarter’s 10-Q filing, EBMT got $43.8 million worth of loans approved by the Small Business Administration under PPP in April. Assuming a margin of 2.75%, I’m estimating PPP to add $1.2 million to EBMT’s net interest income. As I’m expecting most of the PPP loans to get forgiven within a few months, EBMT will likely book the total fees in the third quarter.

Considering the factors mentioned above, I’m expecting EBMT’s loan balance to stand at $837 million by the end of this year, up 8.7% from the end of 2019. The following table shows my estimates for loans and other balance sheet items.Eagle Bancorp Montana Balance Sheet Forecast

EBMT’s net interest margin, NIM, will likely contract following the 150bps federal funds rate cuts in March, which will partially offset the impact of loan growth on net interest income. However, the NIM is only moderately rate sensitive because of the high proportion of long-term residential mortgages in total loans that make the average portfolio yield sticky. As of March 31, 2020, residential mortgages made up 19% of total loans. Moreover, a simulation run by the management showed that NIM was not very sensitive to interest rate changes. According to the results of the simulation disclosed in the 10-Q filing, a 100bps decline in interest rates can reduce net interest income by just 1.2% over 12 months. Considering these factors, I’m expecting average NIM in 2020 to be 23bps below the average for 2019. The following table shows my estimates for yield, cost, and NIM, excluding the impact of PPP.Eagle Bancorp Montana Net Interest Margin

Exposure to COVID-19-Sensitive Industries to Limit Earnings Growth

EBMT posted provisions for loan losses of $670 thousand in the first quarter of 2020 versus $632 thousand in the fourth quarter and $694 thousand in the third quarter of 2019. Despite the COVID-19 pandemic, the company booked a normal amount of provisions in the first quarter. As EBMT does not appear to have made enough provisions to cover the pandemic-driven impairments that can arise in the future, I’m expecting the provision expense to increase in the year ahead. The company has moderately high exposure to COVID-19-sensitive industries, which will likely drive provisions. As mentioned in the 10-Q filing, loans to vulnerable industries, including hotels, healthcare, and restaurants, made up 13.5% of total loans as of March 31, 2020. The following table shows EBMT’s exposure to vulnerable industries.Eagle Bancorp Montana COVID-19 Sensitive Industries

Considering the factors mentioned above, I’m expecting the company to post a provision expense of $3.0 million in 2020, up from $2.6 million in 2019.

Expecting Earnings per Share to Increase by 4%

The acquisition of Western Holding Company and participation in PPP will likely drive earnings this year. On the other hand, an increase in provision expense will likely restrain net income growth. Additionally, an increase in non-interest expenses will likely limit earnings growth. As mentioned in the earnings release, EBMT invested in laptops, etc. due to shelter-in-place orders that will increase non-interest expenses by around $100,000 in the second quarter. Overall, I’m expecting earnings per share to increase by 4% to $1.76 per share. The following table shows my income statement estimates.Eagle Bancorp Montana Income Forecast

Actual earnings may differ materially from the estimates because of the uncertainties surrounding the severity and duration of the COVID-19 pandemic. If the pandemic lasts longer than my expectation, then the provision expense can exceed its estimate. The risk is exacerbated by EBMT’s moderately high exposure to COVID-19-sensitive industries. Overall, I believe EBMT has a high level of risk.

December 2020 Target Price Suggests a Limited Price Upside

EBMT is offering a modest dividend yield of 2.4%, assuming the company maintains its quarterly dividend at the current level of $0.095 per share. Further, the company is ranked 6th in the Financial Sector by Seeking Alpha Premium’s quant rating as of July 11, 2020. The following screenshot shows EBMT’s ratings.

Eagle Bancorp Montana Quant Rating

I’m using the historical price-to-tangible-book, P/TB, multiple to value EBMT. The stock has traded at an average P/TB multiple of 1.05 in the past, as shown below.Eagle Bancorp Montana Historical Price to tangible Book

Multiplying the average P/TB ratio with the forecast tangible book value per share of $17.0 gives a target price of $17.9 for December 2020. This price target is just 12.1% above the current market price. The following table shows the sensitivity of the target price to the P/TB ratio.Eagle Bancorp Montana Valuation Sensitivity

As discussed above, EBMT is carrying a high level of risk due to the COVID-19 pandemic and the company’s exposure to COVID-19-sensitive industries. The price upside of 12.1% does not appear sufficient to compensate for the high level of risk. Based on the limited price upside, I’m adopting a neutral rating on EBMT.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to conduct their own due diligence, and consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.

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