Eagle Bancorp Montana, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Eagle’s primary business is Montana community banking through Opportunity Bank of Montana, with lending, deposits, securities investment and mortgage servicing as key activities.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest and dividend income | $24.09 | $19.34 | $67.07 | $49.16 |
| Net interest income | $15.59 | $17.89 | $47.28 | $45.70 |
| Provision for credit losses | $0.59 | $0.52 | $1.19 | $1.65 |
| Noninterest income | $6.04 | $6.25 | $16.91 | $20.92 |
| Noninterest expense | $17.88 | $19.49 | $53.20 | $55.53 |
| Net income | $2.64 | $3.09 | $7.89 | $7.08 |
| Diluted EPS | $0.34 | $0.40 | $1.01 | $0.98 |
| Net interest margin | 3.41% | 4.18% | 3.57% | 4.00% |
Balance sheet at September 30: Total assets were $2.06 billion, up 5.9% from December 31, 2022. Net loans were $1.46 billion, up $119.9 million (8.9%); commercial real estate represented 41.5% of gross loans. Securities available-for-sale were $308.8 million, down 11.6%, with fair value $42.0 million below amortized cost. Deposits were $1.62 billion, down 1.2%; noninterest-bearing deposits were $435.7 million. Total borrowings increased to $258.7 million from $128.2 million, including $199.8 million of FHLB advances and other borrowings and $59.0 million of net long-term debt. Shareholders’ equity was $157.3 million, down 0.7%.
Cash flow and liquidity: For the first nine months, operating cash flow was negative $2.9 million, investing cash flow was negative $105.2 million, and financing cash flow was positive $107.0 million. Cash and cash equivalents ended at $20.8 million, down $1.0 million. Available borrowing capacity was approximately $333.4 million, including $216.4 million of remaining FHLB capacity; management said internal liquidity minimums were exceeded and available sources were believed sufficient for anticipated needs. Estimated uninsured deposits were $283.3 million, or 17% of deposits. The Bank was reported as “well capitalized”; its total risk-based capital ratio was 12.76%.
Material changes versus comparable periods
- Q3 net income fell 14.8% and diluted EPS declined from $0.40 to $0.34. Net interest income after provision fell by $2.37 million; lower noninterest expense partly offset the decline.
- For the nine months, net income rose 11.5% and diluted EPS increased from $0.98 to $1.01. Net interest income grew 3.5%, but noninterest income declined 19.2%.
- Higher interest rates and funding costs pressured spread: Q3 interest expense rose to $8.51 million from $1.46 million. Deposit interest expense and borrowing expense both increased substantially; the average rate on interest-bearing liabilities rose to 2.37% from 0.47%.
- Mortgage banking weakened year to date: mortgage loan sale gains were $8.55 million versus $15.65 million, and sold residential mortgage volume fell to $256.2 million from $443.9 million. Management attributed lower activity to the interest-rate environment.
- Deposit composition shifted toward time certificates: certificates increased $142.7 million while non-maturity deposits declined. Borrowings increased $130.5 million, primarily to fund loan growth.
Outlook, risks and unusual items
- No quantitative earnings or financial guidance is provided. Management said it is focused on increasing net interest margin and fee income, controlling expenses, and growing loans and deposits; it also identified efficient funding of growth and deposit competition as challenges.
- The Federal Reserve target rate rose to 5.50% during the first nine months of 2023. Management identifies interest-rate movements, deposit retention and funding costs, banking-sector volatility, Montana economic and real-estate concentration, borrower repayment and future credit losses as significant risks.
- Credit quality: nonperforming loans were $7.75 million, or 0.53% of loans, versus $7.78 million, or 0.57%, at year-end 2022. Nonaccrual loans increased to $7.0 million from $3.3 million. The filing reports two commercial real estate modifications during the first nine months; neither involved principal forgiveness and both were current under modified terms at quarter-end.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $0.7 million, established a $1.5 million allowance for unfunded commitments, and reduced beginning retained earnings by $1.6 million after tax. Comparative credit-loss measures are therefore not fully on the same accounting basis.
- Management identified a goodwill impairment triggering event, citing a lower stock price and revised earnings outlook amid economic uncertainty and rising rates. An interim assessment as of August 31, 2023 found no impairment; future impairment remains possible if conditions worsen.
- Unrealized securities losses were attributed primarily to interest rates and market spreads, not credit deterioration; management said it was not likely to be required to sell the securities before recovery. Accumulated other comprehensive loss was $30.9 million at quarter-end.
- The company reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending legal proceedings. The 2023 share repurchase plan authorized up to 400,000 shares; 17,901 shares were bought in Q2 and none in Q3.
Most important facts for investors to verify
- Whether deposit trends, certificate-of-deposit pricing and increased reliance on FHLB borrowing remain manageable, and how funding costs affect future net interest margin.
- Credit quality in the large commercial real estate portfolio, the rise in nonaccrual loans, and adequacy of CECL reserves and unfunded-commitment allowances.
- Liquidity and capital under stress, including the availability and terms of stated borrowing capacity and the level of uninsured deposits.
- Potential further declines in securities fair values and any resulting liquidity, capital or accounting effects if securities must be sold.
- Whether revised earnings expectations or market conditions lead to a goodwill impairment, and whether mortgage banking and fee income recover.