Eagle Bancorp Montana, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company operates Opportunity Bank of Montana, a Montana-focused commercial bank. Unless otherwise noted, dollar amounts below are in millions. Results include First Community Bancorp (FCB) from its April 30, 2022 acquisition date.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $17.9 | $12.0 | $45.7 | $34.5 |
| Net interest margin | 4.18% | 3.87% | 4.00% | 3.88% |
| Loan-loss provision | $0.5 | $0.3 | $1.7 | $0.6 |
| Noninterest income | $7.4 | $13.4 | $23.1 | $38.1 |
| Noninterest expense | $20.7 | $18.8 | $57.7 | $55.1 |
| Net income | $3.1 | $4.7 | $7.1 | $12.7 |
| Diluted EPS | $0.40 | $0.73 | $0.98 | $1.89 |
Loan interest income, securities income and average earning assets increased, reflecting FCB and loan growth as well as higher yields. Deposit and borrowing costs also rose as rates increased; the Federal Funds target rate reached 3.25% during the first nine months. Management reported net interest margin expansion. The effective tax rate was 25% in both comparison periods.
Financial position, liquidity and capital
- Total assets were $1.924 billion at September 30, up 34.0% from year-end 2021; net loans were $1.298 billion, up $377.7 million, and deposits were $1.674 billion, up $451.7 million. Much of the growth reflected the FCB acquisition.
- Loans were concentrated in real estate: commercial real estate was $506.7 million, commercial construction and development $145.3 million, and farmland $129.8 million. Total loans were $1.314 billion before deferred fees and the allowance.
- Cash and cash equivalents were $25.2 million, compared with $61.4 million at December 31, 2021. For the nine months, operating cash flow was $15.7 million, investing cash outflow $192.1 million and financing cash inflow $140.2 million.
- Total borrowings were $74.6 million, versus $34.9 million at year-end, including $59.0 million of net long-term debt. The company issued $40 million of subordinated notes in January and redeemed $10 million of senior notes.
- Shareholders’ equity was $151.3 million, down 3.5%; accumulated other comprehensive loss was $30.9 million, principally reflecting unrealized securities losses as interest rates rose. Available-for-sale securities had $42.0 million of gross unrealized losses at quarter-end; management attributed these primarily to market-rate and spread changes and reported no other-than-temporary impairment.
- Management said liquidity exceeded internal minimums and remained strong. The Bank was described as well capitalized: total risk-based capital was 13.00%, Tier 1 risk-based capital 12.09%, common equity Tier 1 12.09%, and Tier 1 leverage 9.83%.
Material changes and unusual items
- FCB acquisition consideration was $38.6 million ($10.2 million cash and $28.4 million stock). It added nine branches and two loan production offices; the transaction generated $13.9 million of goodwill. Acquisition costs were $2.3 million for the nine-month period.
- Net income fell 34.9% in Q3 and 44.2% year to date. The principal offset to higher net interest income was lower mortgage banking revenue: Q3 mortgage banking, net fell to $4.4 million from $11.7 million; year-to-date it was $16.2 million versus $33.4 million. Management cited a return from unusually high 2021 mortgage activity, lower loan-sale volume and margin compression.
- The company reported nonperforming loans of $4.5 million, or 0.34% of loans, down from $7.1 million, or 0.76%, at year-end. The allowance was $13.9 million, 306.42% of nonperforming loans. Two restructured farmland loans defaulted within 12 months; foreclosure had been initiated.
- The company repurchased 99,517 shares during Q3 at an average $19.45 per share under a 400,000-share authorization. Dividends paid during the first nine months totaled $3.0 million.
Outlook, risks and controls
The filing provides no specific earnings or financial guidance. Management’s stated priorities are growing loans and deposits, improving net interest margin and fee income, and controlling expenses. It cautioned that deposit competition and customer shifts could make funding growth more difficult; weaker economic forecasts could require additional loan-loss provisions.
Key disclosed risks include interest-rate and securities-value changes, credit quality and borrower repayment, Montana real-estate and economic conditions, deposit funding and liquidity, competition, acquisition integration and goodwill impairment, and cybersecurity. In the Bank’s rate-sensitivity analysis, a 200-basis-point increase was projected to raise net interest income 1.0% in year one and 7.5% in year two; a 200-basis-point decrease was projected to reduce it 6.3% and 11.1%, respectively. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The company reported no material pending legal proceedings.
Important facts for investors to verify
- How FCB integration, acquired-loan accretion and acquisition-related costs affect sustainable earnings and returns.
- Whether mortgage banking income continues to normalize and how margin compression affects noninterest revenue.
- Loan quality and loss reserves, especially commercial real estate, construction, agricultural exposures and the restructured loans in foreclosure.
- The effect of further rate changes on deposit costs, net interest margin, securities values, accumulated other comprehensive loss and regulatory capital.
- Funding and liquidity trends, including deposit retention, borrowing reliance and the capacity to support continued loan growth.