Eagle Bancorp Montana, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results are for Eagle and its subsidiaries, including Opportunity Bank of Montana. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
The company operates a Montana-focused commercial bank with consumer, commercial, agricultural and mortgage lending, deposit-taking, securities investment and mortgage servicing activities. On April 30, 2022, it completed its acquisition of First Community Bancorp, adding nine branches and two loan production offices. The acquisition was funded with $10.2 million in cash and $28.4 million in stock; $13.9 million of goodwill was recorded provisionally.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $16.0 | $11.3 | $27.8 | $22.5 |
| Loan-loss provision | $0.9 | $0.0 | $1.1 | $0.3 |
| Noninterest income | $7.3 | $11.3 | $15.6 | $24.7 |
| Noninterest expense | $20.0 | $19.0 | $37.0 | $36.3 |
| Net income | $1.8 | $2.7 | $4.0 | $7.9 |
| Diluted EPS | $0.24 | $0.39 | $0.57 | $1.17 |
| Net interest margin | 4.09% | 3.81% | 3.89% | 3.89% |
At June 30, total assets were $1.90 billion, net loans were $1.24 billion, securities available-for-sale were $384.0 million, deposits were $1.65 billion, total borrowings were $63.5 million, and shareholders’ equity was $162.8 million. Cash and cash equivalents were $46.0 million. For the first half, operating cash flow was $16.7 million, investing activities used $141.8 million, and financing activities provided $109.7 million; cash declined $15.4 million from year-end.
The Bank was reported as well capitalized and above regulatory minimums. Its total risk-based capital ratio was 13.31%, common equity Tier 1 ratio 12.40%, and Tier 1 leverage ratio 10.60% at June 30. Management said liquidity remained strong and the Bank exceeded its internal liquidity minimums.
Material changes versus comparable periods
- Q2 net income fell $0.9 million year over year; first-half net income fell $4.0 million. Despite higher net interest income, lower mortgage banking income was the principal offset.
- Net interest income rose 41% in Q2 and 23.8% in the first half, reflecting larger loan and securities balances, including the acquisition, and higher loan yields in Q2. First-half net interest margin was unchanged at 3.89%.
- Mortgage banking income declined $4.4 million in Q2 and $10.0 million in the first half. First-half mortgage loan sales fell to $322.7 million from $552.6 million, while reported sale margins compressed to 3.55% from 4.48%.
- Acquisition costs were $1.9 million in Q2 and $2.2 million in the first half. Higher expenses were partly offset by lower mortgage commissions.
- Loans increased $317.0 million and deposits $429.3 million from December 31, 2021, substantially reflecting the FCB acquisition. Management reported $126.9 million of organic loan growth and $108.2 million of deposit growth excluding acquired balances.
- Rising market rates drove a $30.6 million pretax decline in the fair value of available-for-sale securities during the first half. Accumulated other comprehensive income moved from a $3.5 million gain at year-end to a $19.1 million loss at June 30; first-half comprehensive loss was $18.6 million.
Outlook, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management emphasized growing loans and deposits, improving net interest margin and fee income, and controlling expenses; it noted competition could make deposit growth and funding expansion more difficult.
- Management attributed the mortgage revenue decline to mortgage activity normalizing after 2021’s unusually high volumes and to margin compression from competition.
- Credit indicators included nonperforming loans of $5.7 million, or 0.46% of loans, versus $7.1 million, or 0.76%, at year-end. The allowance for loan losses was $13.3 million, equal to 233% of nonperforming loans. Two restructured farmland loans defaulted within 12 months, and foreclosure had been initiated.
- Commercial real estate represented 38.8% of total loans; total real estate lending was 74.2%. This concentration makes borrower performance and Montana real estate conditions important risks.
- The Bank’s interest-rate sensitivity analysis showed a 16.3% projected reduction in second-year net interest income under an immediate 200-basis-point rate decline, slightly outside its 15% policy limit. Management discussed the result and said no action was needed given the perceived remoteness of that scenario. A 200-basis-point rise was projected to increase second-year net interest income 9.4%.
- The company issued $40 million of subordinated notes in January, partly used to redeem $10 million of senior notes. Management cited economic conditions, inflation and rates, deposit competition, credit losses, acquisition integration, goodwill valuation, cybersecurity and regulatory changes among forward-looking risks. It said capital ratios could be affected by further credit losses and that the parent relies on Bank dividends and cash to service debt.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material legal proceedings or material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether the acquired FCB loans, deposits, branches and expected cost or revenue benefits integrate as planned; the filing does not separately quantify post-acquisition FCB revenue or net income.
- Whether mortgage originations, gain-on-sale margins and mortgage banking income stabilize as rates and housing activity change.
- Credit quality trends in commercial real estate, agricultural and restructured loans, including the two farmland defaults and foreclosure proceedings.
- The scale and persistence of unrealized securities losses, their effect on equity and regulatory capital, and the portfolio’s sensitivity to further rate changes.
- Deposit retention, deposit pricing and liquidity as competition and market rates change, alongside the company’s debt service and capital needs.