Eagle Bancorp Montana, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited and consolidated. The company operates Opportunity Bank of Montana, with a banking and mortgage-lending focus.
Financial performance and position
- Q3 earnings: Net income was $4.75 million, or $0.73 per diluted share, versus $6.38 million, or $0.94 per share, in Q3 2020. For the first nine months, net income was $12.69 million ($1.89 diluted EPS), down from $16.04 million ($2.35) a year earlier.
- Interest income and margins: Q3 net interest income rose 11.6% to $12.03 million; nine-month net interest income rose 8.9% to $34.50 million. Net interest margin was 3.87% for Q3 (3.83% prior year) and 3.88% for nine months (3.91% prior year).
- Other income and expenses: Q3 noninterest income fell to $13.35 million from $14.97 million, mainly due to lower mortgage banking results and fair-value changes. Nine-month noninterest income increased 2.9% to $38.05 million. Noninterest expense rose 15.0% to $18.80 million in Q3 and 24.2% to $55.05 million for nine months; higher salaries and benefits were a major driver.
- Assets and lending: Total assets were $1.407 billion at September 30, up 11.9% from December 31, 2020. Net loans were $872.7 million, up 5.2%; gross loans were $887.0 million, with commercial real estate loans representing 42.9% of gross loans. Available-for-sale securities increased 47.3% to $240.0 million.
- Deposits, liquidity and debt: Deposits grew 15.6% to $1.195 billion. Cash and cash equivalents were $94.9 million. Total borrowings were $34.9 million, down from $46.9 million at year-end; this included $5.0 million of FHLB advances and $29.9 million of other long-term debt, net.
- Cash flows, nine months: Operating activities provided $32.8 million, investing activities used $148.6 million, and financing activities provided $140.9 million. Cash and cash equivalents increased $25.1 million to $94.9 million.
- Credit and capital: Nonperforming loans were $7.81 million, or 0.88% of total loans, versus $8.47 million, or 1.00%, at year-end; allowance coverage of nonperforming loans was 156.27%. The Bank was reported “well capitalized”; total risk-based capital was 15.83% and Tier 1 leverage was 11.25%.
Material changes and notable items
- Q3 net income declined despite higher net interest income, primarily reflecting increased operating expenses and lower noninterest income. For the nine-month period, lower net income likewise reflected substantially higher expenses, partly offset by stronger net interest income after provision and higher noninterest income.
- Mortgage activity remained significant: the company sold $823.4 million of residential mortgage loans in the first nine months, compared with $621.1 million a year earlier. Mortgage banking results included a $3.0 million net fair-value loss on loans held for sale and derivatives for the nine months, versus a $7.32 million gain in the prior-year period.
- COVID-related loan modifications had fallen to five nonresidential borrowers totaling $98,000 at September 30, from 40 borrowers totaling about $29.0 million at December 31, 2020. The company said 11 remaining residential mortgage forbearances were on loans sold and serviced.
- The company completed a $6.28 million tender offer for 250,000 shares in June and sold 251,256 shares to its ESOP for $6.0 million, financed by a 10-year loan at 3.00%. A new authorization to repurchase up to 100,000 shares was approved in July; no shares were repurchased under it in Q3.
- After quarter-end, on October 1, 2021, Eagle announced an agreement to acquire First Community Bancorp. Based on June 30 information, the target had $374 million of assets, $307 million of deposits and $220 million of gross loans. Closing was expected in Q4 2021, subject to regulatory, shareholder and other approvals.
Outlook, risks and contingencies
No specific earnings or financial guidance was provided. Management described Q3 momentum as supported by net interest income growth and higher loan production, and said it continued to focus on growing loans and deposits, increasing fee income and controlling expenses. It also noted that prolonged low rates pressure loan yields and that deposit competition could make funding growth more difficult.
Key disclosed risks include COVID-19 effects on borrowers and the Montana economy; concentration in Montana and real estate lending; interest-rate, inflation, liquidity and deposit competition risks; credit-loss estimates; mortgage-volume and servicing-rights valuation sensitivity; cybersecurity; and the execution, approval and integration risks of the proposed First Community acquisition. Management said the allowance was adequate but could rise if economic conditions or forecasts worsen. The company expects adoption of the current expected credit loss standard in 2023 and said it may increase the allowance, but it could not yet estimate the impact. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether expense growth, particularly compensation and occupancy costs, continues to outpace net interest income growth.
- Mortgage banking trends, including loan-sale margins, fair-value movements, origination volumes and mortgage servicing rights assumptions.
- Credit performance and allowance adequacy, especially across the substantial commercial real estate portfolio and COVID-affected industries.
- Deposit growth, funding costs, liquidity measures and the sensitivity of earnings and economic value to changing interest rates.
- First Community transaction approvals, terms, closing timing, integration costs and expected benefits; the filing provides no quantified earnings guidance for the transaction.