EAGLE BANCORP MONTANA, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS. (Form 10-K)

The following discussion and analysis of the financial condition and results of
operations of Eagle is intended to help investors understand our company and our
operations. The financial review is provided as a supplement to, and should be
read in conjunction with the Consolidated Financial Statements and the related
Notes included elsewhere in this report.



Introduction



The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes Eagle and its subsidiaries' results of
operations for the year ended December 31, 2021 as compared to the year ended
December 31, 2020, and also analyzes our financial condition as of December 31,
2021 as compared to December 31, 2020. Like most banking institutions, our
principal business consists of attracting deposits from the general public and
the business community and making loans secured by various types of collateral,
including real estate and other consumer assets. We are significantly affected
by prevailing economic conditions, particularly interest rates, as well as
government policies concerning, among other things, monetary and fiscal affairs,
housing and financial institutions and regulations regarding lending and other
operations, privacy and consumer disclosure. Attracting and maintaining deposits
is influenced by a number of factors, including interest rates paid on competing
investments offered by other financial and nonfinancial institutions, account
maturities, fee structures and levels of personal income and savings. Lending
activities are affected by the demand for funds and thus are influenced by
interest rates, the number and quality of lenders and regional economic
conditions. Sources of funds for lending activities include deposits,
borrowings, repayments on loans, cash flows from maturities of investment
securities and income provided from operations.



Our earnings depend primarily on our level of net interest income, which is the
difference between interest earned on our interest-earning assets, consisting
primarily of loans and investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits, borrowed funds,
and trust-preferred securities. Net interest income is a function of our
interest rate spread, which is the difference between the average yield earned
on our interest-earning assets and the average rate paid on our interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets compared to interest-bearing liabilities. Also contributing to our
earnings is noninterest income, which consists primarily of service charges and
fees on loan and deposit products and services, net gains and losses on sale of
assets, and mortgage loan service fees. Net interest income and noninterest
income are offset by provisions for loan losses, general administrative and
other expenses, including salaries and employee benefits and occupancy and
equipment costs, as well as by state and federal income tax expense.



The Bank has a strong mortgage lending focus, with a large portion of its loan
originations represented by single-family residential mortgages, which has
enabled it to successfully market home equity loans, as well as a wide range of
shorter term consumer loans for various personal needs (automobiles,
recreational vehicles, etc.). The Bank has also focused on adding commercial
loans to our portfolio, both real estate and non-real estate. We have made
significant progress in this initiative. As of December 31, 2021, commercial
real estate and commercial business loans represented 60.97% and 15.82% of the
total loan portfolio, respectively. The purpose of this diversification is to
mitigate our dependence on the residential mortgage market, as well as to
improve our ability to manage our interest rate spread. Recent acquisitions have
added to our agricultural loans, which generally have shorter maturities and
nominally higher interest rates. This has provided additional interest income
and improved interest rate sensitivity. The Bank's management recognizes that
fee income will also enable it to be less dependent on specialized lending and
it maintains a significant loan serviced portfolio, which provides a steady
source of fee income. As of December 31, 2021, we had mortgage servicing rights,
net of $13.69 million compared to $10.11 million as of December 31, 2020. Gain
on sale of loans also provides significant noninterest income in periods of high
mortgage loan origination volumes. Such income will be adversely affected in
periods of lower mortgage activity.



                                       22

————————————————– ——————————

Contents



Fee income is also supplemented with fees generated from deposit accounts. The
Bank has a high percentage of non-maturity deposits, such as checking accounts
and savings accounts, which allows management flexibility in managing its
spread. Non-maturity deposits and certificates of deposit do not automatically
reprice as interest rates rise.



Management continues to focus on improving the Bank's earnings. Management
believes the Bank needs to continue to concentrate on increasing net interest
margin, other areas of fee income and control operating expenses to achieve
earnings growth going forward. Management's strategy of growing the loan
portfolio and deposit base is expected to help achieve these goals as follows:
loans typically earn higher rates of return than investments; a larger deposit
base should yield higher fee income; increasing the asset base will reduce the
relative impact of fixed operating costs. The biggest challenge to the strategy
is funding the growth of the statement of financial condition in an efficient
manner. Though deposit growth has been steady, it may become more difficult to
maintain due to significant competition and possible reduced customer demand for
deposits as customers may shift into other asset classes.



Other than short term residential construction loans, we do not offer "interest
only" mortgage loans on residential 1-4 family properties (where the borrower
pays interest but no principal for an initial period, after which the loan
converts to a fully amortizing loan). We also do not offer loans that provide
for negative amortization of principal, such as "Option ARM" loans, where the
borrower can pay less than the interest owed on their loan, resulting in an
increased principal balance during the life of the loan. We do not offer
"subprime loans" (loans that generally target borrowers with weakened credit
histories typically characterized by payment delinquencies, previous
charge-offs, judgments, bankruptcies, or borrowers with questionable repayment
capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A
loans (traditionally defined as loans having less than full documentation).



The level and movement of interest rates impacts the Bank's earnings as well.
The Federal Open Market Committee decreased the federal funds target rate during
the year ended December 31, 2020 from 1.75% to 0.25%. The rate remained
at 0.25% during the year ended December 31, 2021. The rate reductions add
continued pressure on loan yields.





COVID-19



The Company's performance for the year ended December 31, 2021 was solid due to
higher loan production, record deposit generation and net interest income
growth. However, the Company also continues to see the impact of the COVID-19
pandemic and its consequences on our Montana communities. The Bank remains
focused on supporting our customers, communities and employees while prudently
managing risk. The Bank is closely monitoring borrowers and businesses serviced
and is providing debt service relief for those that have been impacted.



On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") providing economic relief for the country, including
the $349 billion Small Business Administration ("SBA") Paycheck Protection
Program ("PPP") to fund short-term loans for small businesses. In April 2020,
additional funding was approved for the PPP. Eagle began taking loan
applications from its small business clients immediately after the program was
implemented, and as of the close of the program, had helped764 customers receive
$45.71 million in SBA PPP loans. The Bank has processed applications for PPP
loan forgiveness for customers, with759 loans representing over $45.31 million
now paid in full. The remaining five SBA PPP loans represent $402,000.



On December 27, 2020, the Consolidated Appropriations Act ("CAA") was signed
into law, providing new COVID-19 stimulus relief, and it included $284 billion
allocated for another round of PPP lending, extending the program to March 31,
2021. On March 31, 2021, the program was extended to May 31, 2021. The program
offered new PPP loans for companies that did not receive a PPP loan in 2020, and
also "second draw" loans targeted at hard-hit businesses that have already spent
their initial PPP proceeds. As of the close of the program, Eagle supported
646 borrowers in receiving $19.51 million in new PPP funding. The Bank has
processed applications for PPP loan forgiveness for customers, with514 loans
representing$15.45 million now paid in full. The remaining 132 PPP loans
represent$4.06 million.



While all industries have and will continue to experience adverse impacts as a
result of the COVID-19 pandemic, we had exposures in the following impacted
industries, as a percentage of loans as of December 31, 2021: hotels and lodging
(6.8%), health and social assistance (3.5%), bars and restaurants (2.7%),
casinos (0.8%) and nursing homes (0.4%). The Bank continues to reach out to
specific borrowers to assess the risks and understand their needs.



The Bank has offered multiple accommodation options to its clients, including
90-day deferrals, forbearances and interest only payments. During 2020, the
Montana Board of Investments ("MBOI") began offering 12-months of interest
payment assistance to qualified borrowers. As of December 31, 2021, there way
only one remaining loan modification for a nonresidential borrower representing
a loan for $6,000, compared to40 nonresidential borrowers representing $29.00
million, or 3.5% of gross loans excluding loans held-for-sale, as of December
31, 2020. The Bank qualified32 borrowers for the MBOI program
representing$27.25 million in loans, all of which had aged out of the program as
of the third quarter of 2021. Only one loan in the hotel and lodging industry
was approved in the MBOI loan program and was considered a troubled debt
restructured ("TDR") loan as of December 31, 2020, prior to aging out of the
program. No other loans that had been modified related to COVID-19 were reported
as TDR's due to the CARES Act exemption. As of December 31, 2021 there
remain approximately 15 forbearances approved for residential mortgage loans,
all of which are sold and serviced. Utilization of credit lines were78.6% at
December 31, 2021 to 82.7% at December 31, 2020, which has declined slightly
compared to historical usage rates.



Our fee income could still be reduced due to COVID-19. In keeping with guidance
from regulators, we are actively working with COVID-19 affected customers to
waive fees from a variety of sources, such as, but not limited to, insufficient
funds and overdraft fees, early withdrawal fees, ATM fees, account maintenance
fees, etc. These reductions in fees are thought, at this time, to be temporary
in conjunction with the length of the expected COVID-19 related economic crisis.
At this time, we are unable to project the materiality of such an impact, but
recognize the breadth of the economic impact is likely to impact our fee income
in future periods.



As of December 31, 2021, our capital ratios, and our subsidiary bank's capital
ratios, were in excess of all regulatory requirements. While we believe that we
have sufficient capital to withstand an extended economic recession brought
about by COVID-19, our reported and regulatory capital ratios could be adversely
impacted by further credit losses. We rely on cash on hand as well as dividends
from our subsidiary bank to service our debt. If our capital deteriorates such
that our subsidiary bank is unable to pay dividends to us for an extended period
of time, we may not be able to service our debt.



                                       23

————————————————– ——————————

Contents



While certain valuation assumptions and judgments will change to account for
pandemic-related circumstances such as widening credit spreads, we do not
anticipate significant changes in methodology used to determine the fair value
of assets measured in accordance with GAAP.



As of December 31, 2021, our goodwill was not impaired. COVID-19 could cause a
further and sustained decline in our stock price or the occurrence of what
management would deem to be a triggering event that could, under certain
circumstances, cause us to perform a goodwill impairment test and result in an
impairment charge being recorded for that period. In the event that we conclude
that all or a portion of our goodwill is impaired, a noncash charge for the
amount of such impairment would be recorded to earnings. Such a charge would
have no impact on tangible capital or regulatory capital. At December 31, 2021
we had goodwill of $20.8 million.



The State of Montana ended their phased approach to reopening and lifted the
state-wide mask mandate on February 12, 2021. On March 22, 2021, all of our
lobbies opened while still requiring everyone to practice necessary safeguards.
As of May 7, 2021, masks were no longer required for the Bank's branches,
customers or vendors. The Company remains committed to assisting our customers
and communities as the vaccine rollout continues and COVID-19 restrictions lift
in Montana. Management is encouraging its employees to receive the COVID-19
vaccine.





Acquisitions


The Bank used growth through mergers or acquisitions, in addition to its organic growth strategy.

In January 2019, the Company acquired Big Muddy Bancorp, Inc. ("BMB"), a Montana
corporation, and BMB's wholly-owned subsidiary, The State Bank of Townsend, a
Montana chartered commercial bank ("SBOT"). SBOT operated four branches in
Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an
opportunity to expand market presence and lending activities throughout the
state.



In January 2020, Eagle acquired Western Holding Company of Wolf Point ("WHC"), a
Montana corporation, and WHC's wholly-owned subsidiary, Western Bank of Wolf
Point ("WB"), a Montana chartered commercial bank. In the transaction, Eagle
acquired one retail bank branch in Wolf Point, Montana.



On October 1, 2021, Eagle announced that it had reached an agreement to acquire
First Community Bancorp, Inc. ("FCB"), a Montana corporation and its
wholly-owned subsidiary, First Community Bank, a Montana chartered commercial
bank. The agreement provides that, upon the terms and subject to the conditions
set forth in the agreement, FCB will merge with and into Eagle, with Eagle
continuing as the surviving corporation. Upon completion of the transaction,
Eagle will have an additional $377 million of assets, $306 million of deposits
and $208 million in gross loans, based on September 30, 2021 information.
Headquartered in Glasgow, Montana, FCB currently operates nine branches and two
mortgage loan production offices. The transaction is subject to the approvals of
bank regulatory agencies, the shareholders of Eagle and FCB and other customary
closing conditions. As of March 9, 2022, the Company received approval of the
pending merger from the Montana Department of Banking and Financial
Institutions, and the shareholders of both Eagle and FCB have approved the
transaction. The Company is awaiting the approval of the Federal Reserve
Board. The acquisition is expected to close during the first quarter of 2022.
Upon approval, a Form 8-K will be filed to disclose the anticipated closing
date.







                                       24

————————————————– ——————————

  Table of Contents



Critical Accounting Policies



Certain accounting policies are important to the understanding of our financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances, including, but
without limitation, changes in interest rates, performance of the economy,
financial condition of borrowers and laws and regulations. The following are the
accounting policies we believe are critical.



Allowance for Loan Losses



We recognize that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan, the creditworthiness of
the borrower, general economic conditions and the quality of the collateral for
the loan. We maintain an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance for loan losses represents management's
estimate of probable losses based on all available information. This allowance
is based on management's evaluation of the collectability of the loan portfolio,
including past loan loss experience, known and inherent losses, information
about specific borrower situations and estimated collateral values, and current
economic conditions. The loan portfolio and other credit exposures are regularly
reviewed by management in its determination of the allowance for loan losses.
The methodology for assessing the appropriateness of the allowance includes a
review of historical losses, internal data including delinquencies among others,
industry data, and economic conditions.



In addition, as an integral part of their examination process, banking
regulators will periodically review our allowance for loan losses and may
require us to make additional provisions for estimated losses based upon
judgments different from those of management. Although management believes that
it uses the best information available to establish the allowance for loan
losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used in making the determinations. Because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that increases will not be necessary should the quality of loans
deteriorate as a result of the factors discussed previously. Any material
increase in the allowance for loan losses may adversely affect our financial
condition and results of operations. The allowance is based on information known
at the time of the review. Changes in factors underlying the assessment could
have a material impact on the amount of the allowance that is necessary and the
amount of provision to be charged against earnings. Such changes could impact
future results.


Good will and other intangible assets



The Company accounts for business combinations under the acquisition method of
accounting. The Company records assets acquired, including identifiable
intangible assets and liabilities assumed at their fair values as of the
acquisition date. Transaction costs related to the acquisition are expensed in
the period incurred. Results of operations of the acquired entity are included
in the consolidated statements of income from the date of acquisition. Any
measurement-period adjustments are recorded in the period the adjustment is
identified.



The excess of consideration paid over fair value of net assets acquired is
recorded as goodwill. Determining the fair value of assets acquired, including
identifiable intangible assets and liabilities assumed often requires
significant use of estimates and assumptions. This may involve estimates based
on third-party valuations, such as appraisals, or internal valuations based on
discounted cash flow analyses or other valuation techniques such as estimates of
attrition, inflation, asset growth rates, discount rates, multiples of earnings
or other relevant factors. Goodwill is not amortized, but is tested at least
annually for impairment.


Other intangible assets are assigned useful lives and are amortized. The determination of useful lives is subjective. See Note 7 to the Consolidated Financial Statements under “Item 8. Financial Statements and Supplementary Data” for more information.

The Company’s accounting policies and discussion of recent accounting pronouncements are included in note 1 to the consolidated financial statements under “Item 8. Financial statements and supplementary data”.

                                       25

————————————————– ——————————

  Table of Contents




Financial Condition


December 31, 2021 compared to December 31, 2020



Total assets were $1.44 billion at December 31, 2021, an increase of
$178.30 million, or 14.2% from $1.26 billion at December 31, 2020.Securities
available-for-sale increased by $108.31 million from $162.95 million at December
31, 2020. In addition, loans receivable, net increased by $91.14 million
from December 31, 2020. Total liabilities were $1.28 billion at December 31,
2021, an increase of $174.50 million, or 15.8%, from $1.10 billion at December
31, 2020. The increase was largely due to an increase in deposits
slightly offset by a reduction in FHLB advances and other borrowings. Total
deposits increased by $189.47 million from December 31, 2020. However, FHLB
advances and other borrowings decreased $12.07 million from December 31, 2020.
Total shareholders' equity increased by $3.79 million from December 31, 2020.



Financial Condition Details



Investment Activities



We maintain a portfolio of investment securities, classified as either
available-for-sale or held-to-maturity to enhance total return on investments.
Our investment securities generally include U.S. government and agency
obligations, U.S. treasury obligations, Small Business Administration pools,
municipal securities, corporate obligations, mortgage-backed securities
("MBSs"), collateralized mortgage obligations ("CMOs") and asset-backed
securities ("ABSs"), all with varying characteristics as to rate, maturity and
call provisions. There were no held-to-maturity investment securities included
in the investment portfolio at December 31, 2021 or 2020. All investment
securities included in the investment portfolio are available-for-sale. Eagle
also has interest-bearing deposits in other banks and federal funds sold, as
well as, stock in FHLB and FRB. FHLB stock was $1.70 million and $2.06 million
at December 31, 2021 and 2020, respectively. FRB stock was $2.97 million at
both December 31, 2021 and 2020.



                                       26

————————————————– ——————————

Contents

The following table summarizes investing activities:


                                                                                  December 31,
                                                   2021                               2020                               2019
                                                       Percentage of                      Percentage of                      Percentage of
                                       Fair Value          Total          Fair Value          Total          Fair Value          Total
                                                                             (Dollars in Thousands)
Securities available-for-sale:
U.S. government obligations           $      1,633              0.60 %   $      2,245              1.38 %   $        695              0.55 %
U.S. treasury obligations                   53,183             19.61            5,657              3.47           12,902             10.17
Municipal obligations                      123,667             45.58           99,088             60.81           52,222             41.17
Corporate obligations                        9,336              3.44           10,663              6.54            8,388              6.61
Mortgage-backed securities                  14,636              5.40            7,669              4.71            9,495              7.48
Collateralized mortgage obligations         63,067             23.25           31,189             19.14           33,334             26.27
Asset-backed securities                      5,740              2.12            6,435              3.95            9,839              7.75
Total securities available-for-sale   $    271,262            100.00 %   $    162,946            100.00 %   $    126,875            100.00 %



Securities available for sale have been $271.26 million at December 31, 2021an augmentation of $108.31 millioni.e. 66.5%, of $162.95 million at December 31, 2020. The increase was largely due to purchasing activity due to excess cash levels.



The following table sets forth information regarding fair values, weighted
average yields and maturities of investments. The yields have been computed on a
tax equivalent basis. Maturities are based on the final contractual payment
dates and do not reflect the impact of prepayments or early redemptions that may
occur.



                                                                                                                          December 31, 2021
                                            One Year or Less                  One to Five Years                 Five to Ten Years                  After Ten Years                       Total Investment Securities
                                                        Weighted                          Weighted                          Weighted                           Weighted                         Approximate         Weighted
                                      Fair Value      Average Yield    

Fair value Average return Fair value Average return Fair value Average return Fair value Market value Average return

                                                                                                                       (Dollars in Thousands)
Securities available-for-sale:
U.S. government obligations           $         -              0.00 %   $         -              0.00 %   $     1,633              2.07 %   $          -              0.00 %   $     1,633     $        1,633              2.07 %
U.S. treasury obligations                       -              0.00           5,457              2.76          47,726              0.01                -              0.00          53,183             53,183              0.02
Municipal obligations                         223              2.65           4,843              2.60          27,321              0.03           91,280              0.03         123,667            123,667              0.03
Corporate obligations                       3,003              2.31           3,008              1.18           3,325              0.05                -              0.00           9,336              9,336              0.03
Mortgage-backed securities                      -              0.00               -              0.00             212              0.02           14,424              0.01          14,636             14,636              0.01
Collateralized mortgage obligations             -              0.00           6,853              2.88               -              0.00           56,214              0.01          63,067             63,067              0.01
Asset-backed securities                         -              0.00               -              0.00               -              0.00            5,740              0.01           5,740              5,740              0.01
Total securities available-for-sale   $     3,226              2.33 %   $    20,161              1.78 %   $    80,217              1.13 %   $    167,658              2.09 %   $   271,262     $      271,262              2.07 %




                                       27

————————————————– ——————————

  Table of Contents



Lending Activities



The following table includes the composition of the Bank's loan portfolio by
loan category:



                                                                                             December 31,
                                       2021                         2020                         2019                         2018                         2017
                                           Percent of                   Percent of                   Percent of                   Percent of                   Percent of
                              Amount         Total         Amount         Total         Amount         Total         Amount         Total         Amount         Total
                                                                                        (Dollars in thousands)
Real estate loans:
Residential 1-4 family (1)   $ 101,180          10.82 %   $ 110,802          13.14 %   $ 119,296          15.28 %   $ 116,939          18.92 %   $ 109,911          21.37 %
Residential 1-4 family
construction                    45,635           4.88        46,290           5.49        38,602           4.95        27,168           4.40        25,306           4.92
Total residential 1-4
family                         146,815          15.70       157,092          18.63       157,898          20.23       144,107          23.32       135,217          26.29

Commercial real estate         410,568          43.92       316,668          37.56       331,062          42.41       256,784          41.54       194,805          37.88
Commercial construction
and development                 92,403           9.88        65,281           7.74        52,670           6.75        41,739           6.75        38,351           7.46
Farmland                        67,005           7.17        65,918           7.82        50,293           6.44        29,915           4.84        11,627           2.26
Total commercial real
estate                         569,976          60.97       447,867          53.12       434,025          55.60       328,438          53.13       244,783          47.60

Total real estate loans        716,791          76.67       604,959          71.75       591,923          75.83       472,545          76.45       380,000          73.89

Other loans:
Home equity                     51,748           5.54        56,563           6.71        56,414           7.23        52,159           8.44        52,672          10.24
Consumer                        18,455           1.97        20,168           2.39        18,882           2.42        16,565           2.68        15,712           3.06

Commercial                     101,535          10.86       109,209          12.95        72,797           9.33        59,053           9.56        63,300          12.31
Agricultural                    46,335           4.96        52,242           6.20        40,522           5.19        17,709           2.87         2,563           0.50
Total commercial loans         147,870          15.82       161,451          19.15       113,319          14.52        76,762          12.43        65,863          12.81

Total other loans              218,073          23.33       238,182          28.25       188,615          24.17       145,486          23.55       134,247          26.11

Total loans                    934,864         100.00 %     843,141         100.00 %     780,538         100.00 %     618,031         100.00 %     514,247         100.00 %

Deferred loan fees              (1,725 )                     (2,038 )                     (1,303 )                     (1,098 )                     (1,093 )
Allowance for loan losses      (12,500 )                    (11,600 )                     (8,600 )                     (6,600 )                     (5,750 )

Total loans, net             $ 920,639                    $ 829,503                    $ 770,635                    $ 610,333                    $ 507,404



(1) Excluding loans held for sale

                                       28

————————————————– ——————————

Contents



Loans receivable, net increased $91.14 million to $920.64 million at December
31, 2021. The increase was largely driven by an increase in total commercial
real estate loans of $122.11 million. Construction projects were slow to start
in 2020 and early 2021 due to COVID-19 concerns and supply chain
issues. This increase was offset by decreases in total commercial
loans of $13.58 million, total residential 1- 4 family loans
of $10.27 million, home equity loans of $4.81 million and consumer loans
of $1.71 million.



Total loan originations were $1.56 billion for the year ended December 31, 2021.
Total residential 1-4 family originations were $1.14 billion, which includes
$1.04 billion of originations of loans held-for-sale. Total commercial real
estate originations were $274.40 million. Total commercial originations were
$110.58 million, which includes $19.51 million of SBA PPP loans. Home equity
loan originations totaled $25.59 million. Consumer loan originations totaled
$8.94 million. Loans held-for-sale decreased by $28.80 million, to
$25.82 million at December 31, 2021 from $54.62 million at December 31,
2020 after a robust refinancing period in 2020.



Loan Maturities. The following table sets forth the estimated maturity of the
loan portfolio of the Bank at December 31, 2021. Balances exclude deferred loan
fees and allowance for loan losses. Scheduled principal repayments of loans do
not necessarily reflect the actual life of such assets. The average life of a
loan is typically substantially less than its contractual terms because of
prepayments. In addition, due on sale clauses on loans generally give the Bank
the right to declare loans immediately due and payable in the event, among other
things, the borrower sells the real property, subject to the mortgage, and the
loan is not paid off. All mortgage loans are shown to be maturing based on the
date of the last payment required by the loan agreement, except as noted.



Loans with no declared due date, those with no payment due date, demand loans and loans that have reached maturity are presented as due within six months.


                                                   After One        After Five
                                    One Year      Year to Five       Years to
                                    or Less          Years         Fifteen Years      After Fifteen Years        Total

Total residential 1-4 families (1) $38,411 $13,739 $53,488 $

              41,177     $ 146,815
Total commercial real estate           48,846           48,016           333,732                   139,382       569,976
Home equity                             3,403           15,867            32,062                       416        51,748
Consumer                                  942           12,922             4,367                       224        18,455
Total Commercial                       45,024           52,147            49,483                     1,216       147,870
Total loans (1)                    $  136,626     $    142,691     $     473,132     $             182,415     $ 934,864



(1) Excluding loans held for sale




The following table includes loans by fixed or adjustable rates at December 31,
2021:



                                          Fixed        Adjustable        Total
                                                 (Dollars in Thousands)
Due after December 31, 2022:
Total residential 1-4 family (1)        $  52,669     $     55,735     $ 108,404
Total commercial real estate               27,368          493,762       521,130
Home equity                                43,605            4,740        48,345
Consumer                                   14,679            2,834        17,513
Total commercial                            1,176          101,670       102,846
Total due after December 31, 2022 (1)     139,497          658,741       792,238

Due in less than one year                  18,262          118,364       136,626

Total loans (1)                         $ 157,759     $    777,105     $ 934,864

Percent of total                            16.88 %          83.12 %      100.00 %



(1) Excluding loans held for sale

                                       29

————————————————– ——————————

Contents



Nonperforming Assets. Generally, our collection procedures provide that when a
loan is 15 or more days delinquent, the borrower is sent a past due notice. If
the loan becomes 30 days delinquent, the borrower is sent a written delinquency
notice requiring payment. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower, including face to face meetings and
counseling to resolve the delinquency. All collection actions are undertaken
with the objective of compliance with the Fair Debt Collection Act.



For mortgage loans and home equity loans, if the borrower is unable to cure the
delinquency or reach a payment agreement, we will institute foreclosure actions.
If a foreclosure action is taken and the loan is not reinstated, paid in full or
refinanced, the property is sold at judicial sale at which we may be the buyer
if there are no adequate offers to satisfy the debt. Any property acquired as
the result of foreclosure, or by deed in lieu of foreclosure, is classified as
real estate owned until such time as it is sold or otherwise disposed of. When
real estate owned is acquired, it is recorded at its fair market value less
estimated selling costs. The initial recording of any loss is charged to the
allowance for loan losses. Subsequent write-downs are recorded as a charge to
operations. As of December 31, 2021 and 2020, the Bank had $4,000 and $25,000,
respectively, of real estate owned and other repossessed property.



The State of Montana placed a freeze on foreclosures on March 28, 2020.
Subsequently the State of Montana released the freeze effective May 24, 2020
with the exception of continued protections for those individuals deemed
vulnerable to the coronavirus. The Federal foreclosure moratorium that began
March 18, 2020 was later extended to July 31, 2021. On June 28, 2021, the
Consumer Financial Protection Bureau finalized a rule requiring loan servicers
to enhance their efforts to help homeowners affected by the COVID-19 pandemic.
As a result, servicers could not initiate a foreclosure until the borrower was
more than 120 days delinquent and were effectively prohibited from beginning the
foreclosure process before January 1, 2022. However, the Bank has had minimal
impact due to foreclosures affected by these freezes.



Loans are reviewed on a quarterly basis and are placed on nonaccrual status when
they are 90 days or more delinquent. Loans may be placed on nonaccrual status at
any time if, in the opinion of management, the collection of additional interest
is doubtful. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured. At December 31, 2021, the Bank had
$5.49 million ($4.89 million net of specific reserves for loan losses) of loans
that were nonperforming and held on nonaccrual status. At December 31, 2020, the
Bank had $6.27 million ($5.92 million net of specific reserves for loan losses)
of loans that were nonperforming and held on nonaccrual status.



The following table provides information regarding the Bank's delinquent loans:



                                                                December 31, 2021
                                         30-89 Days                                    90 Days and Greater
                                                       Percentage of                                       Percentage of
                           Number         Amount           Total           Number            Amount            Total
                                   (Dollars in Thousands)                            (Dollars in Thousands)
Loan type:
Real estate loans:
Residential 1-4 family            2     $       21              2.26 %             -       $         -              0.00 %
Commercial real estate            2            788             84.64               -                 -              0.00
Farmland                          2             61              6.55               -                 -              0.00
Other loans:
Consumer                         24             55              5.91               -                 -              0.00
Commercial                        1              6              0.64               -                 -              0.00
Total                            31     $      931            100.00 %             -       $         -              0.00 %




                                       30

————————————————– ——————————

Contents

The following table presents information on non-performing assets:


                                                                   December 31,
                                             2021         2020         2019         2018         2017
                                                              (Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential 1-4 family                     $    616     $    684     $    618     $    253     $    475
Residential 1-4 family construction             337          337          337          634            -
Commercial real estate                          497          631          583          432            -
Commercial construction and development           -           36           50           13            -
Farmland                                        989        2,245          323            -            -
Other loans:
Home equity                                     100           94           78          469          242
Consumer                                         62          151          156          127          153
Commercial                                      516          537          750          308          107
Agricultural                                  1,718        1,542          499           32            -
Accruing loans delinquent 90 days or
more
Real estate loans:
Residential 1-4 family                            -           34            4          130            -
Residential 1-4 family construction               -          170            -            -            -
Commercial real estate                            -            -            -        1,347            -
Other loans:
Home equity                                       -            -            -            -            -
Commercial                                        -            6            -            -            -
Agricultural                                      -          182        1,805            -            -
Restructured loans
Real estate loans:
Commercial real estate                        1,527        1,633            -            -            -
Commercial construction and development           -           14            -            -            -
Farmland                                        641            -          153            -            -
Other loans:
Home equity                                      15           17           20           22            -
Commercial                                        -            -           74            -            -
Agricultural                                     41          160            -            -            -
Total nonperforming loans                     7,059        8,473        5,450        3,767          977
Real estate owned and other repossessed
property, net                                     4           25           26          107          525
Total nonperforming assets                 $  7,063     $  8,498     $  

5,476 $3,874 $1,502

Total nonperforming loans to total loans       0.76 %       1.00 %       0.70 %       0.61 %       0.19 %
Total nonperforming loans to total
assets                                         0.49 %       0.67 %       0.52 %       0.44 %       0.14 %
Total nonaccrual loans to total loans          0.59 %       0.74 %       0.47 %       0.37 %       0.19 %
Total allowance for loan loss to
nonperforming loans                          177.08 %     136.91 %     157.80 %     175.21 %     588.54 %
Total nonperforming assets to total
assets                                         0.49 %       0.68 %       0.52 %       0.45 %       0.21 %



Loans not accrued at December 31, 2021 and 2020 include $492,000 and
$1.28 millionrespectively acquired loans that deteriorated after the acquisition date.



During the year ended December 31, 2021, the Bank sold three real estate owned
and other repossessed assets resulting in a net loss of $12,000. There was
one write-down on real estate owned and other repossessed assets for a loss of
$10,000 during the year ended December 31, 2021. During the year ended December
31, 2020, the Bank sold five real estate owned and other repossessed assets
resulting in a net loss of $9,000. There were no write-down on real estate owned
and other repossessed assets during the year ended December 31, 2020. During the
year ended December 31, 2021 and 2020, an insignificant amount of interest was
recorded on loans previously accounted for on a nonaccrual basis.



Management, in compliance with regulatory guidelines, conducts an internal loan
review program, whereby loans are placed or classified in categories depending
upon the level of risk of nonpayment or loss. These categories are special
mention, substandard, doubtful or loss. When a loan is classified as substandard
or doubtful, management is required to evaluate the loan for impairment and
establish an allowance for loan loss if deemed necessary. When management
classifies a loan as a loss asset, an allowance equaling up to 100.0% of the
loan balance is required to be established or the loan is required to be
charged-off. The allowance for loan losses is composed of an allowance for both
inherent risk associated with lending activities and specific problem assets.



                                       31

————————————————– ——————————

Contents



Management's evaluation of classification of assets and adequacy of the
allowance for loan losses is reviewed by the Board on a regular basis and by
regulatory agencies as part of their examination process. We also utilize a
third party review as part of our loan classification process. In addition, on
an annual basis or more often if needed, the Company formally reviews the
ratings of all commercial real estate, real estate construction, and commercial
business loans that have a principal balance of $750,000 or more.



The following table reflects our classified assets:


                                                             December 31, 2021
                                   Special
                                   Mention        Substandard       Doubtful         Loss          Total
                                                               (In Thousands)
Real estate loans:
Residential 1-4 family            $        -     $         301     $      199     $        -     $     500
Residential 1-4 family
construction                               -               337              -              -           337
Commercial real estate                 1,527             2,145              -              -         3,672
Commercial construction and
development                                -                 -              -              -             -
Farmland                                 177             1,744             47              -         1,968
Other loans:
Home equity                                -               134              -              -           134
Consumer                                   -                63              -              -            63
Commercial                               130               524              -              -           654
Agricultural                             332             1,444              9              -         1,785
Total loans                            2,166             6,692            255              -         9,113

Real estate owned/repossessed
property, net                                                                                            4

                                                                                                 $   9,117






                                                             December 31, 2020
                                   Special
                                   Mention        Substandard       Doubtful         Loss          Total
                                                               (In Thousands)
Real estate loans:
Residential 1-4 family            $        -     $         857     $      199     $        -     $   1,056
Residential 1-4 family
construction                               -               337              -              -           337
Commercial real estate                 2,568             2,344              -              -         4,912
Commercial construction and
development                               14                36              -              -            50
Farmland                                 136             2,164             53              -         2,353
Other loans:
Home equity                              274               112              -              -           386
Consumer                                   -               151              -              -           151
Commercial                               829               570              -              -         1,399
Agricultural                             355             1,395            121              -         1,871
Total loans                            4,176             7,966            373              -        12,515

Real estate owned/repossessed
property, net                                                                                           25

                                                                                                 $  12,540






                                       32

————————————————– ——————————

Contents



Allowance for Loan Losses. The Bank segregates its loan portfolio for loan
losses into the following broad categories: residential 1-4 family, commercial
real estate, home equity, consumer and commercial. The Bank provides for a
general allowance for losses inherent in the portfolio in the categories
referenced above. General loss percentages which are calculated based on
historical analyses and other factors such as volume and severity of
delinquencies, local and national economy, underwriting standards and other
factors. This portion of the allowance is calculated for inherent losses which
probably exist as of the evaluation date even though they might not have been
identified by the more objective processes used. This is due to the risk of
error and/or inherent imprecision in the process. This portion of the allowance
is subjective in nature and requires judgments based on qualitative factors
which do not lend themselves to exact mathematical calculations such as: trends
in delinquencies and nonaccruals; trends in volume; terms and portfolio mix; new
credit products; changes in lending policies and procedures; and changes in the
outlook for the local and national economy.



At least quarterly, the management of the Bank evaluates the need to establish
an allowance for losses on specific loans when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full collectability may not be reasonably assured and considers, among other
matters: the estimated market value of the underlying collateral of problem
loans; prior loss experience; economic conditions; and overall portfolio
quality.



Provisions for, or adjustments to, estimated losses are included in earnings in
the period they are established. At December 31, 2021, we had $12.50 million in
allowances for loan losses.



While we believe we have established our existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that bank regulators, in reviewing our loan portfolio, will not
request that we significantly increase our allowance for loan losses, or that
general economic conditions, a deteriorating real estate market, or other
factors will not cause us to significantly increase our allowance for loan
losses, therefore negatively affecting our financial condition and earnings.



In originating loans, we recognize that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and, in the
case of a secured loan, the quality of the security for the loan.



It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, at least quarterly.

                                       33

————————————————– ——————————

Contents

The following table includes information on the allowance for loan losses:


                                                                Years Ended
                                                                December 31,
                                                     2021           2020           2019
                                                           (Dollars in Thousands)

Beginning balance                                 $   11,600     $    8,600     $    6,600

Provision for loan losses                                861          3,130          2,627
Loans charged-off
Commercial real estate                                   (35 )          (18 )         (195 )
Home equity                                                -              -            (75 )
Consumer                                                 (16 )          (36 )          (78 )
Commercial                                                (6 )         (173 )         (380 )
Recoveries
Commercial real estate                                    21             12             17
Home equity                                                -              -              -
Consumer                                                   8             16             26
Commercial                                                67             69             58
Net loans charged-off                                     39           (130 )         (627 )

Ending balance                                    $   12,500     $   11,600     $    8,600

Allowance for loan losses to total loans
excluding loans held-for-sale                           1.34 %         1.38 %         1.10 %
Allowance for loan losses to total
nonperforming loans                                   177.08 %       136.91 %       157.80 %
Allowance for loan losses to nonaccrual loans         227.65 %       184.89 %       236.20 %
Net charge-offs to average loans outstanding
during the period                                       0.00 %         0.01 %         0.08 %



Net allocations to average outstanding loans for each loan category are considered insignificant for the periods presented in the table above.

The following table shows the breakdown of the allowance for loan losses by loan category and the percentage of loans in each category relative to total loans:


                                                                                                  December 31,
                                                    2021                                              2020                                              2019
                                              Percentage of          Loan                       Percentage of          Loan                      Percentage of          Loan
                                               Allowance to       Category to                    Allowance to       Category to                   Allowance to       Category to
                                 Amount      Total Allowance      Total Loans      Amount      Total Allowance      Total Loans     Amount      Total Allowance      Total Loans
                                                                                             (Dollars in Thousands)
Real estate loans:
Residential 1-4 family          $  1,596                12.77 %         15.70 %   $  1,506                12.98 %         18.63 %   $ 1,301                15.13 %         20.23 %
Commercial real estate             7,470                59.76           60.97        6,951                59.92           53.12       4,826                56.12            55.6
Total real estate loans            9,066                72.53           76.67        8,457                72.90           71.75       6,127                71.25           75.83

Other loans:
Home equity                          533                 4.26            5.54          515                 4.44            6.71         477                 5.55            7.23
Consumer                             365                 2.92            1.97          364                 3.14            2.39         284                 3.30            2.42
Commercial                         2,536                20.29           15.82        2,264                19.52           19.15       1,712                 19.9           14.52
Total other loans                  3,434                27.47           23.33        3,143                27.10           28.25       2,473                28.75           24.17

Total                           $ 12,500               100.00 %        100.00 %   $ 11,600               100.00 %        100.00 %   $ 8,600               100.00 %        100.00 %




                                       34

————————————————– ——————————

Contents

Deposits and other sources of funds



Deposits. Deposits are the Company's primary source of funds. Core deposits are
deposits that are more stable and somewhat less sensitive to rate changes. They
also represent a lower cost source of funds than rate sensitive, more volatile
accounts such as certificates of deposit. We believe that our core deposits are
checking, savings, money market and IRA accounts. Based on our historical
experience, we include IRA accounts funded by certificates of deposit as core
deposits because they exhibit the principal features of core deposits in that
they are stable and generally are not rate sensitive. Core deposits were $1.10
billion or 89.8% of the Bank's total deposits at December 31, 2021
($1.07 billion or 87.9% excluding IRA certificates of deposit). The presence of
a high percentage of core deposits and, in particular, transaction accounts
reflects in part our strategy to restructure our liabilities to more closely
resemble the lower cost liabilities of a commercial bank. However, a significant
portion of our deposits remains in certificate of deposit form. These
certificates of deposit, if they mature and are renewed at higher rates, would
result in an increase in our cost of funds.



The following table includes the deposit accounts and the associated weighted average interest rates for each category of deposits:


                                                                                              December 31,
                                                      2021                                         2020                                        2019
                                                                   Weighted                                     Weighted                                   Weighted
                                                     Percent       Average                        Percent       Average                      Percent       Average
                                      Amount        of Total         Rate          Amount        of Total         Rate         Amount       of Total         Rate
                                                                                         (Dollars in Thousands)
Noninterest checking                $   368,846         30.16 %         0.00 %   $   318,389         30.82 %         0.00 %   $ 200,035         24.72 %         0.00 %
Interest-bearing checking               203,410         16.64           0.02         160,614         15.55           0.02       116,397         14.39           0.03
Savings                                 223,069         18.25           0.06         179,868         17.41           0.06       126,991          15.7           0.08
Money market                            277,469          22.7           0.25         202,407         19.59           0.24       132,506         16.38           0.42
Total                                 1,072,794         87.75           0.08         861,278         83.37           0.07       575,929         71.19           0.12
Certificates of deposit accounts:
IRA certificates                         25,333          2.07           0.44          24,693          2.39           0.50        25,240          3.12           0.71
Brokered certificates                         -          0.00           0.00             495          0.05           1.35        10,180          1.26           2.13
Other certificates                      124,422         10.18           0.38         146,617         14.19           0.71       197,644         24.43           1.81
Total certificates of deposit           149,755         12.25           0.39         171,805         16.63           0.68       233,064         28.81           1.70
Total deposits                      $ 1,222,549        100.00 %         0.12 %   $ 1,033,083        100.00 %         0.18 %   $ 808,993        100.00 %         0.55 %




Deposits increased by $189.47 million, or 18.3%, to $1.22 billion at December
31, 2021 from $1.03 billion at December 31, 2020. Money market increased by
$75.06 million, noninterest checking increased by $50.46 million, savings
increased by $43.20 million, and interest-bearing checking increased by
$42.80 million. However, certificates of deposit decreased by $22.05 million.
The decrease was driven by a decrease in other certificates of $22.20 million.
Due to the continued low interest rate environment, some depositors have been
compelled to move funds from other certificates to non-maturity deposits upon
maturity.


AT December 31, 2021 and 2020, the Company held $444.89 million and $326.53 millionrespectively, in deposit accounts that have reached or exceeded the Federal Deposit Insurance Corporation (“FDIC”) requirements of $250,000 and bigger.



The following table shows the amount of certificates of deposit with balances of
$250,000 and greater by time remaining until maturity as of December 31, 2021:



                          Balance
                          $250,000
                        and Greater
                       (In Thousands)
3 months or less      $          3,853
Over 3 to 6 months               4,482
Over 6 to 12 months              8,391
Over 12 months                   7,746
Total                 $         24,472



Our depositors are primarily residents of the state of Montana.



Borrowings. Deposits are the primary source of funds for our lending and
investment activities and for general business purposes. However, as the need
arises, or in order to take advantage of funding opportunities, we also borrow
funds in the form of advances from FHLB of Des Moines to supplement our supply
of lendable funds and to meet deposit withdrawal requirements. In addition,
during the year ended December 31, 2020, the Bank utilized the FRB's Payroll
Protection Program Loan Funding ("PPPLF") facility as a partial source of
funding for its SBA PPP loans. The Bank has Federal funds lines of credit with
PCBB, PNC, TIB and UBB. Eagle has a line of credit with Bell Bank.



                                       35

————————————————– ——————————

Contents



The following table includes information related to FHLB of Des Moines and other
borrowings:



                                                               Years Ended
                                                               December 31,
                                                     2021         2020          2019
                                                          (Dollars in Thousands)
FHLB advances:
Average balance                                    $  9,410     $  61,252     $  97,000
Maximum balance at any month-end                     16,917        94,585   

123,512

Balance at period end                                 5,000        17,070   

88,350

Weighted average interest rate during the period 1.86% 1.84%

        2.41 %
Weighted average interest rate at period end           1.81 %        1.89 %        2.18 %

FRB's PPPLF facility:
Average balance                                    $      -     $  14,675     $       -
Maximum balance at any month-end                          -        24,065   

Balance at period end                                     -             -   

Weighted average interest rate during the period 0.00% 0.35%

        0.00 %
Weighted average interest rate at period end           0.00 %        0.00 %        0.00 %

Other:
Average balance                                    $    548     $     192     $   2,307
Maximum balance at any month-end                          -             -   

6,311

Balance at period end                                     -             -   

Weighted average interest rate during the period 0.43% 1.15%

        2.11 %
Weighted average interest rate at period end           0.00 %        0.00 %        0.00 %

Total borrowings:
Average balance                                    $  9,958     $  76,119     $  99,307
Maximum balance at any month-end                     16,917       105,820   

124,377

Balance at period end                                 5,000        17,070   

88,350

Weighted average interest rate during the period 1.86% 1.55%

        2.40 %
Weighted average interest rate at period end           1.81 %        1.89 %        2.18 %



Advances on FHLB and other borrowings decreased by $12.07 million for
$5.00 million at December 31, 2021 compared to $17.07 million at December 31, 2020. This decrease is due to maturities.



Other Long-Term Debt. The following table summarizes other long-term debt
activity:



                                                 December 31,                 December 31,
                                                     2021                         2020
                                              Net         Percent          Net         Percent
                                            Amount        of Total       Amount        of Total
                                                          (Dollars in Thousands)
Senior notes fixed at 5.75%, due 2022      $   9,996          33.47 %   $   9,952          33.41 %
Subordinated debentures fixed at 5.5% to
floating, due 2030                            14,718          49.27        14,684          49.29
Subordinated debentures variable, due
2035                                           5,155          17.26         5,155          17.30
Total other long-term debt, net            $  29,869         100.00 %   $  29,791         100.00 %



The total of other long-term debt was $29.87 million at December 31, 2021 compared to $29.79 million at December 31, 2020.

                                       36

————————————————– ——————————

  Table of Contents



Shareholders' Equity



Total shareholders' equity increased slightly by $3.79 million or 2.5%, to
$156.73 million at December 31, 2021 from $152.94 million at December 31, 2020.
The increase was impacted by net income of $14.42 million.
This increase was largely offset due to treasury stock purchased through the
Tender Offer of $6.28 million, dividends paid of $3.02 million and other
comprehensive loss of $2.36 million.





Net interest income analysis



The Bank's earnings have historically depended primarily upon net interest
income, which is the difference between interest income earned on loans and
investments and interest paid on deposits and any borrowed funds. It is the
single largest component of Eagle's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on loans and
investments and rates paid on interest-bearing deposits and borrowings (the
"interest rate spread") and (ii) the relative amounts of loans and investments
and interest-bearing deposits and borrowings.



The following table includes average balances for statement of financial
position items, as well as, interest and dividends and average yields related to
the average balances. All average balances are daily average balances.
Nonaccrual loans were included in the computation of average balances, but have
been reflected in the table as loans carrying a zero yield. The yields include
the effect of deferred fees and discounts and premiums that are amortized or
accreted to interest income or expense.



                             Year Ended December 31, 2021                Year Ended December 31, 2020                Year Ended December 31, 2019
                          Average        Interest                     Average        Interest                     Average        Interest
                           Daily           and          Yield/         Daily           and          Yield/         Daily           and          Yield/
                          Balance       Dividends      Cost(4)        Balance       Dividends      Cost(4)        Balance       Dividends      Cost(4)
                                                                            (Dollars in Thousands)
Assets:
Interest earning
assets:
Investment securities   $   215,978     $    4,238         1.96 %   $   166,577     $    3,742         2.24 %   $   135,904     $    3,672         2.70 %
FHLB and FRB stock            4,831            255         5.28           6,534            370         5.65           7,363            408         5.54
Loans receivable(1)         914,804         45,134         4.93         874,669         45,381         5.17         764,075         42,344         5.54
Other earning assets         74,102            120         0.16          44,771            161         0.36           5,030             87         1.73
Total interest
earning assets            1,209,715         49,747         4.11       1,092,551         49,654         4.54         912,372         46,511         5.10
Noninterest earning
assets                      147,534                                     127,339                                      97,645
Total assets            $ 1,357,249                                 $ 1,219,890                                 $ 1,010,017

Liabilities and
equity:
Interest-bearing
liabilities:
Deposit accounts:
Checking                $   190,645     $       47         0.02 %   $   151,745     $       58         0.04 %   $   116,424     $       44         0.04 %
Savings                     198,648            117         0.06         154,224            145         0.09         119,674             85         0.07
Money market                244,113            545         0.22         169,531            473         0.28         124,785            449         0.36
Certificates of
deposit                     158,959            765         0.48         213,696          2,938         1.37         212,370          3,315         1.56
Advances from FHLB
and other borrowings
including long-term
debt                         39,245          1,733         4.42         104,712          2,870         2.73         123,497          3,833         3.10
Total
interest-bearing
liabilities                 831,610          3,207         0.39         793,908          6,484         0.81         696,750          7,726         1.11
Noninterest checking        346,243                                     265,304                                     184,654
Other
noninterest-bearing
liabilities                  22,382                                      19,518                                      12,819
Total liabilities         1,200,235                                   1,078,730                                     894,223

Total equity                157,014                                     141,160                                     115,794

Total liabilities and
equity                  $ 1,357,249                                 $ 1,219,890                                 $ 1,010,017
Net interest
income/interest rate
spread(2)                               $   46,540         3.72 %                   $   43,170         3.73 %                   $   38,785         3.99 %

Net interest
margin(3)                                                  3.85 %                                      3.94 %                                      4.25 %
Total interest
earning assets to
interest-bearing
liabilities                                              145.47 %                                    137.62 %                                    130.95 %




(1)   Includes loans held-for-sale.

(2) The interest rate spread represents the difference between the average return on interest-bearing assets and the average rate on interest-bearing liabilities.

(3) Net interest margin represents income before allowance for loan losses divided by average interest-earning assets.

(4) For the purposes of this table, tax-exempt income is not calculated in tax equivalent.



                                       37

————————————————– ——————————

  Table of Contents




Rate/Volume Analysis



The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which
are changes in rate multiplied by the old volume; and (3) changes not solely
attributable to rate or volume, which have been allocated proportionately to the
change due to volume and the change due to rate.



                                           Year Ended December 31, 2021              Year Ended December 31, 2020
                                                        Due to                                    Due to
                                         Volume          Rate         Net         Volume           Rate         Net
                                                                       (In Thousands)
Interest earning assets:
Investment securities                  $    1,110      $   (614 )   $    496     $     829       $   (759 )   $     70
FHLB and FRB stock                            (96 )         (19 )       (115 )         (46 )            8          (38 )
Loans receivable(1)                         2,082        (2,329 )       (247 )       6,129         (3,092 )      3,037
Other earning assets                          105          (146 )        (41 )         687           (613 )         74
Total interest earning assets               3,201        (3,108 )         

93 7,599 (4,456) 3,143

Interest-bearing liabilities:
Checking                                       15           (26 )        (11 )          13              1           14
Savings                                        42           (70 )        (28 )          25             35           60
Money Market                                  208          (136 )         72           161           (137 )         24
Certificates of deposit                      (753 )      (1,420 )     (2,173 )          21           (398 )       (377 )

Advances from FHLB and other borrowings, including long-term debt (1,794 ) 657 (1,137 ) (583 ) (380 ) (963 ) Total interest-bearing liabilities (2,282 ) (995 ) (3,277 ) (363 ) (879 ) (1,242 )

Change in net interest income $5,483 ($2,113) $3,370 $7,962 ($3,577) $4,385



(1)   Includes loans held-for-sale.





Results of Operations



Comparison of operating results for the years ended December 31, 2021 and 2020



Net Income



Eagle's net income for the year ended December 31, 2021 was $14.42 million
compared to $21.21 million for the year ended December 31, 2020. The decrease of
$6.79 million was largely due to an increase in noninterest expense of
$13.50 million and a decrease in noninterest income of $1.30 million. These
changes were partially offset by an increase in net interest income after loan
loss provision of $5.64 million and a decrease in provision for income taxes of
$2.37 million. Basic and diluted earnings per share were both $2.17 for the year
ended December 31, 2021. Basic and diluted earnings per share were $3.12 and
$3.11, respectively, for the prior period.



Net Interest Income



Net interest income increased to $46.54 million for the year ended December 31,
2021, from $43.17 million for the year ended December 31, 2020. This increase of
$3.37 million, or 7.8%, was primarily the result of a decrease in interest
expense of $3.27 million.



Interest and Dividend Income



Interest and dividend income was $49.75 million for the year ended December 31,
2021, compared to $49.65 million for the year ended December 31, 2020, an
increase of $93,000, or 0.2%. Interest and fees on loans decreased to
$45.13 million for the year ended December 31, 2021 from $45.38 million for the
same period ended December 31, 2020. This slight decrease of $247,000, or 0.5%,
was due to a decrease in the average yield of loans, largely offset by
an increase in the average balance of loans. The average interest rate earned on
loans receivable decreased by 24 basis points, from 5.17% to 4.93%. Interest
accretion on purchased loans was $579,000 for the year ended December 31,
2021,which resulted in a 5 basis point increase in net interest margin compared
to $1.55 million for the year ended December 31, 2020,which resulted in
a 14 basis point increase in net interest margin. Average balances for loans
receivable, including loans held-for-sale, for the year ended December 31,
2021 were $914.80 million, compared to $874.67 million of the prior year period.
This represents an increase of $40.13 million or 4.6% and was impacted by
organic growth and PPP funding. Interest and dividends on investment securities
available-for-sale increased by $496,000 or 13.3% period over period. Average
balances for investments increased to $215.98 million for the year ended
December 31, 2021, from $166.58 million for the year ended December 31, 2020.
Investments have increased in the current period due to excess liquidity.
However, average interest rates earned on investments decreased to 1.96% for the
year ended December 31, 2021 from 2.24% for the year ended December 31, 2020.







                                       38

————————————————– ——————————

  Table of Contents



Interest Expense



Total interest expense was $3.21 million for the year ended December 31, 2021,
decreasing from $6.48 million for the year ended December 31, 2020. The decrease
of $3.27 million, or 50.5%, was due to a decrease of $2.14 million in interest
expense on deposits and a net decrease of $1.13 million in interest expense on
total borrowings. The overall average rate on total deposits was 0.13% for the
year ended December 31, 2021 compared to 0.38% for the year ended December 31,
2020. However, the average balance for total deposits was $1.14 billion for the
year ended December 31, 2021 compared to $954.50 million for the year
ended December 31, 2020. This increase was impacted by PPP funding and economic
stimulus. Due to the continued low interest rate environment though, some
depositors have moved funds from certificates of deposit to other non-maturity
deposit accounts that earn lower yields. The average balance for total
borrowings decreased from $104.71 million for the year ended December 31,
2020 to $39.25 million for the year ended December 31, 2021. However, the
average rate paid on total borrowings increased from 2.73% for the year ended
December 31, 2020 to 4.42% for the year ended December 31, 2021. The increase in
the average rate paid is due to the change in the mix of the outstanding
borrowings.



Loan Loss Provision



Loan loss provisions are charged to earnings to maintain the total allowance for
loan losses at a level considered adequate by the Bank to provide for probable
loan losses based on prior loss experience, volume and type of lending we
conduct and past due loans in portfolio. The Bank's policies require the review
of assets on a quarterly basis. The Bank classifies loans if warranted. While
management believes it uses the best information available to make a
determination with respect to the allowance for loan losses, it recognizes that
future adjustments may be necessary. Using this methodology, the Bank recorded
$861,000 in loan loss provisions for the year ended December 31, 2021.
Management made the decision that due to the strength of the local economy, in
conjunction with loan credit quality, no additional loan loss provision was
necessary in the year ended December 31, 2021 when considering the COVID-19
pandemic. Loan loss provisions were $3.13 million for the year ended December
31, 2020, which included $1.40 million related to the potential impact of
COVID-19. Management believes the level of total allowances is adequate to cover
estimated losses inherent in the portfolio. However, if the economic outlook
worsens relative to the assumptions we utilized, our allowance for loan losses
will increase accordingly in future periods. Total nonperforming loans,
including restructured loans, net, was $7.06 million at December 31, 2021
compared to $8.47 million at December 31, 2020. The Bank had $4,000 in other
real estate owned and other repossessed assets at December 31, 2021 compared to
$25,000 at December 31, 2020.



Noninterest Income



Total noninterest income was $47.77 million for the year ended December 31,
2021, compared to $49.07 million for the year ended December 31, 2020. The
decrease of $1.30 million, or 2.6% was largely due to a decrease in a mortgage
banking, net of $1.01 million for the year ended December 31, 2021. Mortgage
banking, net includes the impact of fair value changes of loans held-for sale
and derivatives. The net change in fair value of loans held-for-sale and
derivatives was a loss of $5.44 million for the year ended December 31,
2021 compared to a gain of $5.97 million for the year ended December 31,
2020. Mortgage banking, net also includes net gain on sale of mortgage loans
which increased $9.70 million to $46.09 million for the year ended December 31,
2021 compared to $36.39 million for the year ended December 31, 2020. During the
year ended December 31, 2021, $1.06 billion residential mortgage loans were sold
compared to $874.72 million in the same period in the prior year. In addition,
gross margin on sale of mortgage loans for the year ended December 31, 2021 was
4.34% compared to 4.16% for the year ended  December 31, 2020.



Noninterest Expense



Noninterest expense was $74.17 million for the year ended December 31, 2021
compared to $60.67 million for the year ended December 31, 2020. The increase of
$13.50 million, or 22.3%, was largely driven by increased salaries and employee
benefits expense of $9.93 million. The increase in salaries expense is due in
part to higher commission-based compensation related to mortgage loan growth, as
well as overall increased staff levels. In addition, occupancy and equipment
expense increased $1.43 million due to office expansion and the corresponding
depreciation and amortization expense, as well as utilization and maintenance
costs. Other noninterest expense includes a recovery of $736,000 of
mortgage servicing rights incurred during the year ended December 31, 2021.
However, impairment expense on mortgage servicing rights of $792,000 was
recorded for the year ended December 31, 2020.



Provision for Income Taxes



Provision for income taxes was $4.86 million for the year ended December 31,
2021, compared to $7.23 million for the year ended December 31, 2020 due to
decreased income before provision for income taxes. The effective tax rate was
25.2% for the year ended December 31, 2021 compared to 25.4% for the prior year.



                                       39

————————————————– ——————————

  Table of Contents



Cash and capital resources


Liquidity



The Bank is required by regulation to maintain sufficient levels of liquidity
for safety and soundness purposes. Appropriate levels of liquidity will depend
upon the types of activities in which the company engages. For internal
reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for "basic
surplus" and "basic surplus with FHLB" as internally defined. In general, the
"basic surplus" is a calculation of the ratio of unencumbered short-term assets
reduced by estimated percentages of CD maturities and other deposits that may
leave the Bank in the next 90 days divided by total assets. "Basic surplus with
FHLB" adds to "basic surplus" the additional borrowing capacity the Bank has
with the FHLB of Des Moines.The Bank exceeded those minimum ratios as of
December 31, 2021 and 2020.



The Company's primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, funds provided from
operations, advances from the FHLB of Des Moines and other borrowings. Scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are generally predictable. However, other sources of funds, such as
deposit flows and loan prepayments, can be greatly influenced by the general
level of interest rates, economic conditions and competition. The Company uses
liquidity resources principally to fund existing and future loan commitments. It
also uses them to fund maturing certificates of deposit and demand deposit
withdrawals. In addition, the Bank uses liquidity resources for investment
purposes, to meet operating expenses and capital expenditures, for dividend
payments and stock repurchases and to maintain adequate liquidity levels.



Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable based in part on
Eagle's commitments to make loans and management's assessment of Eagle's ability
to generate funds.



Through the year ended December 31, 2021, liquidity levels remained strong, as a
result of PPP loan payoffs and deposit growth. A portion of the excess funds
was deployed into investment securities. Eagle utilized the FRB's PPPLF facility
as a partial source for its SBA PPP loans during the year ended December 31,
2020. However, as of December 31, 2020, Eagle had repaid all PPPLF borrowings.
The Company completed a $40.00 million subordinated debt offering in January
2022. A portion of the net proceeds were used to redeem $10.00 million of senior
notes due in February 2022. The Company closed a $15.00 million subordinated
debt offering in June of 2020, adding to borrowings. In July of 2020, $10.00
million in callable subordinated debt was paid off, reducing overall borrowings.



Comparison of cash flows for the years ended December 31, 2021 and 2020



Net cash provided by the Company's operating activities, which is primarily
comprised of cash transactions affecting net income, was $56.45 million for the
year ended December 31, 2021 compared to $2.12 million for the prior year. Net
cash provided by operating activities was higher for the year ended December 31,
2021 primarily due to changes in loans held-for-sale activity.



Net cash used in the Company's investing activities, which is primarily
comprised of cash transactions related to investment securities and activity in
the loan portfolio, was $232.92 million for the year ended December 31, 2021
compared to $22.04 million for the year ended December 31, 2020.
Available-for-sale securities purchases were $132.18 million during the year
ended December 31, 2021. Net cash used in investing activities for the year
ended December 31, 2021 was also impacted by loan originations being higher than
loan pay-off and principal payments during the year. Loan origination and
principal collection, net was $98.67 million for the year ended December 31,
2021.  Net cash used in investing activities for the year ended December 31,
2020 was due in part to loan originations being higher than loan pay-off and
principal payments during the year. Loan origination and principal collection,
net was $24.29 million for the year ended December 31, 2020. In addition,
purchases of premises and equipment, net was $20.64 million. Available-for-sale
securities purchases were $47.72 million during the year ended December 31,
2020. These uses of cash during the year ended December 31, 2020 were more than
offset by available-for-sale securities sales and maturities, principal payments
and calls of $64.44 million.



Net cash provided by the Company's financing activities was $168.10 million for
the year ended December 31, 2021 compared to $64.80 million for the year ended
December 31, 2020. Net cash provided by financing activities for the year ended
December 31, 2021 was largely impacted by a net increase in deposits of
$189.47 million. This was slightly offset by net payments on FHLB and other
borrowings of $12.07 million. Net cash provided by financing activities for the
year ended December 31, 2020 was impacted by a net increase in deposits of
$137.52 million. This was partially offset by net payment on FHLB and other
borrowings of $73.78 million.





                                       40

————————————————– ——————————

  Table of Contents



Capital Resources



At December 31, 2021, the Bank's internally determined measurement of
sensitivity to interest rate movements as measured by a 200 basis point rise in
interest rates scenario, increased the economic value of equity ("EVE") by
8.90% compared to an increase of 15.0% at December 31, 2020. The Bank is within
the guidelines set forth by the Board of Directors for interest rate
sensitivity.



The Bank's Tier 1 leverage ratio, as measured under State of Montana and FRB
rules, decreased from 11.72% as of December 31, 2020 to 10.96% as of December
31, 2021. The Bank's strong capital position helps to mitigate its interest rate
risk exposure.



As of December 31, 2021, the Company's regulatory capital was in excess of all
applicable regulatory requirements and both are deemed "well capitalized"
pursuant to State of Montana and FRB rules. At December 31, 2021, the Bank's
total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage
ratios amounted to 15.32%, 14.17%, 14.17% and 10.96%, respectively, compared to
regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, respectively. At
December 31, 2021, Eagle's consolidated total capital, Tier 1 capital, common
equity Tier 1 capital and Tier 1 leverage ratios were 15.18%, 12.64%, 12.18% and
9,75%, respectively.


Impact of inflation and price changes



Our consolidated financial statements and the accompanying notes, which are
found in Item 8, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations.
Interest rates have a greater impact on our performance than do the general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.



Interest Rate Risk



Interest rate risk is the potential for loss of future earnings resulting from
adverse changes in the level of interest rates. Interest rate risk results from
several factors and could have a significant impact on the Company's net
interest income, which is the Company's primary source of net income. Net
interest income is affected by changes in interest rates, the relationship
between rates on interest-bearing assets and liabilities, the impact of interest
fluctuations on asset prepayments and the mix of interest-bearing assets and
liabilities.



Although interest rate risk is inherent in the banking industry, banks are
expected to have sound risk management practices in place to measure, monitor
and control interest rate exposures. The objective of interest rate risk
management is to contain the risks associated with interest rate fluctuations.
The process involves identification and management of the sensitivity of net
interest income to changing interest rates.



The ongoing monitoring and management of this risk is an important component of
the Company's asset/liability committee, which is governed by policies
established by the Company's Board that are reviewed and approved annually. The
Board delegates responsibility for carrying out the asset/liability management
policies to the Bank's asset/liability committee. In this capacity, the
asset/liability committee develops guidelines and strategies impacting the
Company's asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate levels
and trends. The Company's goal of its asset and liability management practices
is to maintain or increase the level of net interest income within an acceptable
level of interest rate risk. Our asset and liability policy and strategies are
expected to continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.



The Bank has established acceptable levels of interest rate risk as follows for
an instantaneous and permanent shock in rates: Projected net interest income
over the next twelve months (i.e. year-1) and the subsequent twelve months (i.e.
year-2) will not be reduced by more than 15.0% given an immediate increase in
interest rates of up to 200 basis points or by more than 10.0% given an
immediate decrease in interest rates of up to 100 basis points.



                                       41

————————————————– ——————————

Contents



The following table includes the Banks's net interest income sensitivity
analysis.



Changes in Market        Rate Sensitivity
 Interest Rates      As of December 31, 2021     Policy
 (Basis Points)        Year 1         Year 2     Limits

      +200              4.2%           8.7%      -15.0%
      -100             -2.6%          -7.8%      -10.0%



The following table shows how the Bank’s Economic Value of Equity (“EVE”) would react to changes in interest rates.


Changes in Market         EVE as a % Change from 0 Shock
 Interest Rates     As of December 31, 2021     Board Policy
 (Basis Points)          Projected EVE              Limit
                                              Maximum % change:
      +400                   13.7%                 -40.0%
      +300                   11.7%                 -35.0%
      +200                   8.9%                  -30.0%
      +100                   5.4%                  -20.0%
        0                    0.0%                    0.0%
      -100                  -10.5%                 -20.0%



Off-balance sheet arrangements



As a financial services provider, we routinely are a party to various financial
instruments with off-balance-sheet risks, such as commitments to extend credit
and unused lines of credit. While these contractual obligations represent our
future cash requirements, a significant portion of commitments to extend credit
may expire without being drawn upon. Such commitments are subject to the same
credit policies and approval process accorded to loans we make.



The commitments are summarized as follows:


                                    December 31,
                                 2021          2020
                                   (In Thousands)

Credit commitments $252,485 $173,866
Letter of credit

                  4,129         2,647

© Edgar Online, source Previews

Comments are closed.