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, 2021as compared to the year ended December 31, 2020, and also analyzes our financial condition as of December 31, 2021as 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 millioncompared to $10.11 millionas 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
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 Committeedecreased the federal funds target rate during the year ended December 31, 2020from 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, 2021was 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 Montanacommunities. 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, Congresspassed 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 millionin SBA PPP loans. The Bank has processed applications for PPP loan forgiveness for customers, with759 loans representing over $45.31 millionnow 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 billionallocated 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 millionin 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, 2021there 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, 2021to 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
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, 2021we had goodwill of $20.8 million. The State of Montanaended 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.
January 2019, the Company acquired Big Muddy Bancorp, Inc.("BMB"), a Montanacorporation, and BMB's wholly-owned subsidiary, The State Bank of Townsend, a Montanachartered commercial bank ("SBOT"). SBOT operated four branches in Townsend, Dutton, Dentonand Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities throughout the state. In January 2020, Eagle acquired Western Holding Companyof Wolf Point("WHC"), a Montanacorporation, and WHC's wholly-owned subsidiary, Western Bank of Wolf Point("WB"), a Montanachartered 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 Montanacorporation and its wholly-owned subsidiary, First Community Bank, a Montanachartered 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 millionof assets, $306 millionof deposits and $208 millionin gross loans, based on September 30, 2021information. 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.
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.
Goodwillis 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”.
Table of Contents Financial Condition
Total assets were
$1.44 billionat December 31, 2021, an increase of $178.30 million, or 14.2% from $1.26 billionat December 31, 2020.Securities available-for-sale increased by $108.31 millionfrom $162.95 millionat December 31, 2020. In addition, loans receivable, net increased by $91.14 millionfrom December 31, 2020. Total liabilities were $1.28 billionat December 31, 2021, an increase of $174.50 million, or 15.8%, from $1.10 billionat 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 millionfrom December 31, 2020. However, FHLB advances and other borrowings decreased $12.07 millionfrom December 31, 2020. Total shareholders' equity increased by $3.79 millionfrom 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 Administrationpools, 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, 2021or 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 millionand $2.06 millionat December 31, 2021and 2020, respectively. FRB stock was $2.97 millionat both December 31, 2021and 2020. 26
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
$ 1,6330.60 % $ 2,2451.38 % $ 6950.55 % 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 $ 271,262100.00 % $ 162,946100.00 % $ 126,875100.00 %
Securities available for sale have been
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 SecuritiesWeighted 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 % $ 1,6332.07 % $ - 0.00 % $ 1,633 $ 1,6332.07 % 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 $ 3,2262.33 % $ 20,1611.78 % $ 80,2171.13 % $ 167,6582.09 % $ 271,262 $ 271,2622.07 % 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)
$ 101,18010.82 % $ 110,80213.14 % $ 119,29615.28 % $ 116,93918.92 % $ 109,91121.37 % 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
Loans receivable, net increased
$91.14 millionto $920.64 millionat 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 millionand consumer loans of $1.71 million. Total loan originations were $1.56 billionfor the year ended December 31, 2021. Total residential 1-4 family originations were $1.14 billion, which includes $1.04 billionof 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 millionof 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 millionat December 31, 2021from $54.62 millionat December 31, 2020after 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)
$ 146,815Total 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 $ 108,404Total 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 $ 934,864Percent of total 16.88 % 83.12 % 100.00 %
(1) Excluding loans held for sale
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, 2021and 2020, the Bank had $4,000and $25,000, respectively, of real estate owned and other repossessed property. The State of Montanaplaced a freeze on foreclosures on March 28, 2020. Subsequently the State of Montanareleased the freeze effective May 24, 2020with the exception of continued protections for those individuals deemed vulnerable to the coronavirus. The Federal foreclosure moratorium that began March 18, 2020was later extended to July 31, 2021. On June 28, 2021, the Consumer Financial Protection Bureaufinalized 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 millionnet 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 millionnet 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 $ 212.26 % - $ - 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 $ 931100.00 % - $ - 0.00 % 30
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 $ 475Residential 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$
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
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 $10,000during 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, 2021and 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
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
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$ - $ 500Residential 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 $ 9,117December 31, 2020 Special Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family $ - $ 857 $ 199$ - $ 1,056Residential 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 $ 12,54032
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 millionin 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.
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 $ 6,600Provision 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 $ 8,600Allowance 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
$ 1,59612.77 % 15.70 % $ 1,50612.98 % 18.63 % $ 1,30115.13 % 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 $ 12,500100.00 % 100.00 % $ 11,600100.00 % 100.00 % $ 8,600100.00 % 100.00 % 34
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 billionor 89.8% of the Bank's total deposits at December 31, 2021( $1.07 billionor 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)
$ 368,84630.16 % 0.00 % $ 318,38930.82 % 0.00 % $ 200,03524.72 % 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 $ 1,222,549100.00 % 0.12 % $ 1,033,083100.00 % 0.18 % $ 808,993100.00 % 0.55 % Deposits increased by $189.47 million, or 18.3%, to $1.22 billionat December 31, 2021from $1.03 billionat 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.
The following table shows the amount of certificates of deposit with balances of
$250,000and greater by time remaining until maturity as of December 31, 2021: Balance $250,000and 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
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 Moinesto 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
The following table includes information related to FHLB of
Des Moinesand other borrowings: Years Ended December 31, 2021 2020 2019 (Dollars in Thousands) FHLB advances: Average balance $ 9,410 $ 61,252 $ 97,000Maximum balance at any month-end 16,917 94,585
Balance at period end 5,000 17,070
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 $ 2,307Maximum balance at any month-end - -
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 $ 99,307Maximum balance at any month-end 16,917 105,820
Balance at period end 5,000 17,070
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
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
$ 9,99633.47 % $ 9,95233.41 % 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 $ 29,869100.00 % $ 29,791100.00 %
The total of other long-term debt was
Table of Contents Shareholders' Equity Total shareholders' equity increased slightly by
$3.79 millionor 2.5%, to $156.73 millionat December 31, 2021from $152.94 millionat 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 millionand 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 $ 4,2381.96 % $ 166,577 $ 3,7422.24 % $ 135,904 $ 3,6722.70 % 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 $ 1,010,017Liabilities and equity: Interest-bearing liabilities: Deposit accounts: Checking $ 190,645 $ 470.02 % $ 151,745 $ 580.04 % $ 116,424 $ 440.04 % 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 $ 1,010,017Net interest income/interest rate spread(2) $ 46,5403.72 % $ 43,1703.73 % $ 38,7853.99 % 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.
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 ) $ 70FHLB 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
(1) Includes loans held-for-sale. Results of Operations
Comparison of operating results for the years ended
Net Income Eagle's net income for the year ended
December 31, 2021was $14.42 millioncompared to $21.21 millionfor the year ended December 31, 2020. The decrease of $6.79 millionwas largely due to an increase in noninterest expense of $13.50 millionand 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 millionand a decrease in provision for income taxes of $2.37 million. Basic and diluted earnings per share were both $2.17for the year ended December 31, 2021. Basic and diluted earnings per share were $3.12and $3.11, respectively, for the prior period. Net Interest Income Net interest income increased to $46.54 millionfor the year ended December 31, 2021, from $43.17 millionfor 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 millionfor the year ended December 31, 2021, compared to $49.65 millionfor the year ended December 31, 2020, an increase of $93,000, or 0.2%. Interest and fees on loans decreased to $45.13 millionfor the year ended December 31, 2021from $45.38 millionfor 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 $579,000for the year ended December 31, 2021,which resulted in a 5 basis point increase in net interest margin compared to $1.55 millionfor 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, 2021were $914.80 million, compared to $874.67 millionof the prior year period. This represents an increase of $40.13 millionor 4.6% and was impacted by organic growth and PPP funding. Interest and dividends on investment securities available-for-sale increased by $496,000or 13.3% period over period. Average balances for investments increased to $215.98 millionfor the year ended December 31, 2021, from $166.58 millionfor 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, 2021from 2.24% for the year ended December 31, 2020. 38
Table of Contents Interest Expense Total interest expense was
$3.21 millionfor the year ended December 31, 2021, decreasing from $6.48 millionfor the year ended December 31, 2020. The decrease of $3.27 million, or 50.5%, was due to a decrease of $2.14 millionin interest expense on deposits and a net decrease of $1.13 millionin interest expense on total borrowings. The overall average rate on total deposits was 0.13% for the year ended December 31, 2021compared to 0.38% for the year ended December 31, 2020. However, the average balance for total deposits was $1.14 billionfor the year ended December 31, 2021compared to $954.50 millionfor 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 millionfor the year ended December 31, 2020to $39.25 millionfor the year ended December 31, 2021. However, the average rate paid on total borrowings increased from 2.73% for the year ended December 31, 2020to 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 $861,000in 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, 2021when considering the COVID-19 pandemic. Loan loss provisions were $3.13 millionfor the year ended December 31, 2020, which included $1.40 millionrelated 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 millionat December 31, 2021compared to $8.47 millionat December 31, 2020. The Bank had $4,000in other real estate owned and other repossessed assets at December 31, 2021compared to $25,000at December 31, 2020. Noninterest Income Total noninterest income was $47.77 millionfor the year ended December 31, 2021, compared to $49.07 millionfor 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 millionfor 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 millionfor the year ended December 31, 2021compared to a gain of $5.97 millionfor the year ended December 31, 2020. Mortgage banking, net also includes net gain on sale of mortgage loans which increased $9.70 millionto $46.09 millionfor the year ended December 31, 2021compared to $36.39 millionfor the year ended December 31, 2020. During the year ended December 31, 2021, $1.06 billionresidential mortgage loans were sold compared to $874.72 millionin the same period in the prior year. In addition, gross margin on sale of mortgage loans for the year ended December 31, 2021was 4.34% compared to 4.16% for the year ended December 31, 2020. Noninterest Expense Noninterest expense was $74.17 millionfor the year ended December 31, 2021compared to $60.67 millionfor 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 milliondue to office expansion and the corresponding depreciation and amortization expense, as well as utilization and maintenance costs. Other noninterest expense includes a recovery of $736,000of mortgage servicing rights incurred during the year ended December 31, 2021. However, impairment expense on mortgage servicing rights of $792,000was recorded for the year ended December 31, 2020. Provision for Income Taxes Provision for income taxes was $4.86 millionfor the year ended December 31, 2021, compared to $7.23 millionfor the year ended December 31, 2020due to decreased income before provision for income taxes. The effective tax rate was 25.2% for the year ended December 31, 2021compared 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, 2021and 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 Moinesand 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 millionsubordinated debt offering in January 2022. A portion of the net proceeds were used to redeem $10.00 millionof senior notes due in February 2022. The Company closed a $15.00 millionsubordinated debt offering in June of 2020, adding to borrowings. In July of 2020, $10.00 millionin callable subordinated debt was paid off, reducing overall borrowings.
Comparison of cash flows for the years ended
Net cash provided by the Company's operating activities, which is primarily comprised of cash transactions affecting net income, was
$56.45 millionfor the year ended December 31, 2021compared to $2.12 millionfor the prior year. Net cash provided by operating activities was higher for the year ended December 31, 2021primarily 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 millionfor the year ended December 31, 2021compared to $22.04 millionfor the year ended December 31, 2020. Available-for-sale securities purchases were $132.18 millionduring the year ended December 31, 2021. Net cash used in investing activities for the year ended December 31, 2021was 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 millionfor the year ended December 31, 2021. Net cash used in investing activities for the year ended December 31, 2020was 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 millionfor 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 millionduring the year ended December 31, 2020. These uses of cash during the year ended December 31, 2020were 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 millionfor the year ended December 31, 2021compared to $64.80 millionfor the year ended December 31, 2020. Net cash provided by financing activities for the year ended December 31, 2021was 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, 2020was 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 Montanaand FRB rules, decreased from 11.72% as of December 31, 2020to 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 Montanaand 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
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, 20212020 (In Thousands)
Letter of credit
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