# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2023-05-12
- Accepted by EDGAR: May 12, 2023, 15:18 ET
- Period: 2023-03-31
- Accession: 0001437749-23-014190
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000143774923014190/ebmt20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000143774923014190/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $4.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $3.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.42 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 7,792,467 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | −$1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $3.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $1.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-03-31 | $19.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $1.98bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $1.82bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $58.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $163.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,475 characters.

### Introduction

This discussion and analysis provides information that management believes is necessary to understand Eagle's financial condition, changes in financial condition, results of operations, and cash flows for the three months ended March 31, 2023, as compared to 2022. The following should be read in conjunction with the Company's Consolidated Financial Statements, and accompanying Notes thereto, for the year ended December 31, 2022, included in Eagle's Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 8, 2023, and in conjunction with the Condensed Consolidated Financial Statements, and accompanying Notes thereto, included in Part I - Item 1. Financial Statements. The results of operations for the three months ended March 31, 2023, are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.

### Executive Summary

The Company’s primary business activity is the ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”). The Bank is a Montana chartered commercial bank that focuses on both consumer and commercial lending. It engages in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. 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 its portfolio, both real estate and non-real estate. We have made significant progress in this initiative. The purpose of this diversification is to mitigate the Bank’s 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 now maintains a significant loan serviced portfolio which provides a steady source of fee income. 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 deposits do not automatically reprice as interest rates rise. 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.

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 of 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. It may become more difficult to maintain deposit growth due to significant competition, the current conditions in the banking industry and possible reduced customer demand for deposits as customers may shift into other asset classes.

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee increased the federal funds target rate to 4.50% during the year ended December 31, 2022. The rate increased to 5.00% during the three months ended March 31, 2023.

### Recent Events

### Acquisitions

On September 30, 2021, the Company entered into an Agreement and Plan of Merger with First Community Bancorp, Inc. ("FCB"), a Montana corporation, and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, FCB would merge with and into Eagle, with Eagle continuing as the surviving corporation. The transaction closed on April 30, 2022. In the transaction, Eagle acquired nine retail bank branches and two loan production offices in Montana. The total consideration paid was $38.58 million and included cash consideration of $10.23 million and common stock issued of $28.35 million.

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### Financial Condition

Comparisons of financial condition in this section are between March 31, 2023 and December 31, 2022.

Total assets were $1.98 billion at March 31, 2023, an increase of $34.36 million, or 1.8% from $1.95 billion at December 31, 2022. Loans receivable, net increasedby $22.74 million from December 31, 2022. Total liabilities were $1.82 billion at March 31, 2023, an increase of $29.75 million, or 1.7%, from $1.79 billion at December 31, 2022. Total borrowings increased $53.19 million from December 31, 2022 and total deposits decreased $27.73 million from December 31, 2022. Total shareholders’ equity increased $4.60 million or 2.9% from December 31, 2022.

### Financial Condition Details

### Investment Activities

The following table summarizes investment activities:

*(Dollars in Thousands)*

| Securities available-for-sale: | March 31, 2023 Fair Value | Percentage of Total | December 31, 2022 Fair Value | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government and agency obligations | $7,827 | 2.24% | $2,390 | 0.68% |
| U.S. Treasury obligations | 47,882 | 13.70 | 51,951 | 14.86 |
| Municipal obligations | 153,144 | 43.83 | 172,849 | 49.47 |
| Corporate obligations | 5,993 | 1.72 | 6,990 | 2.00 |
| Mortgage-backed securities | 31,043 | 8.88 | 29,653 | 8.48 |
| Collateralized mortgage obligations | 90,588 | 25.93 | 82,131 | 23.50 |
| Asset-backed securities | 12,946 | 3.70 | 3,531 | 1.01 |
| Total securities available-for-sale | $349,423 | 100.00% | $349,495 | 100.00% |

Securities available-for-sale were $349.42 million at March 31, 2023, a decrease of $72,000, from $349.50 million at December 31, 2022. The decrease was due to sales of $22.77 million and maturity, principal payments and call activity of $10.09 million. These decreases were largely offset by $28.13 million in investment purchases. In addition, the unrealized losses on securities improved from year end, decreasing by $5.20 million.

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### Financial Condition – continued

### Lending Activities

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

*(Dollars in thousands)*

| Real estate loans: | March 31, 2023 Amount | Percent of Total | December 31, 2022 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Residential 1-4 family (1) | $135,615 | 9.85% | $135,947 | 10.03% |
| Residential 1-4 family construction | 61,190 | 4.44 | 59,756 | 4.41 |
| Total residential 1-4 family | 196,805 | 14.29 | 195,703 | 14.44 |
| Commercial real estate | 544,618 | 39.53 | 539,070 | 39.76 |
| Commercial construction and development | 165,912 | 12.05 | 151,145 | 11.15 |
| Farmland | 138,910 | 10.08 | 136,334 | 10.06 |
| Total commercial real estate | 849,440 | 61.66 | 826,549 | 60.97 |
| Total real estate loans | 1,046,245 | 75.95 | 1,022,252 | 75.41 |
| Other loans: |  |  |  |  |
| Home equity | 78,321 | 5.69 | 74,271 | 5.48 |
| Consumer | 28,996 | 2.11 | 27,609 | 2.04 |
| Commercial | 131,252 | 9.53 | 127,255 | 9.39 |
| Agricultural | 92,609 | 6.72 | 104,036 | 7.68 |
| Total commercial loans | 223,861 | 16.25 | 231,291 | 17.07 |
| Total other loans | 331,178 | 24.05 | 333,171 | 24.59 |
| Total loans | 1,377,423 | 100.00% | 1,355,423 | 100.00% |
| Deferred loan fees(2) | - |  | (1,745) |  |
| Allowance for credit losses (3) | (15,000) |  | (14,000) |  |
| Total loans, net | $1,362,423 |  | $1,339,678 |  |

(1) Excludes loans held-for-sale.

(2) Deferred loan fees, net included in individual loan categories above for the quarter ended March 31, 2023.

(3) Allowance for credit losses for the quarter ended March 31, 2023; allowance for loan losses for prior periods.

Loans receivable, net increased $22.74 million, or 1.7%, to $1.36 billion at March 31, 2023 from $1.34 billion at December 31, 2022. Total commercial real estate loans increased $22.89 million, total home equity loans increased $4.05 million, total residential loans increased $1.11 million, consumer loans increased $1.39 million, and commercial loans decreased $7.43 million.

Total loan originations were $144.52 million for the three months ended March 31, 2023. Total residential 1-4 family originations were $71.47 million, which includes $64.84 million of loans held-for-sale originations. Total commercial real estate originations were $35.18 million. Total commercial originations were $29.08 million. Consumer loan originations totaled $5.11 million. Home equity loan originations totaled $3.68 million. Loans held-for-sale increased by $1.68 million to $9.93 million at March 31, 2023 from $8.25 million at December 31, 2022.

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### Financial Condition – continued

### Lending Activities– continued

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 credit losses. Subsequent write-downs are recorded as a charge to operations. As of March 31, 2023 and December 31, 2022 there was no real estate owned and other repossessed property.

The following table sets forth information regarding nonperforming assets:

*(Dollars in Thousands)*

| Nonaccrual loans Real estate loans: | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Residential 1-4 family | $939 | $483 |
| Commercial real estate | 339 | 350 |
| Farmland | 2,132 | 143 |
| Other loans: |  |  |
| Home equity | 99 | 96 |
| Consumer | 51 | 25 |
| Commercial | 43 | 44 |
| Agricultural | 2,279 | 1,059 |
| Accruing loans delinquent 90 days or more |  |  |
| Real estate loans: |  |  |
| Residential 1-4 family | 330 | 330 |
| Commercial real estate | 774 | - |
| Other loans: |  |  |
| Commercial | 137 | 746 |
| Restructured loans: | - | 4,502 |
| Total nonperforming loans | 7,123 | 7,778 |
| Real estate owned and other repossessed property, net | - | - |
| Total nonperforming assets | $7,123 | $7,778 |
| Total nonperforming loans to total loans | 0.52% | 0.57% |
| Total nonperforming loans to total assets | 0.36% | 0.40% |
| Total nonaccrual loans to total loans | 0.43% | 0.24% |
| Total nonperforming assets to total assets | 0.36% | 0.40% |

Nonaccrual loans as of March 31, 2023 and December 31, 2022 include $589,000 and $694,000, respectively of acquired loans that deteriorated subsequent to the acquisition date.

Effective January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings ("TDRs") and Vintage Disclosures. The update eliminated the recognition and measurement of TDRs, therefore, TDRs are not included in nonperforming assets as of March 31, 2023.

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### Financial Condition – continued

### Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

*(Dollars in Thousands)*

|  | March 31, 2023 Amount | Percent of Total | December 31, 2022 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Noninterest checking | $460,195 | 28.63% | $468,955 | 28.68% |
| Interest-bearing checking | 237,365 | 14.77 | 252,922 | 15.47 |
| Savings | 258,225 | 16.06 | 273,790 | 16.74 |
| Money market | 334,746 | 20.82 | 387,947 | 23.72 |
| Total | 1,290,531 | 80.28 | 1,383,614 | 84.61 |
| Certificates of deposit accounts: |  |  |  |  |
| IRA certificates | 24,521 | 1.53 | 24,907 | 1.52 |
| Brokered certificates | 19,574 | 1.22 | - | 0.00 |
| Other certificates | 272,912 | 16.97 | 226,751 | 13.87 |
| Total certificates of deposit | 317,007 | 19.72 | 251,658 | 15.39 |
| Total deposits | $1,607,538 | 100.00% | $1,635,272 | 100.00% |

Deposits slightly decreased by $27.73 million, or 1.7%, to $1.61 billion at March 31, 2023 from $1.64 billion at December 31, 2022. Money market decreased by $53.21 million, savings decreased by $15.56 million, interest-bearing checking decreased by $15.55 million, and noninterest checking decreased by $8.76 million. However, these decreases were largely offset by increases in certificates of deposits of $65.35 million.

The estimated amount of uninsured deposits was $292.05 million or 18% of total deposits at March 31, 2023.

The following table summarizes borrowing activity:

*(Dollars in Thousands)*

|  | March 31, 2023 Net Amount | Percent of Total | December 31, 2022 Net Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| FHLB advances and other borrowings | $122,530 | 67.55% | $69,394 | 54.11% |
| Other long-term debt: |  |  |  |  |
| Subordinated debentures fixed at 5.50% to floating, due 2030 | 14,756 | 8.13 | 14,751 | 11.50 |
| Subordinated debentures fixed at 3.50% to floating, due 2032 | 38,976 | 21.48 | 38,938 | 30.37 |
| Subordinated debentures variable, due 2035 | 5,155 | 2.84 | 5,155 | 4.02 |
| Total other long-term debt | 58,887 | 32.45 | 58,844 | 45.89 |
| Total borrowings | $181,417 | 100.00% | $128,238 | 100.00% |

Total borrowings increased by $53.18 million, or 41.5% to $181.42 million at March 31, 2023 from $128.24 million at December 31, 2022. This increase is largely due to an increase in FHLB advances and other borrowings related to funding loan growth.

### Shareholders’ Equity

Total shareholders’ equity increased by $4.60 million, or 2.9%, to $163.02 million at March 31, 2023 from $158.42 million at December 31, 2022. The increase was impacted by net income of $3.24 million and a decrease in unrealized losses on securities available-for-sale of $3.83 million. These increases were offset by a net of tax cumulative adjustment of $1.62 million related to the adoption of the Current Expected Credit Losses standard and dividends paid of $1.10 million.

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### Analysis of Net Interest Income

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 financial condition 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.

*(Dollars in Thousands)*

| Assets: Interest-earning assets: | For the Three Months Ended March 31, 2023 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) | 2022 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $345,033 | $2,843 | 3.34% | $273,004 | $1,297 | 1.93% |
| FHLB and FRB stock | 10,303 | 107 | 4.21 | 4,540 | 59 | 5.27 |
| Loans receivable(1) | 1,366,766 | 17,737 | 5.26 | 974,177 | 11,373 | 4.73 |
| Other earning assets | 2,700 | 21 | 3.15 | 68,278 | 39 | 0.23 |
| Total interest-earning assets | 1,724,802 | 20,708 | 4.87 | 1,319,999 | 12,768 | 3.92 |
| Noninterest-earning assets | 222,289 |  |  | 155,050 |  |  |
| Total assets | $1,947,091 |  |  | $1,475,049 |  |  |
| Liabilities and equity: |  |  |  |  |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |  |
| Checking | $252,667 | $186 | 0.30% | $207,239 | $13 | 0.03% |
| Savings | 259,565 | 35 | 0.05 | 221,531 | 31 | 0.06 |
| Money market | 353,748 | 946 | 1.08 | 294,136 | 192 | 0.27 |
| Certificates of deposit | 283,433 | 1,293 | 1.85 | 146,211 | 76 | 0.21 |
| FHLB advances and other borrowings | 96,525 | 1,142 | 4.80 | 1,278 | 6 | 1.90 |
| Other long-term debt | 58,873 | 678 | 4.67 | 62,350 | 605 | 3.94 |
| Total interest-bearing liabilities | 1,304,811 | 4,280 | 1.33 | 932,745 | 923 | 0.40 |
| Noninterest checking | 456,153 |  |  | 368,223 |  |  |
| Other noninterest-bearing liabilities | 23,849 |  |  | 20,879 |  |  |
| Total liabilities | 1,784,813 |  |  | 1,321,847 |  |  |
| Total equity | 162,278 |  |  | 153,202 |  |  |
| Total liabilities and equity | $1,947,091 |  |  | $1,475,049 |  |  |
| Net interest income/interest rate spread(2) |  | $16,428 | 3.54% |  | $11,845 | 3.52% |
| Net interest margin(3) |  |  | 3.86% |  |  | 3.64% |
| Total interest-earning assets to interest-bearing liabilities |  |  | 132.19% |  |  | 141.52% |

(1) Includes loans held-for-sale.

(2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.

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

(4) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.

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### Rate/Volume Analysis

The following tables present 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.

*(In Thousands)*

| Interest-earning assets: | For the Three Months Ended March 31, 2023 Volume | Due to Rate | Net | 2022 Volume | Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $342 | $1,204 | $1,546 | $588 | $(168) | $420 |
| FHLB and FRB stock | 75 | (27) | 48 | (6) | (4) | (10) |
| Loans receivable(1) | 4,583 | 1,781 | 6,364 | 1,043 | (699) | 344 |
| Other earning assets | (37) | 19 | (18) | (4) | 17 | 13 |
| Total interest-earning assets | 4,963 | 2,977 | 7,940 | 1,621 | (854) | 767 |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Checking | 3 | 170 | 173 | 2 | 1 | 3 |
| Savings | 5 | (1) | 4 | 6 | (2) | 4 |
| Money Market | 39 | 715 | 754 | 40 | 42 | 82 |
| Certificates of deposit | 71 | 1,146 | 1,217 | (33) | (146) | (179) |
| FHLB advances and other borrowings | 447 | 689 | 1,136 | (64) | - | (64) |
| Other long-term debt | (34) | 107 | 73 | 426 | (211) | 215 |
| Total interest-bearing liabilities | 531 | 2,826 | 3,357 | 377 | (316) | 61 |
| Change in net interest income | $4,432 | $151 | $4,583 | $1,244 | $(538) | $706 |

(1) Includes loans held-for-sale.

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### Results of Operations for the Three Months Ended March 31, 2023 and 2022

*Net Income.* Eagle’s net income for the three months ended March 31, 2023 was $3.24 million compared to $2.22 million for the three months ended March 31, 2022. The increase of $1.02 million was primarily due to an increase in net interest income of $4.58 million partially offset by a decrease in noninterest income of $2.94 million. Basic and diluted earnings per common share were both $0.42 for the current period. Basic and diluted earnings per common share were both $0.34 for the prior year comparable period.

*Net Interest Income.* Net interest income increased to $16.43 million for the three months ended March 31, 2023, from $11.85 million for the same quarter in the prior year. The increase of $4.58 million, or 38.6%, was the result of an increase in interest and dividend income of $7.94 million partially offset by an increase in interest expense of $3.36 million.

*Interest and Dividend Income.*Interest and dividend income was $20.71 million for the three months ended March 31, 2023 compared to $12.77 million for the three months ended March 31, 2022. Interest and fees on loans increased to $17.74 million for the three months ended March 31, 2023 from $11.37 million for the three months ended March 31, 2022. This increase of $6.37 million, or 56.0%, was due to an increase in the average balance of loans, as well as an increase in the average yield on loans. Average balances for loans receivable, including loans held-for-sale, for the three months ended March 31, 2023 were $1.37 billion, compared to $974.18 million for the prior year period. This represents an increase of $392.59 million, or 40.3% and was impacted by the FCB acquisition, as well as organic growth. The average interest rate earned on loans receivable also increased by 53 basis points, from 4.73% for the three months ended March 31, 2022 to 5.26% for the current period. Interest accretion on purchased loans was $354,000 for the three months ended March 31, 2023 which resulted in a 8 basis point increase in net interest margin compared to $108,000 for the three months ended March 31, 2022 which resulted in a 3 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $1.54 million period over period. Average balances for investments increased to $345.03 million for the three months ended March 31, 2023 from $273.00 million for the three months ended March 31, 2022. The increase in average investment balances was largely driven by the FCB acquisition. Average interest rates earned on investments also increased to 3.34% for the three months ended March 31, 2023 from 1.93% for the three months ended March 31, 2022.

*Interest Expense.* Total interest expense was $4.28 million for the three months ended March 31, 2023 compared to $923,000 for the three months ended March 31, 2022. The increase of $3.36 million, or 365.2%, was largely due to an increase of $2.15 million in interest expense on deposits, as well as a net increase of $1.20 million in interest expense on total borrowings. The average balance for total deposits was $1.61 billion for the three months ended March 31, 2023 compared to $1.24 billion for the three months ended March 31, 2022. Deposits were acquired through the FCB merger but also increased due to organic growth. In addition, the overall average rate on total deposits was up from 0.10% for the three months ended March 31, 2022 compared to 0.62% for the three months ended March 31, 2023. The average balance for total borrowings increased from $63.63 million for the three months ended March 31, 2022 to $155.40 million for the three months ended March 31, 2023. The average rate paid on total borrowings also increased from 3.89% for the three months ended March 31, 2022, to 4.75% for the three months ended March 31, 2023. Short-term borrowings have increased to fund loan growth.

*Credit Loss Provision.* Credit loss provisions are charged to earnings to maintain the total allowance for credit 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 credit losses, it recognizes that future adjustments may be necessary. The Bank recorded $279,000 in credit loss provisions for the three months ended March 31, 2023 and $279,000 in loan loss provisions for the three months ended March 31, 2022. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic forecast worsens relative to the assumptions we utilized, additional provisions will be necessary in future periods in order to increase our allowance for credit losses.

*Noninterest Income.* Total noninterest income was $4.67 million for the three months ended March 31, 2023 compared to $7.61 million for the three months ended March 31, 2022. The decrease of $2.94 million was primarily due to a decrease in mortgage banking, net of $3.20 million. Mortgage banking, net includes net gain on sale of mortgage loans which decreased to $2.20 million for the three months ended March 31, 2023 compared to $6.23 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, $62.39 million residential mortgage loans were sold compared to $172.14 million in the same period in the prior year. Mortgage volumes have been impacted by the current interest rate environment. However, gross margin levels remained fairly consistent only decreasing 9 basis points from 3.62% for the three months ended March 31, 2022 to 3.53% for the three months ended March 31, 2023.

*Noninterest Expense.*Noninterest expense was $16.53 million for the three months ended March 31, 2023 compared to $16.26 million for the three months ended March 31, 2022, a slight increase of $270,000 or 1.7%. Occupancy and equipment increased $395,000 due to office expansion and the corresponding depreciation expense, as well as utilization and maintenance costs. However, salaries and employee benefits expense was lower quarter over quarter due to decreased commissions paid for residential mortgage originations.

*Provision for Income Taxes.* Provision for income taxes was $1.05 million for the three months ended March 31, 2023, compared to $695,000 for the three months ended March 31, 2022 due to increased income before provision for income taxes. The effective tax rate was 24.4% for the current period and 23.9% for the prior period.

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### Liquidity 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 March 31, 2023 and December 31, 2022.

The Bank’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, 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 the Bank's commitments to make loans and management’s assessment of the Bank's ability to generate funds.

The Bank's available borrowing capacity was approximately $367.10 million as of March 31, 2023 and $419.20 million as of December 31, 2022.

*(Dollars in Thousands)*

|  | March 31, 2023 Borrowings Outstanding | Remaining Borrowing Capacity | December 31, 2022 Borrowings Outstanding | Remaining Borrowing Capacity |
| --- | ---: | ---: | ---: | ---: |
| Federal Home Loan Bank advances | $122,530 | $249,100 | $69,394 | $296,200 |
| Federal Reserve Bank discount window | - | 33,000 | - | 38,000 |
| Correspondent bank lines of credit | - | 85,000 | - | 85,000 |
| Total | $122,530 | $367,100 | $69,394 | $419,200 |

During the first quarter of 2023, the FRB offered a new Bank Term Funding Program ("BTFP") for eligible depository institutions. The BTFP offers loans of up to one year in length to institutions pledging collateral eligible for purchase by FRB such as U.S. treasuries, agency securities, and mortgage-backed securities. These assets will be valued at par. The Company is not currently utilizing the program; however, this is an additional available funding source.

In addition to bank level liquidity management, Eagle must manage liquidity at the parent company level for various operating needs, including the servicing of debt, the payment of dividends on our common stock, share repurchases, payment of general corporate expense, and potential capital infusions into subsidiaries. The primary source of liquidity for Eagle consists of dividends from the Bank, which is governed by certain rules and regulations of the Montana Division of Banking and Financial Institutions and the Federal Reserve, and access to capital markets. Eagle also has a $10.00 million line of credit with a correspondent bank. There was no outstanding balance for this line of credit at both March 31, 2023 and December 31, 2022. Eagle's ability to receive dividends from the Bank in future periods will depend on several factors, including, without limitation, the Bank's future profits, asset quality, liquidity, and overall condition. In addition, both the Montana Division of Banking and Financial Institutions and Federal Reserve may require approval to pay dividends, based on certain regulatory statutes and limitations.

Eagle presently believes that the sources of liquidity discussed above, including existing liquid funds on hand, are sufficient to meet its anticipated funding needs. However, if economic conditions were to significantly deteriorate, regulatory capital requirements for Eagle or the Bank were to increase as the result of regulatory directives or otherwise, or Eagle were to believe it is prudent to enhance current liquidity levels, then Eagle may seek additional liquidity from external sources.

### Capital Resources

As of March 31, 2023, 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 6.2% compared to a decrease of 12.60% at December 31, 2022. The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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The Company's and the Bank's regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed "well capitalized" pursuant to State of Montana and FRB rules as of March 31, 2023. The Company's and the Bank's actual capital amounts and ratios as of March 31, 2023 are presented in the table below and all of the ratios, with the exception of the Tier 1 capital adjusted total average assets ratio, include the capital conservation buffer of 2.50%.

*(Dollars in Thousands)*

| March 31, 2023: Total risk-based capital to risk weighted assets | Actual Amount | Ratio | Minimum Required for Capital Adequacy Purposes Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $223,061 | 13.92% | $168,234 | 10.50% | N/A | N/A |
| Bank | 207,995 | 12.99 | 168,093 | 10.50 | 160,088 | 10.00% |
| Tier 1 capital to risk weighted assets |  |  |  |  |  |  |
| Consolidated | 151,561 | 9.46 | 136,189 | 8.50 | N/A | N/A |
| Bank | 191,495 | 11.96 | 136,075 | 8.50 | 128,070 | 8.00 |
| Common equity Tier 1 capital to risk weighted assets |  |  |  |  |  |  |
| Consolidated | 146,561 | 9.15 | 112,156 | 7.00 | N/A | N/A |
| Bank | 191,495 | 11.96 | 112,062 | 7.00 | 104,057 | 6.50 |
| Tier 1 capital to adjusted total average assets |  |  |  |  |  |  |
| Consolidated | 151,561 | 7.81 | 77,630 | 4.00 | N/A | N/A |
| Bank | 191,495 | 9.87 | 77,613 | 4.00 | 97,016 | 5.00 |

*(Dollars in Thousands)*

| December 31, 2022: Total risk-based capital to risk weighted assets | Actual Amount | Ratio | Minimum Required for Capital Adequacy Purposes Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $219,595 | 14.10% | $163,560 | 10.50% | N/A | N/A |
| Bank | 202,905 | 13.04 | 163,444 | 10.50 | 155,661 | 10.00% |
| Tier 1 capital to risk weighted assets |  |  |  |  |  |  |
| Consolidated | 150,595 | 9.67 | 132,406 | 8.50 | N/A | N/A |
| Bank | 188,905 | 12.14 | 132,312 | 8.50 | 124,529 | 8.00 |
| Common equity Tier 1 capital to risk weighted assets |  |  |  |  |  |  |
| Consolidated | 145,594 | 9.35 | 109,040 | 7.00 | N/A | N/A |
| Bank | 188,905 | 12.14 | 108,962 | 7.00 | 101,179 | 6.50 |
| Tier 1 capital to adjusted total average assets |  |  |  |  |  |  |
| Consolidated | 150,595 | 7.78 | 77,422 | 4.00 | N/A | N/A |
| Bank | 188,905 | 9.82 | 76,947 | 4.00 | 96,184 | 5.00 |

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### Impact of Inflation and Changing Prices

Our condensed consolidated financial statements and the accompanying notes, which are found in Part I, Item 1, 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 revenue. 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 or decrease in interest rates of up to 200 basis points or by more than 10.0% given an immediate increase or decrease in interest rates of up to 100 basis points.

The following table includes the Bank’s net interest income sensitivity analysis.

| Changes in Market Interest Rates (Basis Points) | Rate Sensitivity As of March 31, 2023 Year 1 | Year 2 | Policy Limits |
| ---: | ---: | ---: | ---: |
| +200 | -3.2% | 5.7% | -15.0% |
| +100 | -1.4% | 6.5% | -10.0% |
| -100 | 0.2% | 5.4% | -10.0% |
| -200 | -0.2% | 3.4% | -15.0% |

### Critical Accounting Policies and Estimates

The accounting and financial reporting policies of Eagle are in accordance with generally accepted accounting principles ("GAAP") and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Eagle has identified certain of its accounting policies as “critical accounting policies,” consisting of those related to the allowance for credit losses and business combinations. In determining which accounting policies are critical in nature, Eagle has identified the policies that require significant judgment or involve complex estimates. It is management's practice to discuss critical accounting policies with the Board of Directors' Audit Committee on a periodic basis, including the development, selection, implementation, and disclosure of the critical accounting policies. The application of these policies has a significant impact on Eagle’s unaudited interim consolidated financial statements. Eagle’s financial results could differ significantly if different judgments or estimates are used in the application of these policies. All accounting policies described in "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 – Organization and Summary of Significant Accounting Policies" in Eagle’s 2022 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. There have been no significant changes to the accounting policies, estimates, and assumptions, or the judgments affecting the application of these estimates and assumptions from those disclosed in Eagle’s 2022 Form 10-K, other than the adoption of Accounting Standards Update ("ASU") No. 2016-13 Financial Instruments - Credit Losses, referred to as the Current Expected Credit Losses ("CECL") model on January 1, 2023 and ASU No. 2022-02 Financial Instruments - Credit Losses, Troubled Debt Restructurings and Vintage Disclosures, an update to ASU No. 2016-13. For additional information on CECL, see Note 1. Organization and Summary of Significant Accounting Policies included in Part I. Item 1 of this report.

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## Controls and procedures

As filed, 1,275 characters.

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of March 31, 2023, our disclosure controls and procedures were effective. During the last quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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## Risk factors

As filed, 2,103 characters.

There have not been any material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 other than the addition of the following risk factor:

**A continuation of recent turmoil in our industry, and responsive measures to manage it, could have an adverse effect on our financial position or results of operations.**

In recent months, several financial services institutions have failed or required outside liquidity support—in many cases, as a result of the inability of the institutions to obtain needed liquidity. The impact of this situation has led to risk of additional stress to other financial services institutions and the financial services industry generally as a result of increased lack of confidence in the financial sector. U.S. regulators have taken action in an effort to strengthen public confidence in the banking system, including the creation of a new Bank Term Funding Program. There can be no assurance that these actions will stabilize the financial services industry and financial markets. While we currently do not anticipate liquidity constraints of the kind that caused certain other financial services institutions to fail or require external support, constraints on our liquidity could occur as a result of unanticipated deposit withdrawals because of market distress or our inability to access other sources of liquidity, including through the capital markets due to unforeseen market dislocations or interruptions. Moreover, some of our customers may become less willing to maintain deposits at the Bank because of broader market concerns with the level of insurance available on those deposits. Our business and our financial condition and results of operations could be adversely affected by continued soundness concerns regarding financial institutions generally and our counterparties specifically and limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system as impact of excessive deposit withdrawals.

Filed May 12, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-014190. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.