Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 and nine months ended September 30, 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 and nine months ended September 30, 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 over the past decade. The purpose of diversification is to mitigate the Bank’s exposure 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, and has recently been, 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 5.50% during the nine months ended September 30, 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 September 30, 2023 and December 31, 2022.

Total assets were $2.06 billion at September 30, 2023, an increase of $114.68 million, or 5.9% from $1.95 billion at December 31, 2022. Loans receivable, net increased by $119.86 million from December 31, 2022. Securities available-for-sale decreased $40.71 million or 11.6% from December 31, 2022. Total liabilities were $1.91 billion at September 30, 2023, an increase of $115.82 million, or 6.5%, from $1.79 billion at December 31, 2022. Total borrowings increased $130.48 million from December 31, 2022 and total deposits decreased $19.79 million from December 31, 2022. Total shareholders’ equity decreased $1.15 million or 0.7% from December 31, 2022.

Financial Condition Details

Investment Activities

The following table summarizes investment activities:

(Dollars in Thousands)

Securities available-for-sale were $308.79 million at September 30, 2023, a decrease of $40.71 million from $349.50 million at December 31, 2022. The decrease was due to sales of $34.02 million and maturity, principal payments and call activity of $27.34 million. These decreases were largely offset by $28.13 million in investment purchases.

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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)

(1) Excludes loans held-for-sale.

(2) Deferred loan fees, net included in individual loan categories above for the quarter ended September 30, 2023.

(3) Allowance for credit losses for the quarter ended September 30, 2023; allowance for loan losses for prior period.

Loans receivable, net increased $119.86 million, or 8.9%, to $1.46 billion at September 30, 2023 from $1.34 billion at December 31, 2022. Total commercial real estate loans increased $80.82 million, total commercial loans increased $28.99 million, total home equity loans increased $8.95 million, consumer loans increased $2.22 million and total residential loans decreased $630,000.

Total loan originations were $563.04 million for the nine months ended September 30, 2023. Total residential 1-4 family originations were $299.41 million, which includes $265.50 million of loans held-for-sale originations. Total commercial originations were $117.05 million. Total commercial real estate originations were $113.91 million. Home equity loan originations totaled $19.29 million. Consumer loan originations totaled $13.38 million. Loans held-for-sale increased by $9.63 million to $17.88 million at September 30, 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 September 30, 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 as of September 30, 2023 and December 31, 2022 include $1,725,000 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 September 30, 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)

Deposits decreased by $19.79 million, or 1.2%, to $1.62 billion at September 30, 2023 from $1.64 billion at December 31, 2022. Money market decreased by $61.23 million, savings decreased by $40.61 million, noninterest checking decreased by $33.30 million, and interest-bearing checking decreased by $27.35 million. As indicated in the table above, the decreases were largely offset by increases in certificates of deposits of $142.69 million, which included $40.00 million of fixed rate brokered certificates.

The estimated amount of uninsured deposits was $283.31 million or 17% of total deposits at September 30, 2023.

The following table summarizes borrowing activity:

(Dollars in Thousands)

Total borrowings increased by $130.48 million, or 101.7% to $258.72 million at September 30, 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 decreased by $1.15 million, or 0.7%, to $157.27 million at September 30, 2023 from $158.42 million at December 31, 2022. The decrease was impacted by an increase in unrealized losses on securities available-for-sale of $4.56 million, dividends paid of $3.32 million and a net of tax cumulative adjustment of $1.62 million related to the adoption of the Current Expected Credit Losses standard. These decreases were offset by net income of $7.89 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)

(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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in Thousands)

(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)

(In Thousands)

(1) Includes loans held-for-sale.

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Results of Operations for the Three Months Ended September 30, 2023 and 2022

Net Income. Eagle’s net income for the three months ended September 30, 2023 was $2.64 million compared to $3.09 million for the three months ended September 30, 2022. The decrease of $457,000 was primarily due to a decrease in net interest income after provision for credit losses of $2.37 million, largely offset by a a decrease in noninterest expense of $1.61 million. Basic and diluted earnings per common share were both $0.34 for the current period. Basic and diluted earnings per common share were both $0.40 for the prior year comparable period.

Net Interest Income. Net interest income decreased to $15.59 million for the three months ended September 30, 2023, from $17.89 million for the same quarter in the prior year. The decrease of $2.30 million, or 12.9%, was the result of an increase in interest expense of $7.05 million partially offset by an increase in interest and dividend income of $4.75 million.

Interest and Dividend Income. Interest and dividend income was $24.09 million for the three months ended September 30, 2023 compared to $19.34 million for the three months ended September 30, 2022. Interest and fees on loans increased to $21.07 million for the three months ended September 30, 2023 from $16.67 million for the three months ended September 30, 2022. This increase of $4.40 million, or 26.4%, 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 September 30, 2023 were $1.48 billion, compared to $1.30 billion for the prior year period. This represents an increase of $175.22 million, or 13.5% and was impacted by organic growth. The average interest rate earned on loans receivable increased by 58 basis points, from 5.08% for the three months ended September 30, 2022 to 5.66% for the current period. Interest accretion on purchased loans was $175,000 for the three months ended September 30, 2023 which resulted in a 4 basis point increase in net interest margin compared to $392,000 for the three months ended September 30, 2022 which resulted in a 9 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $239,000, or 9.4% period over period. Average interest rates earned on investments increased to 3.47% for the three months ended September 30, 2023 from 2.68% for the three months ended September 30, 2022. However, average balances for investments decreased to $319.31 million for the three months ended September 30, 2023 from $378.68 million for the three months ended September 30, 2022.

Interest Expense. Total interest expense was $8.51 million for the three months ended September 30, 2023 compared to $1.46 million for the three months ended September 30, 2022. The increase of $7.05 million was due to an increase of $4.43 million in interest expense on deposits, as well as a net increase of $2.61 million in interest expense on total borrowings. The overall average rate on total deposits was up from 0.17% for the three months ended September 30, 2022 compared to 1.28% for the three months ended September 30, 2023. However, the average balance for total deposits was $1.60 billion for the three months ended September 30, 2023 compared to $1.66 billion for the three months ended September 30, 2022. The increase in interest expense on total borrowings was driven by the average balance of FHLB advances and other borrowings which increased from $10.83 million for the three months ended September 30, 2022 to $192.88 million for the three months ended September 30, 2023. Short-term borrowings have increased to fund loan growth. In addition, the average rate paid on FHLB advances and other borrowings increased from 4.98% for the three months ended September 30, 2022, to 5.50% for the three months ended September 30, 2023.

Provision for Credit Losses. Provision for credit losses was $588,000 for the three months ended September 30, 2023, compared to $517,000 in loan loss provisions, prior to the adoption of the Current Expected Credit Losses standard, for the three months ended September 30, 2022. The provision for credit losses for three months ended September 30, 2023 includes a provision for credit losses on loans of $778,000 and a decrease in the provision for unfunded commitments of $190,000.

Noninterest Income. Total noninterest income was $6.04 million for the three months ended September 30, 2023 compared to $6.25 million for the three months ended September 30, 2022. The slight decrease of $211,000, or 3.4% was due to a decrease in other noninterest income of $191,000 primarily due to a net gain on sale of real estate owned and other repossessed assets during the three months ended September 30, 2022. Mortgage banking, net, also decreased $109,000. Mortgage banking, net, includes net gain on sale of mortgage loans which decreased to $3.59 million for the three months ended September 30, 2023 compared to $4.20 million for the three months ended September 30, 2022. During the three months ended September 30, 2023, $109.02 million residential mortgage loans were sold compared to $121.26 million in the same period in the prior year. Mortgage volumes have been impacted by the current interest rate environment. Gross margin levels decreased 17 basis points from 3.46% for the three months ended September 30, 2022 to 3.29% for the three months ended September 30, 2023.

Noninterest Expense. Noninterest expense was $17.88 million for the three months ended September 30, 2023 compared to $19.49 million for the three months ended September 30, 2022, a decrease of $1.61 million or 8.3%. The decrease was primarily related to a decrease in salaries and employee benefits of $862,000 which was driven by lower commissions paid on residential mortgage originations. Data processing also decreased $478,000 due to implementing technology changes.

Provision for Income Taxes. Provision for income taxes was $524,000 for the three months ended September 30, 2023, compared to $1.03 million for the three months ended September 30, 2022 due to the increase in proportion of tax-exempt income compared to the pretax earnings. The effective tax rate was 16.6% for the current period, decreasing from 25.0% for the prior period.

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Results of Operations for the Nine Months Ended September 30, 2023 and 2022

Net Income. Eagle’s net income for the nine months ended September 30, 2023 was $7.89 million compared to $7.08 million for the nine months ended September 30, 2022. The increase of $813,000 was primarily due to an increase in net interest income after provision for credit losses of $2.04 million and a decrease in noninterest expense of $2.33 million, largely offset by a decrease in noninterest income of $4.01 million and a decrease in provision for income taxes of $447,000. Basic and diluted earnings per common share were both $1.01 for the current period. Basic and diluted earnings per common share were both $0.98 for the prior year comparable period.

Net Interest Income. Net interest income increased to $47.28 million for the nine months ended September 30, 2023, from $45.70 million for the same period in the prior year. The increase of $1.58 million, or 3.5%, was the result of an increase in interest and dividend income of $17.91 million largely offset by an increase in interest expense of $16.34 million.

Interest and Dividend Income. Interest and dividend income was $67.07 million for the nine months ended September 30, 2023 compared to $49.16 million for the nine months ended September 30, 2022. Interest and fees on loans increased to $57.94 million for the nine months ended September 30, 2023 from $42.93 million for the nine months ended September 30, 2022. This increase of $15.01 million, or 35.0%, 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 nine months ended September 30, 2023 were $1.42 billion, compared to $1.14 billion for the prior year period. This represents an increase of $272.83 million, or 23.8%, and was impacted by organic growth. The average interest rate earned on loans receivable also increased by 45 basis points, from 5.02% for the nine months ended September 30, 2022 to 5.47% for the current period. Interest accretion on purchased loans was $838,000 for the nine months ended September 30, 2023 which resulted in an 6 basis point increase in net interest margin compared to $1.29 million for the nine months ended September 30, 2022 which resulted in a 11 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $2.73 million period over period. The largest driver of the increase is due to average interest rates earned on investments increasing to 3.42% for the nine months ended September 30, 2023 from 2.35% for the nine months ended September 30, 2022. Average balances for investments also increased slightly to $335.90 million for the nine months ended September 30, 2023 from $332.95 million for the nine months ended September 30, 2022.

Interest Expense. Total interest expense was $19.80 million for the nine months ended September 30, 2023 compared to $3.46 million for the nine months ended September 30, 2022. The increase of $16.34 million was due to an increase of $10.32 million in interest expense on deposits, as well as a net increase of $6.01 million in interest expense on total borrowings. The overall average rate on total deposits was up from 0.13% for the nine months ended September 30, 2022 compared to 0.99% for the nine months ended September 30, 2023. In addition, the average balance for total deposits was $1.60 billion for the nine months ended September 30, 2023 compared to $1.47 billion for the nine months ended September 30, 2022. The increase in the interest expense on total borrowings was due to the average rate paid on FHLB advances and other borrowings, which increased from 2.66% for the nine months ended September 30, 2022 to 5.28% for the nine months ended September 30, 2023. The average balance for FHLB advances and other borrowings also increased from $7.88 million for the nine months ended September 30, 2022 to $151.82 million for the nine months ended September 30, 2023. Short-term borrowings have increased to fund loan growth.

Provision for Credit Losses. Provision for credit losses was $1.19 million for the nine months ended September 30, 2023, compared to $1.65 million in loan loss provisions, prior to the adoption of the Current Expected Credit Losses standard, for the nine months ended September 30, 2022. The provision for credit losses for the nine months ended September 30, 2023 includes a provision for credit losses on loans of $1,466,000 and a decrease in the provision for unfunded commitments of $280,000.

Noninterest Income. Total noninterest income was $16.91 million for the nine months ended September 30, 2023 compared to $20.92 million for the nine months ended September 30, 2022. The decrease of $4.01 million, or 19.2% was primarily due to a decrease in mortgage banking, net, of $4.93 million. Mortgage banking, net, includes net gain on sale of mortgage loans which decreased to $8.55 million for the nine months ended September 30, 2023 compared to $15.65 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, $256.17 million residential mortgage loans were sold compared to $443.92 million in the same period in the prior year. Mortgage volumes have been impacted by the current interest rate environment. Gross margin levels decreased 18 basis points from 3.52% for the nine months ended September 30, 2022 to 3.34% for the nine months ended September 30, 2023.

Noninterest Expense. Noninterest expense was $53.20 million for the nine months ended September 30, 2023 compared to $55.53 million for the nine months ended September 30, 2022, a decrease of $2.33 million or 4.2%. The largest driver of the decrease was acquisition costs of $2.30 million incurred during the nine months ended September 30, 2022 related to the completed merger with FCB. In addition, salaries and employee benefits decreased $1.90 million and was impacted by lower commissions paid on residential mortgage originations.

Provision for Income Taxes. Provision for income taxes was $1.91 million for the nine months ended September 30, 2023, compared to $2.36 million for the nine months ended September 30, 2022. The year-to-date effective tax rate was 19.5% for the current period compared to 25.0% for same period in 2022. The anticipated effective tax rate for 2023 is lower due to the increase in proportion of tax-exempt income compared to the pretax earnings.

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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 September 30, 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 for stock repurchases 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 $333.43 million as of September 30, 2023 and $419.20 million as of December 31, 2022.

(Dollars in Thousands)

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 had a $10.00 million line of credit with a correspondent bank. The line of credit was increased to $15.00 million as of October 30, 2023. There was no outstanding balance for this line of credit at September 30, 2023 or 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 in the short and long term. 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 September 30, 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, decreased the economic value of equity (“EVE”) by 2.50% 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 September 30, 2023. The Company's and the Bank's actual capital amounts and ratios as of September 30, 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)

(Dollars in Thousands)

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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 rate 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.

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.

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 following:

The Company adopted 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.

The excess of consideration paid over fair value of net assets acquired is recorded as goodwill. Goodwill is not amortized but is tested at least annually for impairment or more frequently if events occur or circumstances change that indicate impairment may exist. A goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value. Estimating the fair value of the reporting unit requires the use of inputs and assumptions including projected earnings of the Company in future years for which there is inherent uncertainty.

During the quarter ended September 30, 2023, Management determined that a triggering event had occurred because of a decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget. These conditions are primarily due to economic uncertainty and market volatility from the rising interest rate environment. As a result, the Company performed an interim goodwill impairment assessment as of August 31, 2023, and concluded that goodwill was not impaired. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue to monitor events that could influence this conclusion in the future.

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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 September 30, 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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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, as supplemented in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2023.