EAGLE BANCORP MONTANA: MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS. (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. Overview Historically, our principal business has consisted 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, 2020, commercial real estate and commercial business loans represented 53.12% and 19.15% 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, 2020, we had mortgage servicing rights, net of $10.11 millioncompared to $8.74 millionas of December 31, 2019. 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. 21 -------------------------------------------------------------------------------- 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, 2019from 2.50% to 1.75%. The rate decreased from 1.75% to 0.25% during the year ended December 31, 2020. The rate reductions add continued pressure on loan yields. COVID-19 The Company's performance for the year ended December 31, 2020was strong due to higher mortgage banking operations, as a result of a historically low interest rate environment and substantial gains from loan sales. However, the Company also continues to see the impact of the COVID-19 pandemic and its consequences on our Montanacommunities. The Bank is 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 December 31, 2020had helped 764 customers receive $45.71 millionin SBA PPP loans. The Bank has processed applications for PPP loan forgiveness for customers, with 195 loans representing over $15.00 millionnow paid in full. The remaining 569 SBA PPP loans represent $29.58 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, 2020: health and social assistance (2.6%), hotels and lodging (4.1%), bars and restaurants (2.6%), casinos (1.2%) and nursing homes (0.5%). 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, 2020, remaining loan modifications for 40 nonresidential borrowers represented $29.00 millionin loans or 3.5% of total loans, compared to 66 borrowers representing $55.21 millionor 6.5% of loans as of September 30, 2020. The Bank qualified 32 borrowers for the MBOI program representing $26.62 millionin loans, which are included in the fourth quarter modifications. 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. 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, 2020there remain approximately 54 forbearances approved for residential mortgage loans, of which 49 are sold and serviced. Utilization of credit lines were 82.7% at the end of the fourth quarter compared to 83.4% at the end of the previous quarter, which aligns with historical usage rates. Our fee income could 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, 2020, all of 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. 22 -------------------------------------------------------------------------------- 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, 2020, 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, 2020we had goodwill of $20.80 million. The Company is committed to assisting our customers and communities in this time of need. The State of Montanaentered its Phase 2 reopening on June 1, 2020and Eagle reopened branch lobbies. However, due to increased COVID-19 cases throughout the state, branch lobbies were closed again. In addition, effective July 16, 2020, a mandatory mask directive for indoor areas open to the public was implemented for the State of Montana. Accommodations have been made for employees to work from home when feasible while keeping drive-ups open and scheduling in-person appointments. Acquisitions The Bank has used growth through mergers or acquisition, in addition to its strategy of organic growth. In 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.
Recent accounting statements
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard requires organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also requires qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and was adopted by the Company in the first quarter of 2019. The adoption of the standard did not have a significant impact on our consolidated financial statements. The Company's operating leases expire on various dates through 2028 and primarily relate to branch locations. As a result of adopting the lease standard on January 1, 2019, the Company recorded right-of-use assets of $2.37 millionand corresponding lease liabilities. The right-of-use assets are included in premises and equipment, net and the lease liabilities are included in accrued expenses and other liabilities on the consolidated statement of financial condition. In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this standard in the first quarter of 2019 did not have a significant impact on our consolidated financial statements, as we typically do not invest in these types of securities. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) to remove disclosure requirements that no longer are considered cost beneficial, modify/clarify specific requirements of certain disclosures and add disclosure requirements identified as relevant. The amendment became effective for the Company on January 1, 2020and did not have a significant impact on the consolidated financial statements. In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. 23
The Company believes the amendments in this update will have an impact on the Company's consolidated financial statements and is continuing to evaluate the significance of that impact, even though the adoption date has been deferred. In that regard, we have established a working group under the direction of our
Chief Credit Officerand Controller. The group is composed of individuals from the finance and credit administration areas of the Company. We are currently developing an implementation plan, including assessment of processes, segmentation of the loan portfolio and identifying and adding data fields necessary for analysis. The adoption of this standard is likely to result in an increase in the allowance for loan losses as a result of changing from an "incurred loss" model to an "expected loss" model. While we currently cannot reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwilland Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. The guidance will be effective for the Company on January 1, 2023and adoption of the standard is being evaluated to assess the impact on the Company's consolidated financial statements.
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. The allowance for loan losses 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. As an integral part of their examination process, the FRB and the
Montana Division of Bankingwill 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. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC Topic 310 Receivables. 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. 24
Table of Contents Mortgage Servicing Rights For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Derivative and hedging activities
FASB ASC Topic 815 Derivatives and Hedging requires that derivatives of the Company be recorded in the consolidated financial statements at fair value. These instruments have certain interest rate risk characteristics that change in value based upon changes in the market. The Company's derivatives are primarily the result of its mortgage banking activities in the form of interest rate lock commitments forward To-Be-Announced ("TBA") mortgage backed securities and bulk mandatory forward loan sale commitments. Derivatives are recorded as either other assets or other liabilities on the consolidated statements of financial condition and changes in the fair value of the derivatives are recorded in mortgage banking within noninterest income on the consolidated statements of income. Fair Value FASB ASC Topic 820 Fair Value Measurements and Disclosures establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). Deferred Income Taxes We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC Topic 740 Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings. Financial Condition
Total assets were
$1.26 billionat December 31, 2020, an increase of $203.37 million, or 19.3% from $1.05 billionat December 31, 2019. There were several factors impacting this increase. Loans receivable, net increased by $58.86 millionfrom December 31, 2019. In addition, total cash and cash equivalents increased by $44.88 millionfrom December 31, 2019and has been impacted by PPP funds deposited by borrowers. Securities available-for-sale also increased by $36.07 millionfrom $126.88 millionat December 31, 2019. Mortgage loans held-for-sale increased $29.01 milliondue to robust residential mortgage volumes during 2020. Total liabilities were $1.10 billionat December 31, 2020, an increase of $172.10 million, or 18.5%, from $932.60 millionat December 31, 2019. The increase was largely due to an increase in deposits partially offset by a reduction in FHLB advances and borrowings. Total deposits increased by $224.09 millionfrom December 31, 2019. However, FHLB advances and other borrowings decreased $71.28 millionfrom December 31, 2019. Total shareholders' equity increased by $31.28 millionfrom December 31, 2019. 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, 2020or 2019. 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 $2.06 millionand $4.68 millionat December 31, 2020and 2019, respectively. FRB stock was $2.97 millionand $2.53 millionat December 31, 2020and 2019, respectively. 25
The following table summarizes the investment activities:
December 31, 2020 2019 2018 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
$ 2,2451.38 % $ 6950.55 % $ 4,2172.96 % U.S. treasury obligations 5,657 3.47 % 12,902 10.17 % 5,130 3.61 % Municipal obligations 99,088 60.81 % 52,222 41.17 % 68,278 48.04 % Corporate obligations 10,663 6.54 % 8,388 6.61 % 11,119 7.82 % Mortgage-backed securities 7,669 4.71 % 9,495 7.48 % 19,348 13.61 % Collateralized mortgage obligations 31,189 19.14 % 33,334 26.27 % 23,875 16.79 % Asset-backed securities 6,435 3.95 % 9,839 7.75 % 10,198 7.17 % Total securities available-for-sale $ 162,946100.00 % $ 126,875100.00 % $ 142,165100.00 % Securities available-for-sale were $162.95 millionat December 31, 2020, an increase of $36.07 million, or 28.4%, from $126.88 millionat December 31, 2019. Securities increased during the period due to the WHC acquisition, which included acquired securities of $43.71 million. Excluding securities acquired, securities decreased by $7.64 million. The decrease was due to sales and maturities of securities, largely offset by purchases during the period. 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, 2020 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 % $ 1,6841.62 % $ 5613.07 % $ 2,245 $ 2,2451.98 % U.S.treasury obligations - 0.00 % 5,657 2.76 % - 0.00 % - 0.00 % 5,657 5,657 2.76 % Municipal obligations 1,978 2.08 % 4,427 2.75 % 13,563 2.77 % 79,120 3.03 % 99,088 99,088 3.02 % Corporate obligations - 0.00 % 7,418 1.72 % 3,245 4.98 % - 0.00 % 10,663 10,663 2.71 % Mortgage-backed securities - 0.00 % - 0.00 % 310 1.85 % 7,360 1.52 % 7,669 7,669 1.54 % Collateralized mortgage obligations 580 2.58 % 7,164 2.88 % 3,915 0.54 % 19,530 1.14 % 31,189 31,189 1.49 % Asset-backed securities - 0.00 % - 0.00 % - 0.00 % 6,435 1.20 % 6,435 6,435 1.20 % Total securities available-for-sale $ 2,5582.20 % $ 24,6661.85 % $ 22,7172.60 % $ 113,0062.50 % $ 162,946 $ 162,9462.54 % 26
Table of Contents Lending Activities The following table includes the composition of the Bank's loan portfolio by loan category: December 31, 2020 2019 2018 2017 2016 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)
$ 110,80213.14 % $ 119,29615.28 % $ 116,93918.92 % $ 109,91121.37 % $ 113,26224.24 % Residential 1-4 family construction 46,290 5.49 % 38,602 4.95 % 27,168 4.40 % 25,306 4.92 % 20,540 4.40 % Total residential 1-4 family 157,092 18.63 % 157,898 20.23 % 144,107 23.32 % 135,217 26.29 % 133,802 28.64 % Commercial real estate 316,668 37.56 % 331,062 42.41 % 256,784 41.54 % 194,805 37.88 % 166,932 35.73 % Commercial construction and development 65,281 7.74 % 52,670 6.75 % 41,739 6.75 % 38,351 7.46 % 41,810 8.95 % Farmland 65,918 7.82 % 50,293 6.44 % 29,915 4.84 % 11,627 2.26 % 6,185 1.32 % Total commercial real estate 447,867 53.12 % 434,025 55.60 % 328,438 53.13 % 244,783 47.60 % 214,927 46.00 % Total real estate loans 604,959 71.75 % 591,923 75.83 % 472,545 76.45 % 380,000 73.89 % 348,729 74.64 % Other loans: Home equity 56,563 6.71 % 56,414 7.23 % 52,159 8.44 % 52,672 10.24 % 49,018 10.49 % Consumer 20,168 2.39 % 18,882 2.42 % 16,565 2.68 % 15,712 3.06 % 14,800 3.16 % Commercial 109,209 12.95 % 72,797 9.33 % 59,053 9.56 % 63,300 12.31 % 52,795 11.30 % Agricultural 52,242 6.20 % 40,522 5.19 % 17,709 2.87 % 2,563 0.50 % 1,911 0.41 % Total commercial loans 161,451 19.15 % 113,319 14.52 % 76,762 12.43 % 65,863 12.81 % 54,706 11.71 % Total other loans 238,182 28.25 % 188,615 24.17 % 145,486 23.55 % 134,247 26.11 % 118,524 25.36 % Total loans 843,141 100.00 % 780,538 100.00 % 618,031 100.00 % 514,247 100.00 % 467,253 100.00 % Deferred loan fees (2,038 ) (1,303 ) (1,098 ) (1,093 ) (1,092 ) Allowance for loan losses (11,600 ) (8,600 ) (6,600 ) (5,750 ) (4,770 ) Total loans, net $ 829,503 $ 770,635 $ 610,333 $ 507,404 $ 461,391
(1) Excludes loans intended for sale
Loans receivable, net increased
$58.86 millionto $829.50 millionat December 31, 2020due in part to the WHC acquisition. The WHC acquisition included $43.42 millionof acquired loans. Excluding acquired loans, loans receivable, net increased by $15.44 million. Including acquired loans, total commercial loans increased $48.13 million, total commercial real estate loans increased $13.84 million, consumer loans increased $1.29 million, home equity loans increased $149,000and total residential 1- 4 family loans decreased $800,000. Total loan originations were $1.29 billionfor the year ended December 31, 2020Total residential 1-4 family originations were $971.02 million, which includes $904.27 millionof originations of loans held-for-sale. Total commercial originations were $140.96 million, which includes $45.71 millionof SBA PPP loans. Total commercial real estate originations were $134.93 million. Home equity loan originations totaled $30.22 million. Consumer loan originations totaled $11.86 million. Loans held-for-sale increased by $29.01 million, to $54.62 millionat December 31, 2020from $25.61 millionat December 31, 2019. Loan Maturities. The following table sets forth the estimated maturity of the loan portfolio of the Bank at December 31, 2020. 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 without a declared maturity, those without payment due, demand loans and loans due, are presented as due within six months.
One Year One to Five or Less Years After 5 Years Total Total residential 1-4 family (1)
$ 38,882 $ 3,991 $ 114,219 $ 157,092Total commercial real estate 40,831 22,758 384,278 447,867 Home equity 4,033 17,002 35,528 56,563 Consumer 1,196 13,401 5,571 20,168 Total Commercial 46,941 73,554 40,956 161,451 Total loans (1) $ 131,883 $ 130,706 $ 580,552 $ 843,141
(1) Excludes loans intended for sale
The following table includes loans by fixed or adjustable rates at
December 31, 2020: Fixed Adjustable Total (Dollars in Thousands) Due after December 31, 2020: Total residential 1 to 4 family (1) $ 67,301 $ 50,910 $ 118,211Total commercial real estate 37,147 369,888 407,035 Home equity 47,251 5,279 52,530 Consumer 17,568 1,403 18,971 Total commercial 6,393 108,118 114,511 Total due after December 31, 2020 (1) 175,660 535,598 711,258 Due in less than one year 29,165 102,718 131,883 Total loans (1) $ 204,825 $ 638,316 $ 843,141Percent of total 24.29 % 75.71 % 100.00 %
(1) Excludes loans intended 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, 2020and 2019, the Bank had $25,000and $26,000, respectively, of real estate owned and other repossessed property. The State of Montanaplaced a freeze on foreclosures on March 28, 2020. Subsequently it released 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 recently extended to June 30, 2021. 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, 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. At December 31, 2019, the Bank had $3.64 million( $3.57 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, 2020 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 5
$ 69325.22 % 1 $ 348.67 % Residential 1-4 family construction 2 853 31.05 % 1 170 43.37 % Commercial real estate 2 274 9.97 % - - 0.00 % Farmland 5 179 6.51 % - - 0.00 % Other loans: Home equity 3 53 1.93 % - - 0.00 % Consumer 42 72 2.62 % - - 0.00 % Commercial 6 553 20.12 % 1 6 1.53 % Agricultural 3 71 2.58 % 1 182 46.43 % Total 68 $ 2,748100.00 % 4 $ 392100.00 % 29
The following table presents information on non-performing assets:
December 31, 2020 2019 2018 2017 2016 (Dollars in Thousands) Nonaccrual loans Real estate loans: Residential 1-4 family
$ 684 $ 618 $ 253 $ 475 $ 221Residential 1-4 family construction 337 337 634 - - Commercial real estate 631 583 432 - - Commercial construction and development 36 50 13 - - Farmland 2,245 323 - - - Other loans: Home equity 94 78 469 242 297 Consumer 151 156 127 153 96 Commercial 537 750 308 107 - Agricultural 1,542 499 32 - - Accruing loans delinquent 90 days or more Real estate loans: Residential 1-4 family 34 4 130 - 456 Residential 1-4 family construction 170 - - - - Commercial real estate - - 1,347 - 4 Other loans: Home equity - - - - 35 Commercial 6 - - - - Agricultural 182 1,805 - - - Restructured loans Real estate loans: Commercial real estate 1,633 - - - - Commercial construction and development 14 - - - - Farmland - 153 - - - Other loans: Home equity 17 20 22 - 43 Commercial - 74 - - - Agricultural 160 - - - - Total nonperforming loans 8,473 5,450 3,767 977 1,152 Real estate owned and other repossessed property, net 25 26 107 525 825 Total nonperforming assets $ 8,498 $ 5,476$
Total nonperforming loans to total loans 1.00 % 0.70 % 0.61 % 0.19 % 0.25 % Total nonperforming loans to total assets 0.67 % 0.52 % 0.44 % 0.14 % 0.17 % Total allowance for loan loss to nonperforming loans 136.91 % 157.80 % 175.21 % 588.54 % 414.06 % Total nonperforming assets to total assets 0.68 % 0.52 % 0.45 % 0.21 % 0.29 %
Non-criminal loans as of
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, 2019, the Bank sold three real estate owned and other repossessed assets resulting in a net loss of $18,000. There was one write-down on real estate owned and other repossessed assets for a loss of $66,000during the year ended December 31, 2019. During the year ended December 31, 2020and 2019, 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 equal 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. 30
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, 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 $ 12,540December 31, 2019 Special Mention Substandard Doubtful Loss Total (In Thousands) Real estate loans: Residential 1-4 family $ - $ 1,180$ - $ - $ 1,180Residential 1-4 family construction - 337 - - 337 Commercial real estate - 2,312 - - 2,312 Commercial construction and development - 50 - - 50 Farmland 108 168 58 - 334 Other loans: - - Home equity 78 297 - - 375 Consumer - 188 - - 188 Commercial 159 707 63 - 929 Agricultural 138 570 467 - 1,175 Total loans 483 5,809 588 - 6,880 Real estate owned/repossessed property, net 26 $ 6,90631
Allowance for Loan Losses and Real Estate Owned. 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, regional and national economy. At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans based on estimated 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. Real estate owned is evaluated annually and recorded at fair value. Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. At
December 31, 2020, we had $11.60 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.
Our policy is to review our loan portfolio, in accordance with regulatory classification procedures, at least quarterly.
The following table contains information on the allowance for loan losses:
Years Ended December 31, 2020 2019 2018 (Dollars in Thousands) Beginning balance
$ 8,600 $ 6,600 $ 5,750Provision for loan losses 3,130 2,627 980 Loans charged-off Commercial real estate (18 ) (195 ) (13 ) Home equity - (75 ) (80 ) Consumer (36 ) (78 ) (72 ) Commercial (173 ) (380 ) (24 ) Recoveries Commercial real estate 12 17 19 Home equity - - 1 Consumer 16 26 27 Commercial 69 58 12 Net loans charged-off (130 ) (627 ) (130 ) Ending balance $ 11,600 $ 8,600 $ 6,600Allowance for loan losses to total loans excluding loans held-for-sale 1.38 % 1.10 % 1.07 % Allowance for loan losses to total nonperforming loans 136.91 % 157.80 % 175.21 % Net charge-offs to average loans outstanding during the period 0.01 % 0.08 % 0.02 %
The following table shows the breakdown of the allowance for loan losses by loan category and the percentage of loans in each category compared to total loans:
December 31, 2020 2019 2018 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
$ 1,50612.98 % 18.63 % $ 1,30115.13 % 20.23 % $ 1,30119.71 % 23.32 % Commercial real estate 6,951 59.92 % 53.12 % 4,826 56.12 % 55.60 % 3,593 54.44 % 53.13 % Total real estate loans 8,457 72.90 % 71.75 % 6,127 71.25 % 75.83 % 4,894 74.15 % 76.45 % Other loans: Home equity 515 4.44 % 6.71 % 477 5.55 % 7.23 % 477 7.23 % 8.44 % Consumer 364 3.14 % 2.39 % 284 3.30 % 2.42 % 190 2.88 % 2.68 % Commercial 2,264 19.52 % 19.15 % 1,712 19.90 % 14.52 % 1,039 15.74 % 12.43 % Total other loans 3,143 27.10 % 28.25 % 2,473 28.75 % 24.17 % 1,706 25.85 % 23.55 % Total $ 11,600100.00 % 100.00 % $ 8,600100.00 % 100.00 % $ 6,600100.00 % 100.00 % 33
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 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
$885.97 millionor 85.8% of the Bank's total deposits at December 31, 2020( $861.28 millionor 83.6% 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, 2020 2019 2018 Weighted Weighted Weighted Percent Average Percent Average Percent Average Amount of Total Rate Amount of Total Rate Amount of Total Rate (Dollars in Thousands) Noninterest checking
$ 318,38930.82 % 0.00 % $ 200,03524.72 % 0.00 % $ 142,78822.79 % 0.00 % Interest-bearing checking 160,614 15.55 % 0.02 % 116,397 14.39 % 0.03 % 105,115 16.78 % 0.03 % Savings 179,868 17.41 % 0.06 % 126,991 15.70 % 0.08 % 108,234 17.27 % 0.05 % Money market accounts 202,407 19.59 % 0.24 % 132,506 16.38 % 0.42 % 108,050 17.24 % 0.30 % Total 861,278 83.37 % 0.07 % 575,929 71.19 % 0.12 % 464,187 74.08 % 0.09 % Certificates of deposit accounts: IRA certificates 24,693 2.39 % 0.50 % 25,240 3.12 % 0.71 % 28,198 4.50 % 0.60 % Brokered certificates 495 0.05 % 1.35 % 10,180 1.26 % 2.13 % - 0.00 % 0.00 % Other certificates 146,617 14.19 %
0.71% 197.644 24.43% 1.81% 134226 21.42% 1.46% Total certificates of deposit
171,805 16.63 % 0.68 % 233,064 28.81 % 1.70 % 162,424 25.92 % 1.31 % Total deposits
$ 1,033,083100.00 % 0.18 % $ 808,993100.00 % 0.55 % $ 626,611100.00 % 0.41 % Deposits increased by $224.09 million, or 27.7%, to $1.03 billionat December 31, 2020from $808.99 millionat December 31, 2019. The increase was due in part to the WHC acquisition. Excluding acquired deposits, total deposits increased by $137.52 million. Including acquired deposits, noninterest checking increased by $118.35 million, money market increased by $69.90 million, savings increased by $52.88 million, and interest-bearing checking increased by $44.22 million. Certificates of deposit decreased by $61.26 million. The decrease in time certificates of deposit was impacted by a decrease of $9.68 millionin fixed rate brokered CDs, as well as a decrease in other certificates of $51.02. The decrease in other certificates was due to the low interest rate environment and impelled some depositors to move funds 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, 2020: Balance $250,000and Greater (In Thousands) 3 months or less $ 5,970 Over 3 to 6 months 4,735 Over 6 to 12 months 10,704 Over 12 months 10,031 Total $ 31,440
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. We also have Federal funds lines of credit with PCBB, PNC, Zions Bankand UBB. 34
The following table includes information related to FHLB of
Des Moinesand other borrowings: Years Ended December 31, 2020 2019 2018 (Dollars in Thousands) FHLB advances: Average balance $ 61,252 $ 97,000 $ 83,979Maximum balance at any month-end 94,585 123,512
Balance at period end 17,070 88,350
Weighted average interest rate during the period 1.84% 2.41% 1.85% Weighted average interest rate at the end of the period
1.89 % 2.18 % 2.21 % FRB's PPPLF facility: Average balance
$ 14,675$ - $ - Maximum balance at any month-end 24,065 - - Balance at period end - - -
Weighted average interest rate over the period 0.35% 0.00% 0.00% Weighted average interest rate at the end of the period
0.00 % 0.00 % 0.00 % Other: Average balance
$ 192 $ 2,307 $ 3,304Maximum balance at any month-end - 6,311
Balance at period end - -
Weighted average interest rate over the period 1.15% 2.11% 1.91% Weighted average interest rate at the end of the period
0.00 % 0.00 % 1.00 % Total borrowings: Average balance
$ 76,119 $ 99,307 $ 87,283Maximum balance at any month-end 105,820 124,377
Balance at period end 17,070 88,350
Weighted average interest rate over the period 1.55% 2.40% 1.85% Weighted average interest rate at the end of the period
1.89 % 2.18 % 2.20 %
FHLB advances and other borrowings decreased by
Other Long-Term Debt. The following table summarizes other long-term debt activity: December 31, December 31, 2020 2019 Net Percent Net Percent Amount of Total Amount of Total (Dollars in Thousands) Senior notes fixed at 5.75%, due 2022
$ 9,95233.41 % $ 9,90839.72 % Subordinated debentures fixed at 6.75%, due 2025 - 0.00 % 9,878 39.61 % Subordinated debentures fixed at 5.5% to floating, due 2030 14,684 49.29 % - 0.00 % Subordinated debentures variable, due 2035 5,155 17.30 % 5,155 20.67 % Total other long-term debt, net $ 29,791100.00 % $ 24,941100.00 %
Total other long-term debt increased by
Table of Contents Shareholders' Equity Total shareholders' equity increased by
$31.28 millionor 25.7%, to $152.94 millionat December 31, 2020from $121.66 millionat December 31, 2019. This was primarily due to net income of $21.21 million. The increase was also due to stock issued in connection with the WHC acquisition of $8.47 millionand other comprehensive income of $4.52 million. These increases were slightly offset by dividends paid of $2.62 millionand treasury stock purchased for $987,000.
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 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, 2020 Year Ended December 31, 2019 Year Ended December 31, 2018 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
$ 166,577 $ 3,7422.24 % $ 135,904 $ 3,6722.70 % $ 151,018 $ 4,0682.69 % FHLB and FRB stock 6,534 370 5.65 % 7,363 408 5.54 % 6,272 322 5.13 % Loans receivable(1) 874,669 45,381 5.17 % 764,075 42,344 5.54 % 590,059 30,400 5.15 % Other earning assets 44,771 161 0.36 % 5,030 87 1.73 % 2,778 53 1.91 % Total interest-earning assets 1,092,551 49,654 4.54 % 912,372 46,511 5.10 % 750,127 34,843 4.64 % Noninterest-earning assets 127,339 97,645 79,059 Total assets $ 1,219,890 $ 1,010,017 $ 829,186Liabilities and equity: Interest-bearing liabilities: Deposit accounts: Checking $ 151,745 $ 580.04 % $ 116,424 $ 440.04 % $ 106,845 $ 360.03 % Savings 154,224 145 0.09 % 119,674 85 0.07 % 103,519 53 0.05 % Money market 169,531 473 0.28 % 124,785 449 0.36 % 107,236 229 0.21 % Certificates of deposit 213,696 2,938 1.37 % 212,370 3,315 1.56 % 163,750 1,738 1.06 % Advances from FHLB and other borrowings including long-term debt 104,712 2,870
2.73% 123.497 3.833 3.10% 111.264
3,046 2.74 % Total interest-bearing liabilities 793,908 6,484
0.81% 696,750 7,726 1.11% 592,614
5,102 0.86 % Noninterest checking 265,304 184,654 135,831 Other noninterest-bearing liabilities 19,518 12,819 9,214 Total liabilities 1,078,730 894,223 737,659 Total equity 141,160 115,794 91,527 Total liabilities and equity
$ 1,219,890 $ 1,010,017 $ 829,186Net interest income/interest rate spread(2) $ 43,1703.73 % $ 38,7853.99 % $ 29,7413.78 % Net interest margin(3) 3.94 % 4.25 % 3.96 % Total interest-earning assets to interest-bearing liabilities 137.62 % 130.95 % 126.58 % (1) Includes loans held-for-sale.
(2) The interest rate differential 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 on an equivalent tax basis.
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, 2020 Year Ended December 31, 2019 Due to Due to Volume Rate Net Volume Rate Net (In Thousands) Interest-earning assets: Investment securities
$ 829 $ (759 ) $ 70 $ (407 ) $ 11 $ (396 )FHLB and FRB stock (46 ) 8 (38 ) 56 30 86 Loans receivable(1) 6,129 (3,092 ) 3,037 8,965 2,979 11,944 Other earning assets 687 (613 ) 74 43 (9 ) 34 Total interest-earning assets 7,599 (4,456 )
3,143 8,657 3,011 11,668
Interest-bearing liabilities: Checking, savings and money market accounts 199 (101 ) 98 49 211 260 Certificates of deposit 21 (398 ) (377 ) 517 1,060 1,577 Advances from FHLB and other borrowings including long-term debt (583 ) (380 ) (963 ) 335 452 787
Total interest-bearing liabilities (363) (879) (1,242) 901 1,723 2,624
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, 2020was $21.21 millioncompared to $10.87 millionfor the year ended December 31, 2019. The increase of $10.34 millionwas due to an increase of $25.23 millionin noninterest income and an increase in net interest income after loan loss provision of $3.88 million, partially offset by an increase in noninterest expense of $14.64 millionand an increase in provision for income taxes of $4.13 million. Basic and diluted earnings per share were $3.12and $3.11, respectively, for the year ended December 31, 2020. Basic and diluted earnings per share were both $1.69for the prior period. Net Interest Income Net interest income increased to $43.17 millionfor the year ended December 31, 2020, from $38.79 millionfor the year ended December 31, 2019. This increase of $4.38 million, or 11.3%, was the result of an increase in interest and dividend income of $3.14 millionand a decrease in interest expense of $1.25 million.
Interest and dividend income
Total interest and dividend income was
$49.65 millionfor the year ended December 31, 2020, compared to $46.51 millionfor the year ended December 31, 2019, an increase of $3.14 million, or 6.8%. Interest and fees on loans increased to $45.38 millionfor the year ended December 31, 2020from $42.34 millionfor the same period ended December 31, 2019. This increase of $3.04 million, or 7.2%, was due to an increase in the average balance of loans, partially offset by a decrease in the average yield of loans for the year ended December 31, 2020. Net fee income of $1.03 millionearned on PPP loans for the year ended December 31, 2020, along with the 1.0% contractual rate on PPP loans contributed to the downward push on loan yield. Average balances for loans receivable, including loans held for sale, for the year ended December 31, 2020were $874.67 million, compared to $764.08 millionfor the prior year period. This represents an increase of $110.59 million, or 14.5% and was impacted by the WHC acquisition, as well as organic growth. The average interest rate earned on loans receivable decreased by 37 basis points, from 5.54% to 5.17%. Interest accretion on purchased loans was $1.55 millionfor the year ended December 31, 2020which resulted in a 14 basis point increase in net interest margin compared to $1.88 millionfor the year ended December 31, 2019which resulted in an 21 basis point increase in net interest margin. Interest and dividends on investment securities available-for-sale increased slightly by $70,000or 1.9% for the year ended December 31, 2020compared to the same period last year. Average balances on investments increased to $166.58 millionfor the year ended December 31, 2020, from $135.90 millionfor the year ended December 31, 2019. The increase in average investments is primarily due to the WHC acquisition. However, average interest rates earned on investments decreased to 2.24% for the year ended December 31, 2020from 2.70% for the year ended December 31, 2019. 37
Table of Contents Interest Expense Total interest expense decreased for the year ended
December 31, 2020to $6.48 millionfrom $7.73 millionfor the year ended December 31, 2019, a decrease of $1.25 million, or 16.2%. The decrease was due to a decrease in interest expense on total borrowings, as well as a decrease in interest expense on deposits. The average borrowing balance decreased from $123.50 millionfor the year ended December 31, 2019to $104.71 millionfor the year ended December 31, 2020due to increased liquidity levels. The average rate paid on total borrowings also decreased from 3.10% for the year ended December 31, 2019, to 2.73% for the year ended December 31, 2020. The average balance for total deposits was $954.50 millionfor the year ended December 31, 2020compared to $757.91 millionfor the same period in the prior year. This increase was impacted by the WHC acquisition and also increased nonmaturing deposits due to PPP funding and economic stimulus. However, the overall average rate on total deposits was 0.38% for the year ended December 31, 2020compared to 0.51% for the same period in the prior year. 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 $1.73 millionin loan loss provisions for the year ended December 31, 2020. Additionally, management considered the potential impact of COVID-19 during 2020. Due to the economic slowdown, an increase in the related economic factors was included in the allowance for loan losses analysis and the loan loss reserves was increased by approximately $1.40 million. Therefore, the total loan loss provision for the year ended December 31, 2020was $3.13 million. Loan loss provisions were $2.63 millionfor the year ended December 31, 2019. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. Total nonperforming loans, including restructured loans, net, was $8.47 millionat December 31, 2020compared to $5.45 millionat December 31, 2019. The Bank has $25,000in other real estate owned and other repossessed assets at December 31, 2020compared to $26,000at December 31, 2019. Noninterest Income Noninterest income increased to $49.07 millionfor the year ended December 31, 2020, from $23.84 millionfor the year ended December 31, 2019, an increase of $25.23 million. The increase is largely due to increases in net gain on sale of loans which increased to $36.39 millionfor the year ended December 31, 2020from $16.68 millionfor the year ended December 31, 2019. During the year ended December 31, 2020, $874.72 millionresidential mortgage loans were sold compared to $480.05 millionin the same period in the prior year. In addition, gross margin on sale of mortgage loans for the year ended December 31, 2020was 4.16% compared to 3.47% for the year ended December 31, 2019. Noninterest Expense Noninterest expense was $60.67 millionfor the year ended December 31, 2020compared to $46.03 millionfor the year ended December 31, 2019. The increase of $14.64 million, or 31.8%, is largely due to increased salaries and employee benefits expenses of $11.21 million. The increase in salaries expense is due in part to higher commission-based compensation related to mortgage loan growth and additional staff related to compliance with mortgage rules. Mortgage compensation and benefits increased $5.69 millionfor the year ended December 31, 2020compared to the year ended December 31, 2019. Salaries and employee benefits expense was also impacted by the addition of staff partly due to the WHC acquisition. Other noninterest expense includes $792,000of impairment of servicing rights incurred during the year ended December 31, 2020. Provision for Income Taxes Provision for income taxes was $7.23 millionfor the year ended December 31, 2020, compared to $3.10 millionfor the year ended December 31, 2019due to increased income before provision for income taxes. The effective tax rate was 25.4% for the year ended December 31, 2020compared to 22.2% for the prior year. 38
Liquidity and capital resources
Liquidity The Bank is required to maintain minimum levels of liquid assets as defined by the
Montana Division of Banking and FRBregulations. The liquidity requirement is retained for safety and soundness purposes, and that 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, 2020and 2019. 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 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 Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses. 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. Despite significant liquidity events, liquidity levels throughout the year ended December 31, 2020remained stable. Elevated cash levels from deposit growth sparked by PPP funds deposited, tax refunds, economic stimulus money and flight to quality was only partially offset by the increase in PPP loans. Subsequent to the end of the first quarter of 2020, and in coordination with the roll out of the PPP, Eagle was approved for short-term funding through the FRB Discount Window. The discount window has not been utilized; however, Eagle has utilized the FRB's PPPLF facility as a partial source for its SBA PPP loans. As of December 31, 2020, Eagle had repaid all PPPLF borrowings. The Company closed a $15.00 millionsubordinated debt offering in June of 2020, adding to borrowings. In July, $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
$2.12 millionfor the year ended December 31, 2020compared to $366,000for the prior year. Net cash provided by operating activities was slightly higher for the year ended December 31, 2020primarily due to changes in net income and loans held-for-sale activity, which was offset by an increase in gain on sale of loans. Net cash used in the Company's investing activities, which is primarily comprised of cash transactions from investment securities and activity in the loan portfolio, was $22.04 millionfor the year ended December 31, 2020compared to $59.70 millionfor the year ended December 31, 2019. 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 were more than offset by available-for-sale securities sales and maturities, principal payments and calls of $64.44 million. Net cash used in investing activities for the year ended December 31, 2019was largely impacted by loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was $79.89 millionfor the year ended December 31, 2019. There was $51.46 millionin available-for-sale securities purchases during the year ended December 31, 2019. These uses of cash were more than offset by available-for-sale securities sales and maturities, principal payments and calls of $71.63 million. Net cash provided by the Company's financing activities was $64.80 millionfor the year ended December 31, 2020compared to $73.05 millionfor the year ended December 31, 2019. 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 payments on FHLB and other borrowings of $73.78 million. Net cash provided by financing activities for the year ended December 31, 2019was primarily due to a net increase in deposits of $89.68 million. This was partially offset by net payment on FHLB and other borrowings of $13.01 million. 39
Table of Contents Capital Resources At
December 31, 2020, 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 15.0% compared to an increase of 10.6% at December 31, 2019. The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity. The Bank's Tier I leverage ratio, as measured under State of Montanaand FRB rules, increased from 11.08% as of December 31, 2019to 11.72% as of December 31, 2020. The Bank's strong capital position helps to mitigate its interest rate risk exposure. As of December 31, 2020, the Bank's regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed "well capitalized" pursuant to State of Montanaand FRB rules. At December 31, 2020, the Bank's total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios amounted to 16.71%, 15.46%, 15.46% and 11.72%, respectively, compared to regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, 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. 40
The following table includes the Banks's net interest income sensitivity analysis. Changes in Market Rate Sensitivity Interest Rates As of December 31, 2020 Policy (Basis Points) Year 1 Year 2 Limits +200 6.3% 11.1% -15.0% -100 -1.6% -4.0% -10.0%
The following table shows how the economic value of the Bank’s 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, 2020 Board Policy (Basis Points) Projected EVE Limit Must be no greater than: +400 24.5% -40.0% +300 20.2% -35.0% +200 15.0% -30.0% +100 8.7% -20.0% 0 0.0% 0.0% -100 -15.2% -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, 20202019 (In Thousands)
Letter of credit
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