EAGLE BANCORP MONTANA, INC.
The following discussion and analysis of the financial condition and results of
operations of Eagle is intended to help investors understand our company and our
operations. The financial review is provided as a supplement to, and should be
read in conjunction with the Consolidated Financial Statements and the related
Notes included elsewhere in this report.
Introduction
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes Eagle and its subsidiaries' results of
operations for the year ended December 31, 2022 as compared to the year ended
December 31, 2021 , and also analyzes our financial condition as of December 31,
2022 as compared to December 31, 2021 . Like most banking institutions, our
principal business consists of attracting deposits from the general public and
the business community and making loans secured by various types of collateral,
including real estate and other consumer assets. We are significantly affected
by prevailing economic conditions, particularly interest rates, as well as
government policies concerning, among other things, monetary and fiscal affairs,
housing and financial institutions and regulations regarding lending and other
operations, privacy and consumer disclosure. Attracting and maintaining deposits
is influenced by a number of factors, including interest rates paid on competing
investments offered by other financial and nonfinancial institutions, account
maturities, fee structures and levels of personal income and savings. Lending
activities are affected by the demand for funds and thus are influenced by
interest rates, the number and quality of lenders and regional economic
conditions. Sources of funds for lending activities include deposits,
borrowings, repayments on loans, cash flows from maturities of investment
securities and income provided from operations.
Our earnings depend primarily on our level of net interest income, which is the
difference between interest earned on our interest-earning assets, consisting
primarily of loans and investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits, borrowed funds,
and trust-preferred securities. Net interest income is a function of our
interest rate spread, which is the difference between the average yield earned
on our interest-earning assets and the average rate paid on our interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets compared to interest-bearing liabilities. Also contributing to our
earnings is noninterest income, which consists primarily of service charges and
fees on loan and deposit products and services, net gains and losses on sale of
assets, and mortgage loan service fees. Net interest income and noninterest
income are offset by provisions for loan losses, general administrative and
other expenses, including salaries and employee benefits and occupancy and
equipment costs, as well as by state and federal income tax expense.
The Bank has a strong mortgage lending focus, with a large portion of its loan
originations represented by single-family residential mortgages, which has
enabled it to successfully market home equity loans, as well as a wide range of
shorter term consumer loans for various personal needs (automobiles,
recreational vehicles, etc.). The Bank has also focused on adding commercial
loans to our portfolio, both real estate and non-real estate. We have made
significant progress in this initiative. As of December 31, 2022 , commercial
real estate and commercial business loans represented 60.97% and 17.07% 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, 2022 , we had mortgage servicing rights,
net of $15.41 million compared to $13.69 million as of December 31, 2021 . 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.
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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
Acquisitions
The Bank has used growth through mergers or acquisition, in addition to its strategy of organic growth.
InApril 2022 , Eagle acquiredFirst Community Bancorp, Inc. ("FCB"), aMontana corporation, and FCB's wholly-owned subsidiary,First Community Bank , aMontana chartered commercial bank. In the transaction, Eagle acquired nine retail bank branches and two loan production offices inMontana . InJanuary 2020 , Eagle acquiredWestern Holding Company ofWolf Point ("WHC"), aMontana corporation, and WHC's wholly-owned subsidiary,Western Bank of Wolf Point ("WB"), aMontana chartered commercial bank. In the transaction, Eagle acquired one retail bank branch inWolf Point, Montana . 23
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Critical Accounting Policies and Estimates
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 The allowance for loan losses is the estimated amount considered necessary to absorb losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. The provision for loan losses reflects the amount required to maintain the allowance for loan losses at an appropriate level based upon management's evaluation of the adequacy of loss reserves. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded 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. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired, and have been individually evaluated. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable), and payment history. Using a three-year lookback period, historical loss experience, delinquency trends and general economic conditions are analyzed. Separately evaluated but also taken into consideration are call report, geographic, and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. In addition, as an integral part of their examination process, banking regulators will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.
For the year ended
Business Combinations The Company accounts for business combinations under the acquisition method of accounting. The Company records assets acquired, including identifiable intangible assets and liabilities assumed at their fair values as of the acquisition date. Transaction costs related to the acquisition are expensed in the period incurred. Results of operations of the acquired entity are included in the consolidated statements of income from the date of acquisition. Any measurement-period adjustments are recorded in the period the adjustment is identified. The excess of consideration paid over fair value of net assets acquired is recorded as goodwill. Determining the fair value of assets acquired, including identifiable intangible assets and liabilities assumed often requires significant use of estimates and assumptions. This may involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques such as estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors.Goodwill is not amortized but is tested at least annually for impairment. Other intangible assets are assigned useful lives and amortized. The determination of useful lives is subjective. See Note 2 and 7 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for further information.
The Company's accounting policies and discussion of recent accounting pronouncements is included in Note 1 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data".
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Table of Contents Financial Condition
Total assets were$1.95 billion atDecember 31, 2022 , an increase of$512.45 million , or 35.7% from$1.44 billion atDecember 31, 2021 . The increase was largely due to the FCB acquisition inApril 2022 , primarily reflected in loans receivable. Loans receivable, net increased by$419.04 million or 45.5%, to$1.34 billion atDecember 31, 2022 from$920.64 million atDecember 31, 2021 . In addition, securities available-for-sale increased by$78.24 million from$271.26 million atDecember 31, 2021 . Total liabilities were$1.79 billion atDecember 31, 2022 , an increase of$510.77 million , or 39.9%, from$1.28 billion atDecember 31, 2021 . The increase in liabilities was mainly due to an increase in deposits. Total deposits increased by$412.72 million fromDecember 31, 2021 ,$321.11 million of which were brought on from the FCB acquisition. FHLB advances and other borrowings also increased$64.39 million fromDecember 31, 2021 . Total shareholders' equity increased by$1.69 million fromDecember 31, 2021 . 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 includeU.S. government and agency obligations,U.S. treasury obligations,Small Business Administration pools, municipal securities, corporate obligations, mortgage-backed securities ("MBSs"), collateralized mortgage obligations ("CMOs") and asset-backed securities ("ABSs"), all with varying characteristics as to rate, maturity and call provisions. There were no held-to-maturity investment securities included in the investment portfolio atDecember 31, 2022 or 2021. 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$5.09 million and$1.70 million atDecember 31, 2022 and 2021, respectively. FRB stock was$4.13 million and$2.97 million atDecember 31, 2022 and 2021, respectively. 25
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The following table summarizes investment activities:
December 31,
2022 2021 2020
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 and agency obligations $ 2,390 0.68 % $ 1,633 0.60 % $ 2,245 1.38 %
U.S. treasury obligations 51,951 14.86 % 53,183 19.61 5,657 3.47
Municipal obligations 172,849 49.47 % 123,667 45.58 99,088 60.81
Corporate obligations 6,990 2.00 % 9,336 3.44 10,663 6.54
Mortgage-backed securities 29,653 8.48 % 14,636 5.40 7,669 4.71
Collateralized mortgage obligations 82,131 23.50 % 63,067 23.25 31,189 19.14
Asset-backed securities 3,531 1.01 % 5,740 2.12 6,435 3.95
Total securities available-for-sale $ 349,495 100.00 % $ 271,262 100.00 % $ 162,946 100.00 %
Securities available-for-sale were $349.50 million at December 31, 2022 ,
an increaseof $78.24 million , or 28.8%, from $271.26 million at December 31,
2021 . The FCB acquisition included acquired securities of $126.12 million .
However, immediately following the acquisition, a restructure of FCB's portfolio
was incurred to better align the acquired portfolio with Eagle's investment
strategy. Excluding securities acquired, securities decreased by $47.89 million .
The decrease was primarily due to unrealized losses at December 31,
2022 resulting from increased interest rates. In addition, the decrease was
impacted by sales, maturity, principal payments and call activity, which were
largely offset by purchases.
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, 2022
One Year or Less One to Five Years Five to Ten Years After Ten Years Total Investment Securities
Weighted Weighted Weighted Weighted Approximate Weighted
Fair Value Average Yield FairValue Average Yield Fair Value Average Yield Fair Value
Average Yield Fair Value Market Value Average Yield
(Dollars in Thousands)
Securities available-for-sale:
U.S. government and agency
obligations $ - 0.00 % $ - 0.00 % $ 2,390 3.94 % $ - 0.00 % $ 2,390 $ 2,390 2.94 %
U.S. treasury obligations 6,270 1.20 4,699 2.78 40,982 1.46 - 0.00 51,951 51,951 1.55
Municipal obligations 4,932 2.97 12,890 2.99 34,905 2.86 120,122 3.58 172,849 172,849 3.37
Corporate obligations 2,995 5.59 956 3.00 3,039 4.99 - 0.00 6,990 6,990 3.97
Mortgage-backed securities 1,250 2.39 4,318 3.52 4,046 3.40 20,039 3.79 29,653 29,653 3.14
Collateralized mortgage
obligations - 0.00 8,859 3.51 1,168 3.55 72,104 3.33 82,131 82,131 3.36
Asset-backed securities - 0.00 - 0.00 - 0.00 3,531 5.47 3,531 3,531 5.47
Total securities
available-for-sale $ 15,447 2.71 % $ 31,722 3.18 % $ 86,530 2.34 % $ 215,796 3.55 % $ 349,495 $ 349,495 3.11 %
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Lending Activities
The following table includes the composition of the Bank's loan portfolio by
loan category:
December 31,
2022 2021 2020 2019 2018
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)$ 135,947 10.03 %$ 101,180 10.82 %$ 110,802 13.14 %$ 119,296 15.28 %$ 116,939 18.92 % Residential 1-4 family construction 59,756 4.41 45,635 4.88 46,290 5.49 38,602 4.95 27,168 4.40 Total residential 1-4 family 195,703 14.44 146,815 15.70 157,092 18.63 157,898 20.23 144,107 23.32 Commercial real estate 539,070 39.76 410,568 43.92 316,668 37.56 331,062 42.41 256,784 41.54 Commercial construction and development 151,145 11.15 92,403 9.88 65,281 7.74 52,670 6.75 41,739 6.75 Farmland 136,334 10.06 67,005 7.17 65,918 7.82 50,293 6.44 29,915 4.84 Total commercial real estate 826,549 60.97 569,976 60.97 447,867 53.12 434,025 55.60 328,438 53.13 Total real estate loans 1,022,252 75.41 716,791 76.67 604,959 71.75 591,923 75.83 472,545 76.45 Other loans: Home equity 74,271 5.48 51,748 5.54 56,563 6.71 56,414 7.23 52,159 8.44 Consumer 27,609 2.04 18,455 1.97 20,168 2.39 18,882 2.42 16,565 2.68 Commercial 127,255 9.39 101,535 10.86 109,209 12.95 72,797 9.33 59,053 9.56 Agricultural 104,036 7.68 46,335 4.96 52,242 6.20 40,522 5.19 17,709 2.87 Total commercial loans 231,291 17.07 147,870 15.82 161,451 19.15 113,319 14.52 76,762 12.43 Total other loans 333,171 24.59 218,073 23.33 238,182 28.25 188,615 24.17 145,486 23.55 Total loans 1,355,423 100.00 % 934,864 100.00 % 843,141 100.00 % 780,538 100.00 % 618,031 100.00 % Deferred loan fees (1,745 ) (1,725 ) (2,038 ) (1,303 ) (1,098 ) Allowance for loan losses (14,000 ) (12,500 ) (11,600 ) (8,600 ) (6,600 ) Total loans, net$ 1,339,678 $ 920,639 $ 829,503 $ 770,635 $ 610,333
(1) Excludes loans held-for-sale
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Loans receivable, net increased$419.04 million , or 45.5%, to$1.34 billion atDecember 31, 2022 from$920.64 million atDecember 31, 2021 . The increase was impacted by the FCB acquisition, which included$190.89 million of acquired loans. Excluding acquired loans, loans receivable, net increased by$228.15 million . Including acquired loans, total commercial real estate loans increased$256.57 million , total commercial loans increased$83.42 million , total residential loans increased$48.88 million , home equity loans increased$22.52 million and consumer loans increased$9.15 million . Total loan originations were$1.13 billion for the year endedDecember 31, 2022 . Total residential 1-4 family originations were$635.03 million , which includes$532.56 million of originations of loans held-for-sale. Total commercial real estate originations were$315.35 million . Total commercial originations were$124.92 million . Home equity loan originations totaled$39.79 million . Consumer loan originations totaled$14.97 million . Loans held-for-sale decreased by$17.57 million , to$8.25 million atDecember 31, 2022 from$25.82 million atDecember 31, 2021 . Loan Maturities. The following table sets forth the estimated maturity of the loan portfolio of the Bank atDecember 31, 2022 . 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 having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months.
After One After Five After
One Year Year to Five Years to Fifteen
or Less Years Fifteen Years Years Total
Total residential 1-4 family (1)
70,429 38,793 172,134 545,193 826,549
Home equity 4,328 22,435 46,158 1,350 74,271
Consumer 1,745 18,339 7,206 319 27,609
Total Commercial 74,760 79,614 73,815 3,102 231,291
Total loans (1) $ 204,328 $ 164,569 $ 323,976 $ 662,550 $ 1,355,423 (1) Excludes loans held-for-sale
The following table includes loans by fixed or adjustable rates atDecember 31, 2022 : Fixed Adjustable Total (Dollars in Thousands) Due afterDecember 31, 2022 Total residential 1-4 family (1)$ 44,719 $ 97,918 $ 142,637 Total commercial real estate 117,848 638,272 756,120 Home equity 4,058 65,885 69,943 Consumer 24,275 1,589 25,864 Total commercial 100,778 55,753 156,531 Total due after December 31, 2022 291,677 859,417 1,151,095 Due in less than one year 150,280 54,048 204,328 Total loans (1)$ 441,958 $ 913,465 $ 1,355,423 Percent of total 32.61 % 67.39 % 100.00 %
(1) Excludes loans held-for-sale
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Delinquent Loans. The following table provides information regarding the Bank's
delinquent loans:
December 31, 2022
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 7 $ 1,798 32.02 % 1 $ 330 30.67 %
Residential 1-4
family construction 2 500 8.91 - - 0.00
Commercial real
estate 2 780 13.89 - - 0.00
Farmland 6 1,620 28.86 - - 0.00
Other loans:
Home equity 4 226 4.03 - - 0.00
Consumer 58 93 1.66 - - 0.00
Commercial 8 597 10.63 2 746 69.33
Total 87 $ 5,614 100.00 % 3 $ 1,076 100.00 %
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Nonperforming Assets. The following table sets forth information regarding
nonperforming assets:
December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential 1-4 family $ 483 $ 616 $ 684 $ 618 $ 253
Residential 1-4 family construction - 337 337 337 634
Commercial real estate 350 497 631 583 432
Commercial construction and development - - 36 50 13
Farmland 143 989 2,245 323 -
Other loans:
Home equity 96 100 94 78 469
Consumer 25 62 151 156 127
Commercial 44 516 537 750 308
Agricultural 1,059 1,718 1,542 499 32
Accruing loans delinquent 90 days or
more
Real estate loans:
Residential 1-4 family 330 - 34 4 130
Residential 1-4 family construction - - 170 - -
Commercial real estate - - - - 1,347
Other loans:
Commercial 746 - 6 - -
Agricultural - - 182 1,805 -
Restructured loans
Real estate loans:
Commercial real estate 3,264 1,527 1,633 - -
Commercial construction and development - - 14 - -
Farmland 611 641 - 153 -
Other loans:
Home equity 11 15 17 20 22
Commercial 140 - - 74 -
Agricultural 476 41 160 - -
Total nonperforming loans 7,778 7,059 8,473 5,450 3,767
Real estate owned and other repossessed
property, net - 4 25 26 107
Total nonperforming assets $ 7,778 $ 7,063 $ 8,498 $ 5,476 $ 3,874
Total nonperforming loans to total loans 0.57 % 0.76 % 1.00 % 0.70 % 0.61 %
Total nonperforming loans to total
assets 0.40 % 0.49 % 0.67 % 0.52 % 0.44 %
Total nonaccrual loans to total loans 0.24 % 0.59 % 0.74 % 0.47 % 0.37 %
Total nonperforming assets to total
assets 0.40 % 0.49 % 0.68 % 0.52 % 0.45 %
Nonaccrual loans as of December 31, 2022 and 2021 include $694,000 and $492,000 ,
respectively of acquired loans that deteriorated subsequent to the acquisition
date. During the year ended December 31, 2022 and 2021, an insignificant amount
of interest was recorded on loans previously accounted for on a nonaccrual
basis.
During the year ended December 31, 2022 , the Bank sold three real estate owned
and other repossessed assets resulting in a net gain of $185,000 . There was
one write-up on real estate owned and other repossessed assets for a gain of
$18,000 during the year ended December 31, 2022 . During the year ended December
31, 2021 , the Bank sold three real estate owned and other repossessed assets
resulting in a net gain of $12,000 . There was one write-up on real estate owned
and other repossessed assets for a gain of $10,000 during the year ended
December 31, 2021 .
Management, in compliance with regulatory guidelines, conducts an internal loan
review program, whereby loans are placed or classified in categories depending
upon the level of risk of nonpayment or loss. These categories are special
mention, substandard, doubtful or loss. When a loan is classified as substandard
or doubtful, management is required to evaluate the loan for impairment and
establish an allowance for loan loss if deemed necessary. When management
classifies a loan as a loss asset, an allowance equaling up to 100.0% of the
loan balance is required to be established or the loan is required to be
charged-off. The allowance for loan losses is composed of an allowance for both
inherent risk associated with lending activities and specific problem assets.
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Management's evaluation of classification of assets and adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by regulatory agencies as part of their examination process. We also utilize a third-party review as part of our loan classification process. In addition, on an annual basis or more often if needed, the Company formally reviews the ratings of all commercial real estate, real estate construction, and commercial business loans that have a principal balance of$750,000 or more.
The following table reflects our classified assets:
December 31, 2022
Special
Mention Substandard Doubtful Loss Total
(In Thousands)
Real estate loans:
Residential 1-4 family $ 515 $ 353 $ - $ - $ 868
Residential 1-4 family
construction - - - - -
Commercial real estate 16,833 1,732 - - 18,565
Commercial construction and
development 1,044 - - - 1,044
Farmland 2,232 2,456 - - 4,688
Other loans:
Home equity - 124 - - 124
Consumer 10 39 - - 49
Commercial 1,476 736 8 - 2,220
Agricultural 311 2,182 102 - 2,595
Total loans 22,421 7,622 110 - 30,153
Real estate owned/repossessed
property, net -
$ 30,153
December 31, 2021
Special
Mention Substandard Doubtful Loss Total
(In Thousands)
Real estate loans:
Residential 1-4 family $ - $ 301 $ 199 $ - $ 500
Residential 1-4 family
construction - 337 - - 337
Commercial real estate 1,527 2,145 - - 3,672
Commercial construction and
development - - - - -
Farmland 177 1,744 47 - 1,968
Other loans:
Home equity - 134 - - 134
Consumer - 63 - - 63
Commercial 130 524 - - 654
Agricultural 332 1,444 9 - 1,785
Total loans 2,166 6,692 255 - 9,113
Real estate owned/repossessed
property, net 4
$ 9,117
The increase in special mention for commercial real estate of $15.30 million
from December 31, 2021 to December 31, 2022 was largely related to one customer
relationship. The outstanding balance of $10.08 million at December 31, 2022 was
paid off during the three months ended March 31, 2023 .
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Allowance for Loan Losses. The Bank segregates its loan portfolio for loan losses into the following broad categories: residential 1-4 family, commercial real estate, home equity, consumer and commercial. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above. General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local and national economy. At least quarterly, the management of the Bank evaluates the need to establish an allowance for losses on specific loans when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectability may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. AtDecember 31, 2022 , we had$14.00 million in allowances for loan losses. While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. In originating loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan.
It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis.
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The following table includes information for allowance for loan losses:
Years Ended
December 31,
2022 2021 2020
(Dollars in Thousands)
Beginning balance $ 12,500 $ 11,600 $ 8,600
Provision for loan losses 2,001 861 3,130
Charge-offs
Residential 1-4 Family (199 ) - -
Commercial real estate - (35 ) (18 )
Home equity (32 ) - -
Consumer (31 ) (16 ) (36 )
Commercial (299 ) (6 ) (173 )
Recoveries
Residential 1-4 Family 4 - -
Commercial real estate 30 21 12
Home equity - - -
Consumer 4 8 16
Commercial 22 67 69
Net loan (recoveries) charge-offs s (501 ) 39 (130 )
Ending balance $ 14,000 $ 12,500 $ 11,600
Allowance for loan losses to total loans
excluding loans held-for-sale 1.03 % 1.34 % 1.38 %
Allowance for loan losses to total
nonperforming loans 179.99 % 177.08 % 136.91 %
Allowance for loan losses to nonaccrual loans 424.50 % 227.65 % 184.89 %
Net (recoveries) charge-offs to average loans
outstanding during the period -0.04 % 0.00 % -0.01 %
Net charge-offs to average loans outstanding for each loan category are considered insignificant for the periods presented in the table above.
The following table presents allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans:
December 31,
2022 2021 2020
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 $ 1,472 10.51 % 14.44 % $ 1,596 12.77 % 15.70 % $ 1,506 12.98 % 18.63 %
Commercial real estate 9,037 64.55 60.97 7,470 59.76 60.97 6,951 59.92 53.12
Total real estate loans 10,509 75.06 75.41 9,066 72.53 76.67 8,457 72.90 71.75
Other loans:
Home equity 509 3.64 5.48 533 4.26 5.54 515 4.44 6.71
Consumer 342 2.44 2.04 365 2.92 1.97 364 3.14 2.39
Commercial 2,640 18.86 17.07 2,536 20.29 15.82 2,264 19.52 19.15
Total other loans 3,491 24.94 24.59 3,434 27.47 23.33 3,143 27.10 28.25
Total $ 14,000 100.00 % 100.00 % $ 12,500 100.00 % 100.00 % $ 11,600 100.00 % 100.00 %
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Deposits and Other Sources of Funds
Deposits. Deposits are the Company's primary source of funds. Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are checking, savings, money market and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits were$1.41 billion or 86.1% of the Bank's total deposits atDecember 31, 2022 ($1.38 billion or 84.4% excluding IRA certificates of deposit). The presence of a high percentage of core deposits and, in particular, transaction accounts reflects in part of our strategy to restructure our liabilities to more closely resemble the lower cost of liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds.
The following table includes deposit accounts and associated weighted average interest rates for each category of deposits:
December 31,
2022 2021 2020
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Amount of Total Rate Amount of Total Rate Amount of Total Rate
(Dollars in Thousands)Noninterest checking$ 468,955 28.68 % 0.00 %$ 368,846 30.16 % 0.00 %$ 318,389 30.82 % 0.00 % Interest-bearing checking 252,922 15.47 0.11 203,410 16.64 0.02 160,614 15.55 0.02 Savings 273,790 16.74 0.06 223,069 18.25 0.06 179,868 17.41 0.06 Money market 387,947 23.72 1.12 277,469 22.7 0.25 202,407 19.59 0.24 Total 1,383,614 84.61 0.34 1,072,794 87.75 0.08 861,278 83.37 0.07 Certificates of deposit accounts: IRA certificates 24,907 1.52 0.48 25,333 2.07 0.44 24,693 2.39 0.50 Brokered certificates - - 0.00 - 0.00 0.00 495 0.05 1.35 Other certificates 226,751 13.87 1.51 124,422 10.18 0.38 146,617 14.19 0.71 Total certificates of deposit 251,658 15.39 1.41 149,755 12.25 0.39 171,805 16.63 0.68 Total deposits$ 1,635,272 100.00 % 0.50 %$ 1,222,549 100.00 % 0.12 %$ 1,033,083 100.00 % 0.18 % Deposits increased by$412.72 million , or 33.8%, to$1.64 billion atDecember 31, 2022 from$1.22 billion atDecember 31, 2021 . A large portion of the deposit increase was due to the FCB acquisition, which brought on$321.11 million in deposits. Excluding acquired deposits, total deposits increased by$91.61 million . Including acquired deposits, money market increased by$110.48 million , certificates of deposits increasedby$101.90 million , noninterest checking increased by$100.11 million , savings increased by$50.72 million , and interest-bearing checkingincreased by$49.51 million .
At
The following table shows the amount of certificates of deposit with balances of$250,000 and greater by time remaining until maturity as ofDecember 31, 2022 : Balance$250,000 and Greater (In Thousands) 3 months or less $ 33,410 Over 3 to 6 months 4,550 Over 6 to 12 months 11,557 Over 12 months 15,686 Total $ 65,203
Our depositors are primarily residents of the state of
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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 ofDes Moines to supplement our supply of lendable funds and to meet deposit withdrawal requirements. The Bank has Federal funds lines of credit with PCBB, PNC, TIB and UBB. Eagle has a line of credit withBell Bank . Advances from FHLB and other borrowings increased by$64.39 million to$69.39 million atDecember 31, 2022 from$5.00 million atDecember 31, 2021 . The increase was related to funding loan growth. The weighted average rate for borrowings was 4.52% as ofDecember 31, 2022 , compared to 1.81% atDecember 31, 2021 . Other Long-Term Debt. The following table summarizes other long-term debt activity: December 31, December 31, 2022 2021 Net Percent Net Percent Amount of Total Amount of Total (Dollars in Thousands) Senior notes fixed at 5.75%, due 2022 $ - 0.00 %$ 9,996 33.47 % Subordinated debentures fixed at 5.50% to floating, due 2030 14,751 25.07 14,718 49.27 Subordinated debentures fixed at 3.50% to floating, due 2032 38,938 66.17 - 0.00 Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035 5,155 8.76 5,155 17.26 Total other long-term debt, net$ 58,844 100.00 %$ 29,869 100.00 %
Total other long-term debt was
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Table of Contents Shareholders' Equity Total shareholders' equity increased slightly by$1.69 million or 1.1%, to$158.42 million atDecember 31, 2022 from$156.73 million atDecember 31, 2021 . This increase was primarily the result of stock issued in connection with the FCB acquisition of$28.35 million in addition to net income of$10.70 million . The increase was largely offset by an increase in other comprehensive loss of$29.85 million , net of tax, related to net unrealized losses in securities available-for-sale, reflecting increases in market interest rates, as well as treasury stock purchases of$4.43 million and dividends paid of$4.06 million .
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, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020
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 $ 336,779 $ 8,579 2.55 % $ 215,978 $ 4,238 1.96 % $ 166,577 $ 3,742 2.24 %
FHLB and FRB stock 6,369 302 4.74 4,831 255 5.28 6,534 370 5.65
Loans receivable(1) 1,194,788 60,353 5.05 914,804 45,134 4.93 874,669 45,381 5.17
Other earning assets 34,170 228 0.67 74,102 120 0.16 44,771 161 0.36
Total interest
earning assets 1,572,106 69,462 4.42 1,209,715 49,747 4.11 1,092,551 49,654 4.54
Noninterest earning
assets 196,813 147,534 127,339
Total assets $ 1,768,919 $ 1,357,249 $ 1,219,890
Liabilities and
equity:
Interest-bearing
liabilities:
Deposit accounts:
Checking $ 244,208 $ 173 0.07 % $ 190,645 $ 47 0.02 % $ 151,745 $ 58 0.04 %
Savings 269,033 128 0.05 198,648 117 0.06 154,224 145 0.09
Money market 358,122 1,711 0.48 244,113 545 0.22 169,531 473 0.28
Certificates of
deposit 188,954 1,112 0.59 158,959 765 0.48 213,696 2,938 1.37
FHLB advances and
other borrowings 14,627 514 3.51 9,411 175 1.86 76,119 1,183 1.55
Other long-term debt 59,807 2,512 4.20 29,834 1,558 5.22 28,593 1,687 5.88
Total
interest-bearing
liabilities 1,134,751 6,150 0.54 831,610 3,207 0.39 793,908 6,484 0.81
Noninterest checking 453,841 346,243 265,304
Other
noninterest-bearing
liabilities 24,672 22,382 19,518
Total liabilities 1,613,264 1,200,235 1,078,730
Total equity 155,655 157,014 141,160
Total liabilities and
equity $ 1,768,919 $ 1,357,249 $ 1,219,890
Net interest
income/interest rate
spread(2) $ 63,312 3.88 % $ 46,540 3.72 % $ 43,170 3.73 %
Net interest
margin(3) 4.03 % 3.85 % 3.94 %
Total interest
earning assets to
interest-bearing
liabilities 138.54 % 145.47 % 137.62 %
(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.
36
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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, 2022 Year Ended December 31, 2021
Due to Due to
Volume Rate Net Volume Rate Net
(In Thousands)
Interest earning assets:
Investment securities $ 2,370 $ 1,971 $ 4,341 $ 1,110 $ (614 ) $ 496
FHLB and FRB stock 81 (34 ) 47 (96 ) (19 ) (115 )
Loans receivable(1) 13,814 1,405 15,219 2,082 (2,329 ) (247 )
Other earning assets (65 ) 173 108 105 (146 ) (41 )
Total interest earning assets 16,200 3,515 19,715 3,201 (3,108 ) 93
Interest-bearing liabilities: Checking 13 113 126 15 (26) (11) Savings 41 (30) 11 42 (70) (28) Money market 255 911 1,166 208 (136) 72 Certificates of deposit 144 203 347 (753 ) (1,420 ) (2,173 ) FHLB advances and other borrowings 97 242 339 (1,037 ) 29 (1,008 ) Other long-term debt 1,565 (611 ) 954 73 (202 ) (129 ) Total interest-bearing liabilities 2,115 828
2,943 (1,452 ) (1,825 ) (3,277 )
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 endedDecember 31, 2022 was$10.70 million compared to$14.42 million for the year endedDecember 31, 2021 . The decrease of$3.72 million was primarily due to a decrease in noninterest income of$19.96 million . This decrease was largely offset by an increase in net interest income after loan loss provision of$15.63 million . Basic and diluted earnings per common share were both$1.45 for the year endedDecember 31, 2022 . Basic and diluted earnings per common share were both$2.17 for the prior period. Net Interest Income Net interest income increased to$63.31 million for the year endedDecember 31, 2022 , from$46.54 million for the year endedDecember 31, 2021 . This increase of$16.77 million , or 36.0%, was primarily the result of an increase in interest and dividend income of$19.71 million . This increase was offset by an increase in interest expense of$2.94 million . Interest and Dividend Income Interest and dividend income was$69.46 million for the year endedDecember 31, 2022 , compared to$49.75 million for the year endedDecember 31, 2021 , an increase of$19.71 million , or 39.6%. Interest and fees on loans increased to$60.35 million for the year endedDecember 31, 2022 from$45.13 million for the same period endedDecember 31, 2021 . This increase of$15.22 million , or 33.7%, was largely due to an increase in the average balance of loans. Average balances for loans receivable, including loans held-for-sale, for the year endedDecember 31, 2022 were$1.19 billion , compared to$914.80 million for the year endedDecember 31, 2021 . This increase of$279.99 million , or 30.6% was impacted by the FCB acquisition, as well as organic growth. In addition, the average interest rate earned on loans receivable increased by 12 basis points, from 4.93% for the year endedDecember 31, 2021 , to 5.05% for the year endedDecember 31, 2022 . Interest accretion on purchased loans was$1.56 million for the year endedDecember 31, 2022 , which resulted in a 10 basis point increase in net interest margin compared to$579,000 for the year endedDecember 31, 2021 , which resulted in a 5 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by$4.34 million or 102.4% period over period. Average balances for investments increased to$336.78 million for the year endedDecember 31, 2022 , from$215.98 million for the year endedDecember 31, 2021 . The increase in average investment balances was largely driven by the FCB acquisition. Average interest rates earned on investments also increased to 2.55% for the year endedDecember 31, 2022 from 1.96% for the year endedDecember 31, 2021 . 37
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Table of Contents Interest Expense Total interest expense was$6.15 million for the year endedDecember 31, 2022 , increasing from$3.21 million for the year endedDecember 31, 2021 . The increase of$2.94 million , or 91.6%, was due to an increase of$1.65 million in interest expense on deposits and a net increase of$1.28 million in interest expense on total borrowings. The average balance for total deposits was$1.51 million for the year endedDecember 31, 2022 , compared to$1.14 million for the year endedDecember 31, 2021 . The increase in average deposit balances was due to the FCB acquisition but was also driven by organic growth. In addition, the overall average rate on total deposits was 0.21% for the year endedDecember 31, 2022 , compared to 0.13% for the year endedDecember 31, 2021 . The average balance for total borrowings increased from$39.25 million for the year endedDecember 31, 2021 to$74.43 million for the year endedDecember 31, 2022 . The increase was impacted by the issuance of$40.00 million of subordinated notes inJanuary 2022 . A portion of the net proceeds were used to redeem$10.00 million of senior notes due inFebruary 2022 . However, the average rate paid on total borrowings decreased from 4.42% for the year endedDecember 31, 2021 , to 4.07% for the year endedDecember 31, 2022 . The decrease in the average rate paid was due to the change in the mix of the outstanding borrowings. Loan Loss Provision Loan loss provisions are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank's policies require the review of assets on a quarterly basis. The Bank classifies loans if warranted. While management believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. Using this methodology, the Bank recorded$2.00 million in loan loss provisions for the year endedDecember 31, 2022 , compared to$861,000 in loan loss provisions for the year endedDecember 31, 2021 . The increase in the loan loss provision was largely due to loan growth. Management believes the level of total allowances is adequate to cover estimated losses inherent in the portfolio. However, if the economic outlook worsens relative to the assumptions we utilized, our allowance for loan losses will increase accordingly in future periods. Total nonperforming loans, including restructured loans, net, was$7.78 million atDecember 31, 2022 compared to$7.06 million atDecember 31, 2021 . There was no other real estate owned and other repossessed assets atDecember 31, 2022 compared to$4,000 atDecember 31, 2021 . Noninterest Income Total noninterest income was$26.22 million for the year endedDecember 31, 2022 , compared to$46.18 million for the year endedDecember 31, 2021 . The decrease of$19.96 million , or 43.2% was primarily due to a decrease in a mortgage banking, net of$21.55 million for the year endedDecember 31, 2022 . Mortgage banking, net includes net gain on sale of mortgage loans which decreased$27.48 million to$18.61 million for the year endedDecember 31, 2022 , compared to$46.09 million for the year endedDecember 31, 2021 . This change reflects a mortgage market that has returned to more normal levels after record levels were reached in 2020 and 2021. During the year endedDecember 31, 2022 ,$551.02 million residential mortgage loans were sold compared to$1.06 billion in the prior year. In addition, gross margin on sale of mortgage loans for the year endedDecember 31, 2022 was 3.38% compared to 4.34% for the year endedDecember 31, 2021 . There has been margin compression due to increased competition. Mortgage banking, net also includes the impact of fair value changes of loans held-for sale and derivatives. The net change in fair value of loans held-for-sale and derivatives was a loss of$1.84 million for the year endedDecember 31, 2022 compared to a loss of$5.44 million for the year endedDecember 31, 2021 . Noninterest Expense Noninterest expense was$73.68 million for the year endedDecember 31, 2022 , compared to$72.58 million for the year endedDecember 31, 2021 , a slight increase of$1.10 million , or 1.5%. Acquisition costs were$2.30 million during the year endedDecember 31, 2022 , compared to$761,000 during the prior year. Occupancy and equipment also increased by$1.15 million due to office expansion and the corresponding depreciation and amortization expense, as well as utilization and maintenance costs. These increases were largely offset by a decrease in salaries and employee benefits of$4.25 million due to lower commissions paid on residential mortgage originations. Provision for Income Taxes Provision for income taxes was$3.15 million for the year endedDecember 31, 2022 , compared to$4.86 million for the year endedDecember 31, 2021 due to decreased income before provision for income taxes. The effective tax rate was 22.7% for the year endedDecember 31, 2022 compared to 25.2% for the prior year. 38
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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 ofDes Moines . The Bank exceeded those minimum ratios as ofDecember 31, 2022 and 2021. The Company's primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB ofDes Moines and other borrowings. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Company uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit and demand deposit withdrawals. In addition, the Bank uses liquidity resources for investment purposes, to meet operating expenses and capital expenditures, for dividend payments and stock repurchases and to maintain adequate liquidity levels. Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable based in part on Eagle's commitments to make loans and management's assessment of Eagle's ability to generate funds.
Comparison of Cash Flow for Years Ended
Net cash provided by the Company's operating activities, which is primarily comprised of cash transactions affecting net income, was$41.91 million for the year endedDecember 31, 2022 compared to$56.45 million for the prior year. Net cash provided by operating activities was lower for the year endedDecember 31, 2022 primarily due to changes in loans held-for-sale activity. Net cash used in the Company's investing activities, which is primarily comprised of cash transactions related to activity in the loan portfolio and investment securities, was$235.04 million for the year endedDecember 31, 2022 compared to$232.92 million for the year endedDecember 31, 2021 . Net cash used in investing activities for the year endedDecember 31, 2022 was due in part to loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was$234.26 million for the year endedDecember 31, 2022 . In addition, available-for-sale securities purchases were$77.07 million during the year endedDecember 31, 2022 , more than offset by available-for sale securities sales and maturities, principal payments and calls of$82.95 million . Investing activities was also impacted by net cash received from acquisitions of$13.40 million . Available-for-sale securities purchases were$132.18 million during the year endedDecember 31, 2021 . Net cash used in investing activities for the year endedDecember 31, 2021 , was also impacted by loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was$98.67 million for the year endedDecember 31, 2021 . Net cash provided by the Company's financing activities was$153.51 million for the year endedDecember 31, 2022 compared to$168.10 million for the year endedDecember 31, 2021 . Net cash provided by financing activities for the year endedDecember 31, 2022 was largely impacted by a net increase in deposits of$91.62 million . In addition, net short-term advances from FHLB and other borrowings increased by$69.39 million and subordinated debentures of$40.00 million were issued. These increases were partially offset by a net decrease in repurchase agreements of$22.85 million and the repayment of$10.00 million of subordinated debentures. Net cash provided by financing activities for the year endedDecember 31, 2021 was impacted by a net increase in deposits of$189.47 million . This was slightly offset by net payment on FHLB and other borrowings of$12.07 million . 39
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Table of Contents Capital Resources AtDecember 31, 2022 , 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 12.6% compared to an increase of 8.90% atDecember 31, 2021 . The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity. The Bank's Tier 1 leverage ratio, as measured underState of Montana and FRB rules, decreased from 10.96% as ofDecember 31, 2021 to 9.82% as ofDecember 31, 2022 . The Bank's strong capital position helps to mitigate its interest rate risk exposure. As ofDecember 31, 2022 , the Company's regulatory capital was in excess of all applicable regulatory requirements and is deemed "well capitalized" pursuant toState of Montana and FRB rules. AtDecember 31, 2022 , the Bank's total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios amounted to 13.04%, 12.14%, 12.14% and 9.82%, respectively, compared to regulatory requirements of 10.50%, 8.50%, 7.00% and 4.00%, respectively.
Impact of Inflation and Changing Prices
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-earning assets and interest-bearing liabilities, the
impact of interest fluctuations on asset prepayments and the mix of
interest-bearing assets and liabilities.
Although interest rate risk is inherent in the banking industry, banks are
expected to have sound risk management practices in place to measure, monitor
and control interest rate exposures. The objective of interest rate risk
management is to contain the risks associated with interest rate fluctuations.
The process involves identification and management of the sensitivity of net
interest income to changing interest rates.
The ongoing monitoring and management of this risk is an important component of
the Company's asset/liability committee, which is governed by policies
established by the Company's Board that are reviewed and approved annually. The
Board delegates responsibility for carrying out the asset/liability management
policies to the Bank's asset/liability committee. In this capacity, the
asset/liability committee develops guidelines and strategies impacting the
Company's asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate levels
and trends. The Company's goal of its asset and liability management practices
is to maintain or increase the level of net interest income within an acceptable
level of interest rate risk. Our asset and liability policy and strategies are
expected to continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
The Bank has established acceptable levels of interest rate risk as follows for
an instantaneous and permanent shock in rates: Projected net interest income
over the next twelve months (i.e. year-1) and the subsequent twelve months (i.e.
year-2) will not be reduced by more than 15.0% given an immediate increase or
decrease in interest rates of up to 200 basis points or by more than 10.0% given
an immediate increase or decrease in interest rates of up to 100 basis points.
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Table of Contents
The following table includes the Banks's net interest income sensitivity
analysis.
Changes in Market Rate Sensitivity
Interest Rates As of December 31, 2022 Policy
(Basis Points) Year 1 Year 2 Limits
+200 -2.3% 8.2% -15.0%
+100 -0.9% 7.8% -10.0%
-100 -0.2% 3.9% -10.0%
-200 -0.7% 0.6% -15.0%
The following table discloses how the Bank's economic value of equity ("EVE") would react to interest rate changes.
Changes in Market EVE as a % Change from 0 Shock
Interest Rates As of December 31, 2022 Board Policy
(Basis Points) Projected EVE Limit
Maximum % change:
+400 4.4% -40.0%
+300 4.1% -35.0%
+200 3.2% -30.0%
+100 2.4% -20.0%
0 0.0% 0.0%
-100 -5.4% -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.
Commitments are summarized as follows:
December 31, 2022 2021 (In Thousands)
Commitments to extend credit
10,563 4,129
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