10-K 1 ebmt20231231_10k.htm FORM 10-K ebmt20231231_10k.htm
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Allowance for credit losses at December 31, 2023; allowance for loan losses at December 31, 2022. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended

December 31, 2023

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from

 

to

 

 

Commission file number

1-34682

 

Eagle Bancorp Montana, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-1449820

State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

 

1400 Prospect Avenue, Helena, MT

59601

(Address of principal executive offices)(Zip Code)

 

Registrant’s telephone number, including area code

406-442-3080

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock par value $0.01 per share

EBMT

Nasdaq Global Market

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

☐ Yes ☒ No

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

        ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer ☒ Smaller reporting company
   
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. 

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10d-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

Yes ☒ No

 

The aggregate market value of the common stock held by non-affiliates of Eagle, computed by reference to the closing price at which the stock was sold as of June 30, 2023 was $95,827,000. The outstanding number of shares of common stock of Eagle as of February 29, 2024 was 8,016,784.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s definitive Proxy Statement relating to its 2024 annual meeting of stockholders (“2024 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. The 2024 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end to which this report relates.

 

   

 

 

    Page
  PART I  
ITEM 1.  DESCRIPTION OF BUSINESS 2
ITEM 1A. RISK FACTORS 14
ITEM 1B. UNRESOLVED STAFF COMMENTS 21
ITEM 1C. CYBERSECURITY 21
ITEM 2. PROPERTIES 23
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. MINE SAFETY DISCLOSURES 23
  PART II  
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 24
ITEM 6.  [RESERVED] 25
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 43
ITEM 9A.  CONTROLS AND PROCEDURES 44
ITEM 9B. OTHER INFORMATION 44
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 44
  PART III  
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 45
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 45
  PART IV  
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES 45
ITEM 16.  FORM 10-K SUMMARY 48

 

 

  

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:

 

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the asset quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of the management of Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”) and Opportunity Bank of Montana (“OBMT” or the “Bank”), Eagle’s wholly-owned subsidiary, and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. 

 

The following factors, among others, could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

the emergence or continuation of widespread health emergencies or pandemics including the magnitude and duration of the COVID-19 pandemic, including but not limited to vaccine efficacy, steps taken by governmental and other authorities to contain, mitigate and combat the pandemic, adverse effects on our employees, customers and third-party service providers; 

 

local, regional, national and international economic and market conditions and political events, either nationally or in our market areas, and the impact they may have on us, our customers and our assets and liabilities;

 

competition among depository and other traditional and non-traditional financial services businesses;

 

risks related to the concentration of our business in Montana, including risks associated with changes in the prices, values and sales volume of residential and commercial real estate in Montana;

 

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

  the impact of continuing adverse developments affecting the U.S. banking industry, including the associated impact of any regulatory changes or other mitigation efforts taken by governmental agencies in response thereto;
 

our ability to attract deposits and other sources of funding or liquidity;

 

changes or volatility in the securities markets;

  the payment of dividends on our common stock is subject to regulatory supervision as well as the discretion of our Board of Directors, our performance and other factors;
 

our ability to implement our growth strategy, including identifying and consummating suitable acquisitions, raising additional capital to finance such transactions, entering new markets, possible failures in realizing the anticipated benefits from such acquisitions and an inability of our personnel, systems and infrastructure to keep pace with such growth;

 

the effect of acquisitions we may make, if any, including, without limitation, the failure to achieve expected revenue growth and/or expense savings from such acquisitions;

 

risks related to the integration of any businesses we have acquired or expect to acquire, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel;

 

potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

 

ownership dilution risk associated with potential mergers and acquisitions in which our stock may be issued as consideration for an acquired company;
  political developments, uncertainties or instability;
 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

the need to retain capital for strategic or regulatory reasons; 

 

changes in consumer spending, borrowing and savings habits;

 

our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;

 

possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

 

the level of future deposit insurance premium assessments;

 

our ability to develop and maintain secure and reliable information technology systems, effectively defend ourselves against cyberattacks, or recover from breaches to our cybersecurity infrastructure and our dependence on the technology of outside service providers;

 

the failure of assumptions underlying the establishment of allowance for possible credit losses and other estimates;

 

changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and

 

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting and auditing standard setters;

  our ability to appropriately address any environmental, social, governmental and sustainability concerns that may arise from our business activities.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. We caution that the foregoing list of risk factors is not exclusive and not to place undue reliance on forward-looking statements. 

 

 

 

PART I

 

 

ITEM 1.

DESCRIPTION OF BUSINESS.

 

Overview

 

Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”), a Delaware corporation, is a bank holding company registered under the Bank Holding Company Act of 1956 that holds 100% of the capital stock of Opportunity Bank of Montana (the “Bank”), formerly American Federal Savings Bank (“AFSB”). The Bank was founded in 1922 as a Montana-chartered building and loan association and has conducted operations and maintained its administrative office in Helena, Montana since that time. In 1975, the Bank adopted a federal thrift charter and in October 2014 converted to a Montana chartered commercial bank and became a member bank in the Federal Reserve System. The Bank currently has 29 full-service branches and 46 automated teller machines located in our market areas and we participate in the Money Pass® ATM network. The Bank also operated certain branches under the brand names Dutton State Bank, Farmers State Bank of Denton and The State Bank of Townsend. Effective January 3, 2022, these branches were rebranded and are now only operating as Opportunity Bank of Montana.

 

We provide loan and deposit services to customers who are predominantly small businesses and individuals throughout Montana. We are a diversified lender with a focus on residential mortgage loans, commercial real estate mortgage loans, commercial business loans, agricultural loans and second mortgage/home equity loan products.

 

The Bank is headquartered at 1400 Prospect Avenue, Helena, Montana, 59601. Investor information for the Company may be found at www.opportunitybank.com. The contents on or accessible through our website are not incorporated into this report.

 

Recent Events

 

Acquisitions

 

As a continuing part of its growth strategy, the Company intends to enhance its market share in Montana through organic growth and opportunistic acquisitions. Potential acquisitions are periodically evaluated by the Company's Merger and Acquisition Committee.

 

In April 2022, the Company acquired First Community Bancorp, Inc. ("FCB"), a Montana corporation, and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank.  In the transaction, Eagle acquired nine retail bank branches and two loan production offices in Montana. The total consideration paid was $38.58 million and included cash consideration of $10.23 million and common stock issued of $28.35 million.

 

In January 2020, the Company acquired Western Holding Company of Wolf Point, a Montana corporation (“WHC”), and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point, a Montana chartered commercial bank (“WB”) merged into the Bank. In the transaction, Eagle acquired one retail branch in Wolf Point, Montana. The total consideration paid was $14.97 million and included cash consideration of $6.50 million and common stock issued of $8.47 million. 

 

In January 2019, the Company acquired Big Muddy Bancorp, Inc. (“BMB”).This acquisition included four branches in Townsend, Dutton, Denton and Choteau, Montana. The total consideration paid was $16.44 million of Eagle common stock issued. 

 

In January 2018, the Company acquired TwinCo, Inc. (“TwinCo”). This acquisition included two branches in Madison County, Montana. The total consideration paid was $18.93 million and included cash consideration of $9.90 million and common stock issued of $9.03 million.

 

 

 

Business Strategy

 

Our principal strategy is to continue our profitability through building a diversified loan portfolio and operating the Bank as a full-service community bank that offers both retail and commercial loan and deposit products in all of its markets. We offer mortgage loans, the majority of which are sold on the secondary market with loan servicing retained. We believe that this focus will enable us to continue to grow our franchise, while maintaining our commitment to customer service, high asset quality and sustained net earnings.

 

The following are the key elements of our business strategy:

 

 

Continue to diversify our portfolio by emphasizing our growth in commercial real estate and commercial business loans, including agricultural loans, as a complement to our single family residential real estate lending while maintaining disciplined credit underwriting standards. As of December 31, 2023, commercial real estate and commercial business loans constituted approximately 78.64% of total loans;

 

 

Continue to emphasize the attraction and retention of core deposits;

 

 

Seek opportunities where presented to acquire other institutions or expand our branch network through opening new branches and/or loan production offices;

 

 

Maintain our strong asset quality; and

 

 

Operate as a community-oriented financial institution that offers a broad array of financial products and services with focus on the customer experience.

 

Our results of operations may be significantly affected by our ability to effectively implement our business strategy including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage acquired or merged businesses or attract significant new business through our branching efforts, our financial performance may be negatively affected.

 

Market Areas

 

We conduct business through our headquarters in Helena, Montana, in addition to 27 other full-service branches located in Ashland, Big Timber, Billings, Bozeman, Butte, Choteau, Culbertson, Denton, Dutton, Froid, Glasgow, Great Falls, Hamilton, Helena, Hinsdale, Livingston, Missoula, Sheridan, Three Forks, Townsend, Twin Bridges, Winifred and Wolf Point, Montana.

 

Montana is one of the largest states in terms of land mass but ranks as one of the least populated states. According to U.S. Census Bureau data for 2020, it had a population of 1.08 million. Helena is Montana’s state capital and is the county seat of Lewis and Clark County. It is located within 120 miles of four of Montana's other five largest cities: Missoula, Great Falls, Bozeman and Butte, and is approximately midway between Yellowstone and Glacier National Parks. Significant contributors to Montana's economy are agriculture, construction, energy production, forestry, healthcare, manufacturing, mining and the service industry. Tourism is also a large part of Montana's economy and is highly influenced by national parks, ski resorts, lakes and rural scenic areas.

 

The following table reflects our deposit market share and ranking by county:

 

County

 

Total Market Share Percentage (1)

   

Deposit Market Share Rank (1)

 

Broadwater, MT

    100.00 %     1  

Cascade, MT

    0.91       9  

Fergus, MT

    6.35       5  

Gallatin, MT

    4.84       7  

Lewis and Clark, MT

    13.34       4  

Madison, MT

    36.27       2  

Missoula, MT

    1.81       9  

Park, MT

    8.83       5  

Ravalli, MT

    3.29       7  

Roosevelt, MT

    60.44       1  
Rosebud, MT     8.29       3  

Silver Bow, MT

    11.00       4  

Sweet Grass, MT

    36.45       2  

Teton, MT

    18.15       2  
Valley, MT     53.71       1  

Yellowstone, MT

    0.79       9  

 

(1) Source: FDIC.gov-data as of June 30, 2023.

 

 

 

Competition

 

We face strong competition in our primary market areas for retail deposits and the origination of loans from both banks and non-bank competitors. Historically, Montana was a unit banking state. This means that the ability of Montana state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of independent financial institutions serving a single community in a single location. While the state’s population is approximately 1.12 millionpeople, there are 45 credit unions in Montana as well as one state-chartered thrift institution and 35 commercial banks as of December 31, 2023. Our most direct competition for depositors has historically come from national banks, super-regional banks, locally owned banks, nontraditional internet based banks, thrift institutions and credit unions operating in our primary market areas. Competition in our primary market areas has increased in recent years. Our competition for loans also comes from banks, thrifts, credit unions and government sponsored entities in addition to mortgage bankers and brokers. Through successive acquisitions, the Company has entered several markets in Montana that are predominantly reliant on agriculture. Accordingly, our lending activities in these markets focus on farm and ranch real estate, annual operating lines of credit, and agriculture related term debt. Competition for agricultural loans comes from both traditional Montana banks and an increasing number of nonbank lenders. These nonbank lenders range from government sponsored entities to large national insurance companies.  

 

Technological advances have made it possible for our competitors, including nonbank competitors, to offer products and services that traditionally were banking products, and for financial institutions and other companies to provide electronic and internet-based financial solutions, including online deposit accounts, electronic payment processing and marketplace lending, without having a physical presence where their customers are located. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. In many cases, our competitors have substantially greater resources and lending limits and offer certain services that we do not currently provide. Our principal market areas can be characterized as markets with moderately increasing incomes, relatively low unemployment, increasing wealth (particularly in the growing resort areas such as Bozeman) and moderate population growth.

 

Lending Activities 

 

General

 

The Bank originates residential 1-4 family loans held for investment and originated for sale in the secondary market. The Bank also originates commercial real estate, home equity, consumer and commercial loans. Residential 1-4 family loans include residential mortgages and construction of residential properties. Commercial real estate loans include loans on multi-family dwellings, nonresidential property, commercial construction and development and farmland loans. Home equity loans include loans secured by the borrower’s primary residence. Typically, the property securing such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial business loans consist of business loans and lines of credit on a secured and unsecured basis and include agriculture production loans.

 

Fee Income

 

The Bank receives lending related fee income from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from mortgage loan servicing generally consist of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing for loans held by others. Mortgage loan servicing fees were $5.09 million and $4.84 million for the years ended December 31, 2023 and 2022, respectively. Other loan related fee income for late charges and other ancillary fees were $1.38 million and $1.01 million for the years ended December 31, 2023 and 2022, respectively.

 

Residential 1-4 Family Loans

 

The Bank originates residential 1-4 family mortgage loans secured by property located in the Bank’s market areas. At December 31, 2023, the Bank's balance of 1-4 family mortgage loans was $156.58 million or 10.55% of total loans. The Bank generally originates residential 1-4 family mortgage loans in amounts of up to 80.0% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds substantially all of its adjustable rate and its 8, 10 and 12-year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Bank’s fixed rate 15-year and 20-year loans are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30-year fixed rate loans are sold in the secondary market. The volume of loan sales is dependent on the volume, type and term of loan originations, as well as market conditions.

 

The Bank derives a significant portion of its noninterest income from servicing of loans that it has sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis. This means that we process the borrower’s payments and send them to the purchaser of the loan. This retention of servicing enables the Bank to increase fee income and maintain a relationship with the borrower. At December 31, 2023, the Bank had $2.07 billion in residential 1-4 family mortgage loans and $134.65 million in other loan categories sold with servicing retained. The Bank does not ordinarily purchase home mortgage loans from other financial institutions.

 

Property appraisals on real estate securing the Bank’s single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the Board. Appraisals are performed in accordance with applicable regulations and policies. The Bank generally obtains title insurance policies on all first mortgage real estate loans originated. On occasion, refinancing of mortgage loans are approved using title reports instead of title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and interest, to a loan escrow account from which the Bank makes disbursements for such items as real estate taxes and hazard and mortgage insurance premiums as they become due.

 

The Bank also lends funds for the residential 1-4 family construction. Residential 1-4 family construction loans are made both to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Residential 1-4 family construction loans accounted for $43.43 million or 2.93% of the Bank’s total loan portfolio at December 31, 2023.

 

 

Commercial Real Estate Loans

 

The Bank originates commercial real estate loans including loans on multi-family dwellings. Commercial real estate loans made up 40.99% of the Bank’s total loan portfolio, or $608.69 million at December 31, 2023. The Bank’s commercial real estate loans are primarily permanent loans secured by improved property such as office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not exceed 80.0% of the appraised value or the selling price of the property, whichever is less. Commercial real estate loans are typically made with fixed rates of interest and 5 to 15-year maturities. Upon maturity, the loan is repaid or the terms and conditions are renegotiated. Generally, all commercial real estate loans that we originate are secured by property located in the state of Montana and within the market areas of the Bank. The Bank's largest single commercial real estate loan at December 31, 2023 was originated by the Bank and participated 44.4% to two other banks in Montana, each being participated 22.2%. The Bank's share of the total outstanding loan at December 31, 2023 was $12.55 million and it is collateralized by commercial real estate located in Bozeman, Montana. At December 31, 2023, this loan is performing in accordance with its repayment terms. 

 

The Bank also lends funds for commercial construction and development. Commercial construction and development loans accounted for $158.13 million or 10.65% of the Bank’s total loan portfolio at December 31, 2023. In addition, the bank originates loans secured by farm and ranch real estate. Farmland loans accounted for $142.59 million or 9.61% of the Bank’s total loan portfolio at December 31, 2023.

 

Home Equity Loans

 

The Bank also originates home equity loans. These loans are secured by the borrowers’ primary residence, but are typically subject to a prior lien, which may or may not be held by the Bank. At December 31, 2023, $86.93 million or 5.86% of our total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity loans for many purposes, including home improvement, debt consolidation or other purchasing needs. The Bank offers fixed rate, fixed payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home equity loans typically have terms of no longer than 15 years.

 

Home equity loans are secured by real estate but they have historically carried a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the flexibility the borrower has with respect to the loan proceeds. The Bank attempts to minimize this risk by maintaining conservative underwriting policies on such loans. We generally make home equity loans for not more than 85.0% of appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan.

 

Consumer Loans

 

As part of its strategy to invest in higher yielding shorter term loans, the Bank emphasized growth of its consumer lending portfolio in recent years. This portfolio includes personal loans secured by collateral other than real estate, unsecured personal loans and lines of credit and loans secured by deposits held by the Bank. As of December 31, 2023, consumer loans totaled $30.13 million or 2.03% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in the Bank’s market areas and generally have maturities of up to 7 years. For loans secured by savings accounts, the Bank will lend up to 90.0% of the account balance on single payment loans and up to 100.0% for monthly payment loans.

 

Consumer loans have a shorter term and generally provide higher interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the same time improve the matching of the maturities of rate sensitive assets and liabilities.

 

The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.

 

 

Commercial Loans

 

Commercial business loans amounted to $132.71 million, or 8.94% of the Bank’s total loan portfolio at December 31, 2023.  Agricultural production loans amounted to $125.30 million, or 8.44% of the Bank’s total loan portfolio at December 31, 2023. The Bank’s commercial business loans are traditional business loans and are not secured by real estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or other business assets. Agricultural operating loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property.

 

Commercial business loans of this nature usually involve greater credit risk than residential 1-4 family loans. The collateral we receive is typically related directly to the performance of the borrower’s business which means that repayment of commercial business loans is dependent on the successful operations and income stream of the borrower’s business. Such risks can be significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to residential real estate lending.

 

Loans to One Borrower

 

Under Montana law, commercial banks such as the Bank, are subject to certain exemptions and are allowed to select the Office of the Comptroller of the Currency (“OCC”) formula used to determine limits on credit concentrations to single borrowers to an amount equal to 15.0% of the institution’s total capital. As of December 31, 2023, the Bank’s limit to a single borrower was $32.84 million. Our largest aggregation of loans to one borrower was approximately $39.23 million at December 31, 2023. The total amount subject to the lending limit at December 31, 2023 was $30.40 million. This consisted of six loans: five commercial real estate loans each secured by a single property and one construction loan secured by a single property. The first commercial real estate loan had a principal balance of $1.45 million at December 31, 2023.  As of December 31, 2023, the principal balance on the second commercial real estate loan was $705,000. The third commercial real estate loan had a principal balance of $3.80 million as of December 31, 2023. However, another bank is 50.0% participating in this loan for $3.80 million. The fourth commercial real estate loan had a principal balance of $11.25 million as of December 31, 2023. The fifth commercial real estate loan had a principal balance of $8.17 million as of December 31, 2023. The sixth construction loan had a principal balance of $5.02 million as of December 31, 2023. However, another bank is 50.0% participating in this loan for $5.02 million. At December 31, 2023, these loans were performing in accordance with their terms. The Bank maintains the servicing for these loans.

 

Loan Solicitation and Processing

 

Our customary sources of mortgage loan applications include repeat customers, walk-ins and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the ability to accept online mortgage loan applications through our website. Our branch managers and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans must be approved at our main offices as disclosed below. Loan consultants or loan brokers are generally not utilized for either residential or commercial lending activities.

 

After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm specific information relating to the loan applicant’s employment, income and credit standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. In connection with the loan approval process, our staff analyzes the loan applications and the property involved. Officers and branch managers are granted lending authority based on the nature of the loan and the managers’ level of experience. We have established a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. Three Directors of the Board are required for approval of any loan, or aggregation of loans to a single borrower, that currently exceeds $7.50 million.

 

Loan applicants are promptly notified of the decision by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis, amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained. We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be maintained during the entire term of the loan.

 

 

Loan Commitments

 

We generally provide commitments to fund fixed and adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter time periods. The total amount of loans in process of origination for sale into the secondary market with interest rate lock commitments was $15.67 million as of December 31, 2023.

 

Investment Activities

 

General

 

State-chartered commercial banks such as the Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities, corporate debt securities and loans to other banking institutions.

 

Eagle maintains liquid assets that may be invested in specified short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They may also be increased based on management’s judgment as to the attractiveness of yields available in relation to other opportunities. Liquidity levels can also change based on management’s expectation of future yield levels, as well as management’s projections as to the short-term demand for funds to be used in the Bank’s loan origination and other activities.

 

Investment Policies

 

The investment policy of Eagle, which is established by the Board, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing the Bank’s lending activities. The policy provides for available-for-sale (including those accounted for under ASC Topic 825), held-to-maturity and trading classifications. However, Eagle currently does not hold any securities for purposes of trading or held-to-maturity. The policy permits investments in high credit quality instruments with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency obligations, state, county and municipal obligations, asset-backed securities and mortgage-backed securities (“MBSs”). Collateralized mortgage obligations (“CMOs”), investment grade corporate debt securities and commercial paper are also included.

 

Our investment policy also includes several specific guidelines and restrictions to ensure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as defined within the policy) without prior approval from the Board. To secure such approval, management must demonstrate the business advantage of such investments.

 

We do not participate in the use of off-balance sheet derivative financial instruments, except interest rate caps and floors. Further, Eagle does not invest in securities which are not rated investment grade at time of purchase.

 

The Board, through its asset/liability committee, has charged the President and CEO with implementation of the investment policy. All transactions are reported to the Board monthly, as well as the current composition of the portfolio, including market values and unrealized gains and losses.

 

Sources of Funds

 

General

 

Deposits are the major source of our funds for lending and other investment purposes. Borrowings are also used to compensate for reductions in the availability of funds from other sources. In addition to deposits and borrowings, we derive funds from loans and investment securities principal payments. Funds are also derived from proceeds for the maturity, call and sale of investment securities and from the sale of loans. Loan and investment securities principal payments are a relatively stable source of funds, while loan prepayments and deposit inflows are significantly influenced by general interest rates and financial market conditions.

 

 

Deposits

 

We offer a variety of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate.

 

Our current deposit products include certificates of deposit accounts ranging in terms from 90 days to five years, as well as, checking, savings and money market accounts. Individual retirement account (“IRA”) certificates are included in certificates of deposit. The Bank may also enter into fixed rate brokered certificates when rates are competitive with other funding sources.

 

Deposits are obtained primarily from residents of Montana. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates, convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television, print media advertising, and sales training. Management believes that nonresidents of Montana hold an insignificant number and amount of deposit accounts.

 

We pay interest rates on deposits which are competitive in our market. Interest rates on deposits are set by senior management, based on a number of factors, including: projected cash flow; a current survey of a selected group of competitors’ rates for similar products; external data which may influence interest rates; investment opportunities and loan demand; and scheduled certificate maturities and loan and investment repayments.

 

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 Moines ("FHLB") to supplement our supply of lendable funds and to meet deposit withdrawal requirements. We have Federal funds lines of credit with Pacific Coast Bankers Bank (“PCBB”), PNC Financial Services Group, Inc. (“PNC”), United Bankers’ Bank (“UBB”) and Texas Independent Bank ("TIB"). In addition, Eagle has a line of credit with Bell Bank.

 

In January 2022, the Company completed the issuance of $40.00 million in aggregate principal amount of subordinated notes due in 2032 in a private placement transaction to certain institutional accredited investors and qualified buyers. The notes bear interest at an annual fixed rate of 3.50% payable semi-annually. Starting February 1, 2027, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term Secured Overnight Financing Rate ("SOFR") plus a spread of 218.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after February 1, 2027. A portion of the net proceeds were used to redeem $10.00 million of senior notes due in February 2022. In June 2020, the Company completed the issuance of $15.00 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction to certain qualified institutional accredited investors. The notes bear interest at an annual fixed rate of 5.50%. Starting July 1, 2025, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be the three-month term SOFR plus a spread of 509.0 basis points. In February 2017, the Company completed the issuance, through a private placement, of $10.00 million aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. These notes were redeemed in February 2022 with proceeds from the subordinated notes issued in January 2022. In September 2005, the Company formed a special purpose subsidiary, Eagle Bancorp Statutory Trust I (the “Trust”), for the purpose of issuing trust preferred securities in the amount of $5.16 million. The Company issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our predecessor in connection with the subordinated debentures and trust preferred securities.

 

Subsidiary Activity

 

We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. The following are subsidiaries of the Company: Opportunity Bank of Montana, Eagle Bancorp Statutory Trust I, Opportunity Financial Services, Inc., formerly Western Financial Services and Opportunity Housing Fund, LLC, which is a subsidiary of the Bank. 

 

Employees and Human Capital Resources

 

As of December 31, 2023, we had 383 full-time employees and 24 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be good. The Board of Directors oversees the strategic management of our human capital resources. The Human Resources Department's day-to-day responsibility is managing our human capital resources. 

 

Opportunity Bank of Montana is committed to providing equal employment opportunity and maintaining an environment that encourages appropriate conduct among all persons and fosters respect for and inclusion of individuals with diverse perspectives, work experiences, lifestyles, and cultures. Embracing equal employment opportunity and the diversity and inclusion of our workforce helps the Bank achieve its mission and each of us to live our core values.

 

Retention and Benefits

 

Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable benefits aids in retention of our top-performing employees. We promote the health and wellness of our employees and strive to keep the employee portion of health care premiums to a minimum. In addition, nearly all of our employees are shareholders of the Company through participation in our ESOP, which aligns employee and shareholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our employees.

 

 

Growth and Development

 

We believe that the success of our business is largely due to the quality of our employees, the development of each employee's full potential, and our ability to provide timely and satisfying recognition and rewards. Amid a competitive labor market, we continue to develop and deliver job specific training programs, leadership and coaching opportunities, career development opportunities including tuition reimbursement, and the retention of top talent through succession planning. Whenever possible, we strive to fill vacancies from within. In addition, our internship programs, in partnership with state colleges and technical schools, help ensure a steady pipeline of accomplished talent.

 

Health and Safety

 

The safety, health and wellness of our employees is a top priority. Robust wellness initiatives supporting a healthy lifestyle are encouraged through an established employee wellness program. All employees and their dependents have access to an employee assistance program which provides expert referrals and consultation in support of mental well-being.

 

The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to transition during the peak of the pandemic, over a short period of time, to rotational work schedules allowing employees to effectively work from remote locations and ensure a safely-distanced working environment for employees performing customer facing activities at branches. All employees are encouraged to stay at home or work from home if they are experiencing signs or symptoms of a possible illness.

 

Community Involvement

 

Employees are encouraged to become involved in their communities and are offered paid time off for participating in bank-sponsored events. Employees may also take 12 hours of paid time off per calendar year during normal working hours for individual volunteer efforts. 

 

Regulation

 

Set forth below is a brief description of certain laws and regulations applicable to Eagle and the Bank. These descriptions of laws and regulations as well as those contained elsewhere do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Legislative or regulatory changes in the future could adversely affect our operations or financial condition.

 

General

 

As a state-chartered commercial bank, the Bank is subject to extensive regulation, examination and supervision by the Federal Reserve Bank of Minneapolis ("FRB") and Montana Division of Banking and Financial Institutions. The Bank is a member of the FRB System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation (“FDIC”). There are periodic examinations to evaluate the Bank’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC may also examine the Bank. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for credit losses for regulatory purposes. Eagle, as a bank holding company, is required to file certain reports with, and is subject to examination by, and must otherwise comply with the rules and regulations of the FRB. Eagle is also subject to the rules and regulations of the Securities and Exchange Commission (“SEC”) under the federal securities laws. See Holding Company Regulation section below.

 

 

Federal Regulation of Commercial Banks

 

General

 

Deposits in the Bank, a Montana state-chartered commercial bank, are insured by the FDIC. The bank has no branches in any other state. The Bank is subject to regulation and supervision by the Montana Department of Administration’s Banking and Financial Institutions Division and the FRB. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions and impose safety and soundness standards.

 

The Bank’s general permissible lending limit for loans-to-one-borrower is 15.0% of unimpaired capital and surplus. An additional amount may be lent, equal to 10.0% of total capital, if the loan is fully secured by certain readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate.

 

The federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.

 

Federal Home Loan Bank System

 

The Bank is a member of the FHLB of Des Moines. FHLB of Des Moines is one of 11 regional FHLBs that administer the home financing credit function of banks, credit unions and savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, the Bank is required to purchase and maintain a specified amount of shares of capital stock in the FHLB of Des Moines.

 

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank’s FHLB stock may result in a corresponding reduction in the Bank’s capital.

 

Federal Reserve System

 

The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their checking and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy liquidity requirements.

 

As a member of the Federal Reserve System, the Bank is required to maintain a minimum level of investment in FRB stock based on a specific percentage of its capital and surplus. A reduction in value of the Bank’s FRB stock may result in a corresponding reduction in the Bank’s capital.

 

Insurance of Deposit Accounts 

 

Deposit accounts at the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The Bank’s deposits, therefore, are subject to FDIC deposit insurance assessments. Assessments paid to the FDIC by the Bank and other banking institutions are used to fund the FDIC’s Federal Deposit Insurance Fund.

 

 

Insurance of Accounts and Regulation by the FDIC

 

As insurer of deposits in banks, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving FRB an opportunity to take such action. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement with the FDIC. We are not aware of any practice, condition or violation that might lead to the termination of the Bank’s deposit insurance.

 

The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. The assessment base for calculating deposit insurance assessments is an institution's average total assets minus its average tangible equity (defined as Tier 1 capital). Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. The assessment rate schedule establishes assessments ranging from 2.5 to 45 basis points. The FDIC may increase or decrease its rates for each quarter by 2 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

 

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance assessment rates will be in the future. In addition to the assessment for deposit insurance, through 2019, institutions were required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

 

Capital Requirements 

 

Federal regulations require Federal Reserve member banks, such as Opportunity Bank of Montana and all other FDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total average assets leverage ratio. 

 

Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Bank exercised its AOCI opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

 

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien 1-4 family residential mortgage loans, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

 

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet each of its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 until fully implemented at 2.5% on January 1, 2019. The Bank’s actual capital ratios are set out in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Prompt Corrective Action 

 

Federal law establishes a prompt corrective action framework to resolve the problems of undercapitalized depository institutions. The Federal Reserve  has adopted regulations to implement the prompt corrective action legislation. Those regulations were amended effective January 1, 2015 to incorporate the previously mentioned increased regulatory capital standards that were effective on the same date. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

 

Generally, a receiver or conservator must be appointed for an institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date a commercial bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Various restrictions, such as restrictions on capital distributions and growth, also apply to “undercapitalized” institutions. The Federal Reserve may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

 

The Bank was classified as “well-capitalized” under the prompt corrective action framework as of December 31, 2023.

 

Limitations on Capital Distributions

 

A principal source of the parent holding company’s cash is from dividends received from the Bank, which are subject to government regulation and limitation. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. The Bank is subject to Montana state law and, in certain circumstances, Montana law places limits or restrictions on a bank’s ability to declare and pay dividends. Additionally, current guidance from the FRB provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per common share, measured over the previous four fiscal quarters. Federal regulations also limit banks’ ability to issue dividends by imposing a capital conservation buffer requirement.

 

 

Transactions with Affiliates

 

The Bank’s authority to engage in transactions with “affiliates” is limited by regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the FRB’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Eagle and the Bank are separate and distinct legal entities. Eagle is an affiliate of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions, i.e. “covered transactions,” are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, banks are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no bank may purchase the securities of any affiliate other than a subsidiary.

 

Our authority to extend credit to executive officers, directors and 10.0% or greater shareholders (“insiders”), as well as entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulation, FRB Regulation O. Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, 2023, we were in compliance with these regulations.

 

Holding Company Regulation

 

General

 

Eagle is a bank holding company subject to regulatory oversight of the FRB. Eagle is required to register and file reports with the FRB and is subject to regulation and examination by the FRB. In addition, the FRB has enforcement authority over Eagle and its nonbank institution subsidiaries which also permits the FRB to restrict or prohibit activities that are determined to present a serious risk to the Bank.

 

Mergers and Acquisitions

 

Eagle must obtain approval from the FRB before acquiring more than 5.0% of the voting stock of another bank or bank holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for Eagle to acquire control of a bank, the FRB would consider the financial and managerial resources and future prospects of Eagle and the target institution, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and the needs of the community and competitive factors.

 

Eagle obtained the necessary approvals from the FRB and the Montana Division of Banking and Financial Institutions before acquiring each of its previous acquisitions.

 

Acquisition of Eagle

 

Under the Bank Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to the FRB if any person (including a company), or a group acting in concert, seeks to acquire 10.0% or more of Eagle’s outstanding voting stock, unless the FRB has found that the acquisition will not result in a change in control of Eagle. In acting on such a notice or application, the FRB must take into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that acquires control will be subject to regulation as a bank holding company.

 

Federal Securities Laws

 

Eagle’s common stock is registered with the SEC under the Exchange Act. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and proxy statements filed with or furnished to the SEC, are available free of charge through our Internet website, www.opportunitybank.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on or accessible through, these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

 

 

ITEM 1A.

RISK FACTORS 

 

Risks Related to Economic and Market Conditions 

 

Our business may be adversely affected by conditions in the financial markets and economic conditions generally and in our market areas in particular.

 

Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our future growth, is highly dependent upon the business environment in the markets in which we operate, principally in Montana, and in the United States as a whole. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in Montana. The economic conditions in our local markets may be different from, and in some instances worse than, the economic conditions in the United States as a whole. Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, monetary policy, unemployment and strength of the domestic economy and local economy in the markets in which we operate. Unfavorable market conditions can result in deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; state or local government insolvency; or a combination of these or other factors.

 

In recent years, economic growth and business activity across a wide range of industries and regions in the U.S. has been slow and uneven. There are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken to address that debt, further declining oil prices and ongoing federal budget negotiations that may have a destabilizing effect on financial markets. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and saving habits. Such conditions could have a material adverse effect on the credit quality of our loans or our business, financial condition or results of operations.

 

Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, the Middle East, terrorism and other geopolitical events.

 

Our success depends, to a certain extent, upon global, domestic and local economic and political conditions, as well as governmental monetary policies. Conditions such as changes in interest rates, money supply, levels of employment and other factors beyond our control may have a negative impact on economic activity. Any contraction of economic activity, including an economic recession, may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. In particular, interest rates are highly sensitive to many factors that are beyond our control, including global, domestic and local economic conditions and the policies of various governmental and regulatory agencies and, specifically, the Federal Reserve. Throughout 2023 the Federal Open Market Committee (“FOMC”) raised the target range for the federal funds rate on four separate occasions, citing inflationary pressures. The last Federal Funds Target rate change occurred on July 26, 2023, and the FOMC has since adopted a cautious approach as inflationary pressures have moderated but remain uncertain. Forecasts for 2024 indicate potential interest rate reductions, but persistent inflation may either delay reductions or may call for further rate increases by the FOMC.

 

The tightening of the Federal Reserve’s monetary policies, including increases in the target range for the federal funds rate as well as the conclusion of the Federal Reserve’s tapering of asset purchases, together with ongoing economic and geopolitical instability, increases the risk of an economic recession. Although forecasts have varied, the potential of slowing economic growth and persistent inflation could lead to the contraction of the U.S. gross domestic output in 2024. Any such downturn, especially domestically and in the regions in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations.

 

As a result of the economic and geopolitical factors discussed above, financial institutions also face heightened credit risk, among other forms of risk. Of note, because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral, which, in turn, can adversely affect the value of our loan and investment portfolios. Adverse economic developments, specifically including inflation-related impacts, may have a negative effect on the ability of our borrowers to make timely repayments of their loans or to finance future home purchases. Moreover, while commercial real estate values have stabilized as demand has returned to pre-pandemic levels in several markets, the outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a rising interest rate environment and higher prices for commodities, goods and services. In each case, credit performance over the medium- and long-term is susceptible to economic and market forces and therefore forecasts remain uncertain. Instability and uncertainty in the commercial and residential real estate markets, as well as in the broader commercial and retail credit markets, could have a material adverse effect on our financial condition and results of operations.

 

Declines in home values could decrease our loan originations and increase delinquencies and defaults.

 

Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher credit losses on loans.

 

Changes in interest rates could adversely affect our results of operations and financial condition.

 

Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities.

 

 

Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates.

 

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates.

 

We may be impacted by the retirement of London Interbank Offered Rate (“LIBOR”) as a reference rate.

 

Many of our lending products, securities, derivatives, and other financial transactions utilize a benchmark rate, such as LIBOR, to determine the applicable interest rate or payment amount. The U.K. Financial Conduct Authority and the ICE Benchmark Administration have announced that the publication of the most commonly used U.S. Dollar LIBOR tenors will cease to be provided or cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. The Adjustable Interest Rate (LIBOR) Act (LIBOR Act), enacted in March 2022, provides a statutory framework to replace U. S. Dollar LIBOR with a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”) for contracts governed by U.S. law that have no fallbacks or fallbacks that would require the use of a poll or LIBOR-based rate, and in December 2022, the FRB adopted rules which identify different SOFR-based replacement rates for derivative contracts, for cash instruments such as floating-rate notes and preferred stock, for consumer loans, for certain government-sponsored enterprise contracts and for certain asset-backed securities. We continue to monitor market developments and regulatory updates related to the cessation of LIBOR. As the transition from LIBOR is ongoing, there continues to be uncertainty as to the ultimate effect of the transition on the financial markets for LIBOR-linked financial instruments.

 

The discontinuation of a benchmark rate, changes in a benchmark rate, or changes in market perceptions of the acceptability of a benchmark rate, including LIBOR, could, among other things, adversely affect the value of and return on certain of our financial instruments or products, result in changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, increased compliance, legal and operational costs, and risks associated with customer disclosures and contract negotiations. Although the LIBOR Act includes safe harbors if the FRB-identified SOFR-based replacement rate is selected, these safe harbors are untested. As a result, and despite the enactment of the LIBOR Act, for the most commonly used U.S. Dollar LIBOR settings, the use or selection of a successor rate could also expose us to risks associated with disputes with customers and other market participants in connection with implementing LIBOR fallback provisions.

 

Strong competition may limit growth and profitability.

 

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas.

 

We are subject to physical and financial risks associated with climate change and other weather and natural disaster impacts.

 

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment.  As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. Although the U.S. rejoined the Paris Agreement, effective as of February 19, 2021, and the U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change, each of which may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, which may require us to expend significant capital and incur compliance, operating, maintenance and remediation costs. Given the lack of empirical data on the credit and other financial risks posed by climate change, it is impossible to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change on the Bank may present certain unique risks. 

 

The physical risks of climate change include discrete events, such as flooding, hurricanes, tornadoes, and wildfires, and longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Physical risks may alter the Company’s strategic direction in order to mitigate certain financial risks. Our operations are located in Montana and are susceptible to severe weather events including severe droughts, wildfires, floods, severe winter storms and tornadoes. Any of these, or any other severe weather event, could cause disruption to our operations and could have a material adverse effect on our overall business, results of operations or financial condition. We have taken certain preemptive measures that we believe will mitigate these adverse effects; however, such measures cannot prevent the disruption that a catastrophic drought, wildfire, tornado or other severe weather event could cause to the markets that we serve and any resulting adverse impact on our customers, such as hindering our borrowers’ ability to timely repay their loans, diminishing the value of any collateral held by us, interrupting supply chains, causing significant property damage, causing us to incur additional expense or resulting in a loss of revenue, and affecting the stability of our deposit base. The severity and impact of future droughts, wildfires, floods, tornadoes and other weather-related events are difficult to predict and may be exacerbated by global climate change. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities, each of which could have a material adverse effect on our financial condition and results of operations. 

 

Climate change may worsen the frequency and severity of future droughts, wildfires, floods, tornadoes and other extreme weather-related events that could cause disruption to our business and operations.  Chronic results of climate change such as shifting weather patterns could also cause disruption to our business and operations.  Climate change may also result in new and/or more stringent regulatory requirements for the Company, which could materially affect the Company’s results of operations by requiring the Company to take costly measures to comply with any new laws or regulations related to climate change that may be forthcoming.  New regulations, shift in customer behaviors, supply chain collapse or breakthrough technologies that accelerate the transition to a lower carbon economy may negatively affect certain sectors and borrowers in our loan portfolio, impacting their ability to timely repay their loans or decreasing the value of any collateral held by us.

 

 

The emergence or continuation of widespread health emergencies or pandemics could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

 

Pandemics could adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. As a result, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners. These factors may be prevalent for a significant period of time and may adversely affect our business, results of operations and financial condition even after an outbreak has subsided.

 

The extent to which an outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak and its variants, its severity, the actions to contain the virus or treat its impact, the effectiveness of vaccination programs for the virus, vaccination rates, and how quickly and to what extent normal economic and operating conditions can resume. Even after an outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

 

Risks Related to Our Business

 

We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.

 

As a result of our branch and whole bank acquisitions we record goodwill. Our consolidated balance sheet at December 31, 2023 included goodwill of $34.74 million. We are required to test our goodwill for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. It is possible that future impairment testing could result in a partial or full impairment of the value of our goodwill. If an impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced by the amount of the impairment.

 

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

 

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

If the allowance for credit losses is not sufficient to cover actual credit losses, our earnings could decrease.

 

Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant credit losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover expected losses in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income.

 

Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for credit losses. As we continue to increase the amount of such loans, additional or increased provisions for credit losses may be necessary and would decrease earnings.

 

Bank regulators periodically review our allowance for credit losses and may require an increase to the provision for credit losses or further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition.

 

 

We could record future losses on our securities portfolio.

 

A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers deteriorates and there is limited liquidity for these securities.

 

Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.

 

Our accounting policies are essential to understanding our financial results and condition. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

 

From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could also be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.

 

Because we have increased our commercial real estate and commercial business loan originations, our credit risk has increased and continued downturns in the local real estate market or economy could adversely affect our earnings.

 

We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the residential real estate (1-4 family) loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

 

Many of our commercial real estate and commercial business loans are made to small-to-mid-sized businesses. These small-to-mid-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small-to-mid-sized business often depends on the management talents and efforts of one or two persons or a small group of persons and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause us to incur substantial credit losses that could have an adverse effect on our business, financial condition and results of operations.

 

We continually encounter technological change.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws or be vulnerable to cyberattacks. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.

 

We expect that new technologies and business processes applicable to the consumer credit industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition or results of operations.

 

We depend on the services of our executive officers and other key employees.

 

Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations.

 

 

We earn a significant portion of our noninterest income through sales of residential mortgages in the secondary market. We rely on the mortgage secondary market for some of our liquidity.

 

Our mortgage banking activities provide a significant portion of our noninterest income. We originate and sell mortgage loans, including $344.31 million of mortgage loans sold during 2023. We rely on Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other purchasers to purchase loans in order to reduce our credit risk and provide funding for additional loans we desire to originate. We cannot provide assurance that these purchasers will not materially limit their purchases from us due to capital constraints or other factors, including, with respect to FNMA and FHLMC, a change in the criteria for conforming loans. In addition, various proposals have been made to reform the U.S. residential mortgage finance market, including the role of FNMA and FHLMC. The exact effects of any such reforms are not yet known but may limit our ability to sell conforming loans to FNMA and FHLMC. In addition, mortgage lending is highly regulated, and our inability to comply with all federal and state regulations and investor guidelines regarding the origination, underwriting documentation and servicing of mortgage loans may also impact our ability to continue selling mortgage loans. If we are unable to continue to sell loans in the secondary market or we experience a period of low mortgage activity, our noninterest income as well as our ability to fund, and thus originate, additional mortgage loans may be adversely affected, which could have a material adverse effect on our business, financial condition or results of operations.

 

There can be no assurance we will be able to continue paying dividends on our common stock at recent levels.

 

We may not be able to continue paying quarterly dividends commensurate with recent levels given that the ability to pay dividends on our common stock depends on a variety of factors. The payment of dividends is subject to government regulation in that the regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. Our ability to pay dividends is subject to certain regulatory requirements. The Federal Reserve generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of a subsidiary bank or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Federal Reserve Board policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.

 

As a result, future dividends will generally depend on the level of earnings at the Bank. The Bank is subject to Montana law and, in certain circumstances, Montana law places limits or restrictions on a bank’s ability to declare and pay dividends. Also, in the event there shall occur an event of default on any of our debt instruments, we would be unable to pay any dividends on our common stock.

 

Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

 

We intend to pursue an organic growth strategy for our business; however, we regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions of financial institutions, branch acquisitions and other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful. There are risks associated with our growth strategy. To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth.

 

Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of integrating acquired banks or branches, the risk of loss of customers and/or employees of the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations, may require investment in integration and in development and enhancement of additional operational and reporting processes and controls and may subject us to additional regulatory scrutiny.

 

Our growth initiatives may also require us to recruit and retain experienced personnel to assist in such initiatives. Accordingly, the failure to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.

 

If we do not successfully execute our acquisition growth plan, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge, which would adversely affect our results of operations. While we believe we will have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.

 

 

We may be unsuccessful in integrating the operations of the business we have acquired or expect to acquire in the future.

 

From time to time, we evaluate and acquire businesses that we believe complement our existing business. The acquisition component of our growth strategy depends on the successful integration of these acquisitions. We face numerous risks and challenges to the successful integration of acquired businesses, including the following:

 

 

the potential for unexpected costs, delays and challenges that may arise in integrating acquisitions into our existing business;

 

limitations on our ability to realize the expected cost savings and synergies from an acquisition;

 

challenges related to integrating acquired operations, including our ability to retain key employees and maintain relationships with significant customers and depositors;

 

challenges related to the integration of businesses that operate in new geographic areas, including difficulties in identifying and gaining access to customers in new markets; and

 

the discovery of previously unknown liabilities following an acquisition associated with the acquired business.

 

If we are unable to successfully integrate the businesses we acquire, our business, financial condition and results of operations may be materially adversely affected.

 

Failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely affect our ability to report our financial condition and results of operations accurately and on a timely basis.

 

A failure to maintain effective internal control over financial reporting or disclosure controls and procedures could adversely affect our ability to report our financial results accurately and on a timely basis, which could result in a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity. Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls may not prevent or detect all misstatements. 

 

Changes in interest rates may change the value of our mortgage servicing rights portfolio, which may increase the volatility of our earnings.

 

As a result of our mortgage servicing business, which we may expand in the future, we have a portfolio of mortgage servicing rights (“MSR”) assets. An MSR is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee. We measure and carry all of our residential MSR assets using the fair value measurement method. Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.

 

Current trends of rising interest rates have resulted in an increased valuation of the MSR asset, however one of the principal risks associated with MSR assets is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. 

 

An increased size of our MSR portfolio could result in us carrying significant asset balances. This could result in a reduction in our liquidity and cause a reduction in our capital ratios. The combination of these impacts along with other impacts, could cause us to not have sufficient liquidity or capital.

 

At December 31, 2023, our MSR asset had a fair value of $15.85 million. All income related to retained servicing, including changes in the value of the MSR asset, is included in noninterest income. Depending on the interest rate environment and market trends related to MSR sales, it is possible that the fair value of our MSR asset may be reduced in the future. If such changes in fair value significantly reduce the carrying value of our MSR asset, our financial condition and results of operations would be negatively affected.

 

Farmland and agriculture production lending presents unique credit risk. 

 

As of December 31, 2023, approximately 18.05% of our total gross loan portfolio was comprised of farmland and agricultural production loans. As of December 31, 2023, we had $267.89 million in farmland and agricultural production loans, including $142.59 million in farmland loans, and $125.30million in agricultural production loans. Repayment of farmland and agricultural production loans depends primarily on the successful raising and feeding of livestock or planting and harvest of crops and marketing the harvested commodity. Collateral securing these loans may be a illiquid. In addition, the limited purpose of some agricultural-related collateral affects credit risk because such collateral may have limited or no other uses to support values when loan repayment problems emerge. Our farmland and agricultural production lending staff have specific technical expertise that we depend on to mitigate our lending risks for these loans and we may have difficulty retaining or replacing such individuals. Many external factors can impact our agricultural borrowers' ability to repay their loans, including adverse weather conditions, water issues, commodity price volatility, diseases, land values, production costs, changing government regulations and subsidy programs, changing tax treatment, technological changes, labor market shortages/increased wages, and changes in consumers' preferences, over which our borrowers may have no control. These factors, as well as recent volatility in certain commodity prices could adversely impact the ability of those to whom we have made farmland and agricultural production loans to perform under the terms of their borrowing arrangements with us, which in turn could result in credit losses and adversely affect our business, financial condition and results of operations. 

 

 

Consumers may decide not to use banks to complete their financial transactions.

 

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

 

Rights Related to the Legal and Regulatory Environment

 

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

 

The Bank Secrecy Act, the Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any future acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have an adverse effect on our business, financial condition and results of operations.

 

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve Board and the Montana Division of Banking and Financial Institutions. The federal banking laws and regulations govern the activities in which we may engage and are primarily for the protection of depositors and the Deposit Insurance Fund at the FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for credit losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

 

Future legislation, regulatory reform or policy changes under the current U.S. administration could have a material effect on our business and results of operations. 

 

New legislation, regulatory reform or policy changes under the current U.S. administration, including financial services regulatory reform, tax reform, and GSE reform, could impact our business. At this time, we cannot predict the scope or nature of these changes or assess what the overall effect of such potential changes could be on our results of operations or cash flows.

 

If our investment in the Federal Home Loan Bank of Des Moines becomes impaired, our earnings and shareholders’ equity could decrease.

 

We are required to own common stock of FHLB to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB’s advance program. The aggregate cost of our FHLB common stock as of December 31, 2023 was $9.19 million. FHLB common stock is not a marketable security and can only be redeemed by the FHLB.

 

FHLB’s may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a FHLB, including the FHLB of Des Moines, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB of Des Moines common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and shareholders’ equity to decrease by the amount of the impairment charge.

 

 

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

 

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

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 1C. CYBERSECURITY

 

Cyber criminals are becoming more sophisticated and effective every day, and they are increasingly targeting financial institutions. We recognize the critical importance of maintaining the safety and security of our systems and data and employ a multi-layered strategy for overseeing and managing cybersecurity and related risks.  Our board of directors (the Board) and our management are actively involved in the oversight of our risk management program, of which cybersecurity represents an important component. As described in more detail below, we have established policies, standards, processes, and practices for assessing, identifying, and managing material risks from cybersecurity threats. We have devoted significant financial and personnel resources to implement and maintain security measures to meet regulatory requirements and customer expectations, and we intend to continue to make significant investments to maintain the security of our data and cybersecurity infrastructure. There can be no guarantee that our policies and procedures will be properly followed in every instance or that those policies and procedures will be effective. We believe we have not experienced any cybersecurity incidents that have materially affected our business to date. We can provide no assurance that there will not be incidents in the future or that they will not materially affect us, including our business strategy, results of operations, or financial condition.

 

Risk Management and Strategy

 

Our policies, standards, processes, and practices for assessing, identifying, and managing material risks from cybersecurity threats are integrated into our overall risk management program and are based on frameworks established by the National Institute of Standards and Technology (NIST), the Federal Financial Institutions Examination Council (FFIEC), and other applicable industry standards. Our cybersecurity program in particular focuses on the following key areas:

 

Collaboration

 

Our cybersecurity risks are identified and addressed through a comprehensive, cross-functional approach. Key security, risk, and compliance stakeholders meet regularly to develop strategies for preserving the confidentiality, integrity and availability of Company and customer information, identifying, preventing, and mitigating cybersecurity threats, and effectively responding to cybersecurity incidents. We maintain controls and procedures that are designed to ensure prompt escalation of certain cybersecurity incidents so that decisions regarding public disclosure and reporting of such incidents can be made by management and the Board in a timely manner.

 

Risk Assessment

 

At least annually, we conduct a cybersecurity risk assessment using the FFIEC Cybersecurity Assessment Tool that considers information from internal stakeholders, known information security vulnerabilities, and information from external sources (e.g., reported security incidents that have impacted other companies, industry trends, and evaluations by third parties and consultants). The results of the assessment are used to drive alignment on, and prioritization of, initiatives to enhance our security controls, make recommendations to improve processes, and inform a broader enterprise-level risk assessment that is presented to our Board, Audit Committee, and members of management.

 

 

Technical Safeguards

 

We regularly assess and deploy technical safeguards designed to protect our information systems from cybersecurity threats. Such safeguards are regularly evaluated and improved based on vulnerability assessments, cybersecurity threat intelligence, and incident response experience.

 

 

Multi-Layered Defense and Continuous Monitoring - We work to protect our computing environments and products from cybersecurity threats through multi-layered defenses and apply lessons learned from our defense and monitoring efforts to help prevent future attacks. We utilize data analytics to detect anomalies and search for cyber threats. We use a third-party Managed Security Service Provider (MSSP) to provide comprehensive cyber threat detection and response capabilities and maintain a 24x7 monitoring system which complements the technology, processes, and threat detection techniques we use to monitor, manage, and mitigate cybersecurity threats. At least annually, we engage third party consultants or auditors to assist in assessing, identifying and/or managing cybersecurity threats.

 

 

Information Sharing and Collaboration - We work with government, customer, industry and/or supplier partners, such as the Financial Services Information Sharing and Analysis Center and other government-industry partnerships, to gather and develop best practices and share information to address cyber threats. These relationships enable the rapid sharing of threat and vulnerability mitigation information across the defense industrial base and supply chain.

 

 

Training and Awareness - We provide awareness training to our employees to help identify, avoid, and mitigate cybersecurity threats. Our employees participate quarterly in required training, including privacy, phishing, and other awareness training. We also periodically host tabletop exercises with management and other employees to practice rapid cyber incident response.

 

 

Third-Party Service Provider Management – We have implemented controls designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of onboarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers and third parties. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate.

 

Incident Response and Recovery Planning

 

We have established comprehensive incident response and recovery plans and continue to regularly test and evaluate the effectiveness of those plans. Our incident response and recovery plans address and guide our employees, management, and the Board on our response to a cybersecurity incident.

 

External Assessments

 

Our cybersecurity policies, standards, processes, and practices are regularly assessed by external auditors and regulatory examiners. These assessments include a variety of activities including information security maturity assessments, audits and independent reviews of our information security control environment and operating effectiveness. The results of significant assessments are reported to management, the Board and Audit Committee. Cybersecurity processes are adjusted based on the information provided from these assessments.

 

Governance

 

Board Oversight

 

Our Board of Directors has ultimate oversight of cybersecurity risk, which it manages as part of our enterprise risk management program. The Board receives regular reports from our Vice President Director of Information Security on various cybersecurity efforts, including risk assessments, mitigation strategies, areas of emerging risks, incidents and industry trends, and other areas of importance.  In addition, we have an escalation process in place to inform senior management and the Board of Directors of material issues.

 

Managements Role

 

Our cybersecurity program is coordinated by our Vice President Director of Information Security, who reports to our Senior Vice President Chief Risk Officer and Chief Administrative Officer, in partnership with our Director of Information Systems and Technology ("IS&T"). Our Director of Information Security started with us in 2012 and holds numerous credentials including: Certified Information Systems Security Professional, Certified Public Accountant, and Certified Fraud Examiner. The Director of Information Security is informed about and monitors prevention, detection, mitigation, and remediation efforts through regular communication and reporting from the IS&T team and our Managed Services Provider, who is overseen by the Director of IS&T. The Director of IS&T started with us in 2020, holds a Bachelor of Science in Business Administration, Information Technology and has over 14 years of direct experience managing information systems and technology. The Director of IS&T is responsible for implementing and maintaining the systems and tools to protect the technology stack we use. The Director of IS&T reports to the Senior Vice President, Chief Operating Officer.

 

 

 

ITEM 2.

PROPERTIES. 

 

The Company's executive office is located at 1400 Prospect Avenue in Helena, Montana. The following table provides information on the Company's 32 properties as of December 31, 2023, including locations by city, as well as whether they are owned or leased. 

 

 

Occupancy Type

 

Locations

Owned

Leased

Total Locations

Ashland, Montana 1 - 1

Big Timber, Montana

1

-

1

Billings, Montana

3

-

3

Bozeman, Montana

2

1

3

Butte, Montana

1

-

1

Choteau, Montana

1

-

1

Culbertson, Montana 1 - 1

Denton, Montana

1

-

1

Dutton, Montana

1

-

1

Froid, Montana 1 - 1
Glasgow, Montana 1 - 1

Great Falls, Montana

-

1

1

Hamilton, Montana

1

-

1

Helena, Montana

5

-

5

Hinsdale, Montana 1 - 1

Livingston, Montana

1

-

1

Missoula, Montana

1

1

2

Sheridan, Montana

1

-

1

Three Forks, Montana 1 - 1

Townsend, Montana

1

-

1

Twin Bridges, Montana

1

-

1

Winifred, Montana - 1 1

Wolf Point, Montana

1

-

1

Total

28

4

32

 

Management believes all locations are in good condition and meet the operating needs of the Company.  For additional information regarding the Company's premises and equipment and lease obligations, see Note 6 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data". 

 

ITEM 3.

LEGAL PROCEEDINGS.

 

The Bank, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company's results of operations. 

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock is traded on the Nasdaq Global Market under the symbol “EBMT.” At the close of business on December 31, 2023, there were 8,016,784 shares of common stock outstanding, held by approximately 970 shareholders of record. The closing price of the common stock on December 31, 2023, was $15.79 per share.

 

Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors (the “Board’’) and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.

 

Because we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends to our stockholders depends, in large part, upon our receipt of dividends from our bank subsidiary, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present and future dividend policy of our bank subsidiary is subject to the discretion of its Board. Our subsidiary bank is not obligated to pay dividends.

 

On April 20, 2023, Eagle's Board of Directors authorized the repurchase of up to 400,000 shares of its common stock beginning May 1, 2023. Under the plan, shares maybe purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend on market conditions and other corporate considerations. During the second quarter of 2023, 17,901 shares were purchased under this plan at an average price of $12.89. No shares were purchased during the third or fourth quarter of 2023 under this plan. The plan expires on May 1, 2024

 

On April 21, 2022, Eagle's Board of Directors (the "Board") authorized the repurchase of up to 400,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. During the second quarter of 2022, 5,000 shares were purchased under this plan at an average price of $19.75. During the third quarter of 2022, 99,517 shares were purchased under this plan at an average price of $19.45. During the fourth quarter of 2022, 6,608 shares were purchased under this plan at an average price of $18.80. No shares were purchased during the first quarter of 2023 under this plan. The plan expired on April 21, 2023. 

 

On July 22, 2021, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased during the year ended December 31, 2021. However, during the first quarter of 2022, the Company purchased the total authorized amount of 100,000 shares at an average price of $22.71 per share. The plan expired on July 22, 2022.

 

 

 

ITEM 6.

[RESERVED]

 

 

ITEM 7.

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

 

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, 2023 as compared to the year ended December 31, 2022, and also analyzes our financial condition as of December 31, 2023 as compared to December 31, 2022. 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 credit 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 over the past decade. As of December 31, 2023, commercial real estate and commercial business loans represented 61.25% and 17.39% 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, 2023, we had mortgage servicing rights, net of $15.85 million compared to $15.41 million as of December 31, 2022. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be, and has recently been, adversely affected in periods of lower mortgage activity.

 

 

 

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 Committee increased the federal funds target rate to 4.50% during the year ended December 31, 2022. The rate increased to 5.50% during the year ended December 31, 2023. 

 

Acquisitions

 

The Bank has used growth through mergers or acquisition, in addition to its strategy of organic growth.

 

In April 2022, Eagle acquired First Community Bancorp, Inc. ("FCB"), a Montana corporation, and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. In the transaction, Eagle acquired nine retail bank branches and two loan production offices in Montana. 

 

 

Critical Accounting Policies and Estimates 

 

The accounting and financial reporting policies of Eagle are in accordance with generally accepted accounting principles ("GAAP") and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Eagle has identified certain of its accounting policies as “critical accounting policies,” consisting of those related to the allowance for credit losses and goodwill. In determining which accounting policies are critical in nature, Eagle has identified the policies that require significant judgment or involve complex estimates. Eagle’s financial results could differ significantly if different judgments or estimates are used in the application of these policies. The critical accounting policies and related estimates are summarized below.

 

Allowance for Credit Losses  

 

The allowance for credit losses ("ACL") on loans is a valuation account that is management’s estimate of the amount considered necessary to absorb expected losses in the loan portfolio at the balance sheet date. The allowance is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans and is established through the provision for credit losses. Increases in the allowance are charged against income, and decreases in the allowance are recorded through net income as a reversal of the provision for credit losses.

 

Quarterly, an assessment is performed of the risks expected in the loan portfolio. A detailed review is conducted for significant loans identified as having weaknesses that do not share common risk characteristics with other loans. The methodology for determining the adequacy of the allowance for credit losses is considered a critical accounting policy by management due to its complexity and the high degree of judgment involved. The primary factors and assumptions considered include loan volume, credit ratings, delinquency status, prepayment speeds, weighted average lives, and other relevant available information from internal and external sources related to past events and historical loss experience. Management uses qualitative judgment to adjust loss rates to reflect management’s assessment of current economic conditions, along with reasonable and supportable forecasts. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment for subsequent evaluations of the loan portfolio could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. See Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for further information.

 

 

Goodwill

 

The excess of consideration paid over fair value of net assets acquired for acquisitions is recorded as goodwill. Goodwill is not amortized but is tested at least annually for impairment or more frequently if events occur or circumstances change that indicate impairment may exist. A goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit's fair value. A blend of both the market and income approaches is used in valuing the reporting unit’s fair value. Weightings are assigned to the approaches regarding fair value and the sensitivity of other weighting scenarios is considered. The market approach incorporates comparable public company information, valuation multiples and consideration of a market control premium along with data related to comparable observed purchase transactions in the financial services industry. The income approach consists of discounting projected future cash flows, which are derived from internal forecasts and economic expectations for the reporting unit. The significant inputs and assumptions for the income approach include projected earnings of the Company in future years for which there is inherent uncertainty and the discount rate. The sensitivity of a range of reasonable discount rates based on the current economic environment is considered.

 

During the quarter ended September 30, 2023, Management determined that a triggering event had occurred because of a decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget. These conditions were primarily due to economic uncertainty and market volatility from the rising interest rate environment. As a result, the Company performed an interim goodwill impairment assessment as of August 31, 2023, and concluded that goodwill was not impaired. Our annual impairment tests as of October 31, 2023 and 2022 also did not result in impairment. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. Management will continue to monitor events that could influence this conclusion in the future. 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".

 

 

 

 

 

Financial Condition

 

December 31, 2023 compared to December 31, 2022

 

Total assets were $2.08 billion at December 31, 2023, an increase of $127.29 million, or 6.5% from $1.95 billion at December 31, 2022. Loans receivable, net increased by $128.37 million or 9.6%, to $1.47 billion at December 31, 2023 from $1.34 billion at December 31, 2022. However, securities available-for-sale decreased by $31.22 million or 8.9% from December 31, 2022. Total borrowings increased $106.50 million to $234.74 million at December 31, 2023, from $128.24 million at December 31, 2022. Total liabilities were $1.91 billion at December 31, 2023, an increase of $116.42 million, or 6.5%, from $1.79 billion at December 31, 2022. Total deposits decreased slightly by $77,000 from December 31, 2022. Total shareholders’ equity increased by $10.85 million or 6.8% from December 31, 2022.

 

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 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 at December 31, 2023 or 2022. 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 $9.19 million and $5.09 million at December 31, 2023 and 2022, respectively. FRB stock was $4.13 million for both at December 31, 2023 and 2022. 

 

The following table summarizes investment activities:

 

   

December 31,

 
   

2023

   

2022

   

2021

 
   

Fair Value

   

Percentage of Total

   

Fair Value

   

Percentage of Total

   

Fair Value

   

Percentage of Total

 
   

(Dollars in Thousands)

 

Securities available-for-sale:

                                               

U.S. government and agency obligations

  $ 6,543       2.06 %   $ 2,390       0.68 %   $ 1,633       0.60 %

U.S. treasury obligations

    46,815       14.71 %     51,951       14.86       53,183       19.61  

Municipal obligations

    137,950       43.33 %     172,849       49.47       123,667       45.58  

Corporate obligations

    3,905       1.23 %     6,990       2.00       9,336       3.44  

Mortgage-backed securities

    26,753       8.41 %     29,653       8.48       14,636       5.40  

Collateralized mortgage obligations

    86,568       27.20 %     82,131       23.50       63,067       23.25  

Asset-backed securities

    9,745       3.06 %     3,531       1.01       5,740       2.12  

Total securities available-for-sale

  $ 318,279       100.00 %   $ 349,495       100.00 %   $ 271,262       100.00 %
                                                 

 

Securities available-for-sale were $318.28 million at December 31, 2023, a decrease of $31.22 million, or 8.9%, from $349.50 million at December 31, 2022. The decrease was due to sales of $34.02 million and maturity, principal payments and call activity of $32.70 million. These decreases were partially offset by $28.13 million in investment purchases. In addition, unrealized losses on securities improved from prior year, decreasing by $8.70 million. 

 

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, 2023

 
   

One Year or Less

   

One to Five Years

   

Five to Ten Years

   

After Ten Years

   

Total Investment Securities

 
   

Fair Value

   

Weighted Average Yield

   

Fair Value

   

Weighted Average Yield

   

Fair Value

   

Weighted Average Yield

   

Fair Value

   

Weighted Average Yield

   

Fair Value

   

Approximate Market Value

   

Weighted Average Yield

 
   

(Dollars in Thousands)

 

Securities available-for-sale:

                                                                                       

U.S. government and agency obligations

  $ -       0.00 %   $ -       0.00 %   $ 4,298       5.02 %   $ 2,245       7.49 %   $ 6,543     $ 6,543       5.86 %

U.S. treasury obligations

    -       0.00       31,001       1.45       15,814       1.66       -       0.00       46,815       46,815       1.52  

Municipal obligations

    2,546       3.19       7,710       2.77       38,809       2.72       88,885       3.13       137,950       137,950       2.93  

Corporate obligations

    -       0.00       975       3.00       2,930       4.99       -       0.00       3,905       3,905       4.49  

Mortgage-backed securities

    505       3.03       3,052       3.29       3,145       3.37       20,051       4.51       26,753       26,753       4.21  

Collateralized mortgage obligations

    4,084       2.74       5,347       3.97       763       2.93       76,374       3.89       86,568       86,568       3.84  

Asset-backed securities

    -       0.00       -       0.00       -       0.00       9,745       6.65       9,745       9,745       6.65  

Total securities available-for-sale

  $ 7,135       2.92 %   $ 48,085       2.09 %   $ 65,759       2.43 %   $ 197,300       3.70 %   $ 318,279     $ 318,279       3.27 %

 

 

Lending Activities 

 

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

  

   

December 31,

 
   

2023

   

2022

   

2021

   

2020

   

2019

 
   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

 
   

(Dollars in thousands)

 

Real estate loans:

                                                                               

Residential 1-4 family (1)

  $ 156,578       10.55 %   $ 135,947       10.03 %   $ 101,180       10.82 %   $ 110,802       13.14 %   $ 119,296       15.28 %

Residential 1-4 family construction

    43,434       2.93       59,756       4.41       45,635       4.88       46,290       5.49       38,602       4.95  

Total residential 1-4 family

    200,012       13.48       195,703       14.44       146,815       15.70       157,092       18.63       157,898       20.23  
                                                                                 

Commercial real estate

    608,691       40.99       539,070       39.76       410,568       43.92       316,668       37.56       331,062       42.41  

Commercial construction and development

    158,132       10.65       151,145       11.15       92,403       9.88       65,281       7.74       52,670       6.75  

Farmland

    142,590       9.61       136,334       10.06       67,005       7.17       65,918       7.82       50,293       6.44  

Total commercial real estate

    909,413       61.25       826,549       60.97       569,976       60.97       447,867       53.12       434,025       55.60  
                                                                                 

Total real estate loans

    1,109,425       74.73       1,022,252       75.41       716,791       76.67       604,959       71.75       591,923       75.83  
                                                                                 

Other loans:

                                                                               

Home equity

    86,932       5.86       74,271       5.48       51,748       5.54       56,563       6.71       56,414       7.23  

Consumer

    30,125       2.03       27,609       2.04       18,455       1.97       20,168       2.39       18,882       2.42  
                                                                                 

Commercial

    132,709       8.94       127,255       9.39       101,535       10.86       109,209       12.95       72,797       9.33  

Agricultural

    125,298       8.44       104,036       7.68       46,355       4.96       52,242       6.20       40,522       5.19  

Total commercial loans

    258,007       17.38       231,291       17.07       147,870       15.82       161,451       19.15       113,319       14.52  
                                                                                 

Total other loans

    375,064       25.27       333,171       24.59       218,073       23.33       238,182       28.25       188,615       24.17  
                                                                                 

Total loans

    1,484,489       100.00 %     1,355,423       100.00 %     934,864       100.00 %     843,141       100.00 %     780,538       100.00 %
                                                                                 

Deferred loan fees(2)

    -               (1,725 )             (1,725 )             (2,038 )             (1,303 )        

Allowance for credit losses (3)

    (16,440 )             (14,000 )             (12,500 )             (11,600 )             (8,600 )        
                                                                                 

Total loans, net

  $ 1,468,049             $ 1,339,678             $ 920,639             $ 829,503             $ 770,635          

 

(1) Excludes loans held-for-sale

(2) Deferred loan fees, net included in individual loan buckets above for the year ended December 31, 2023.
(3) Allowance for credit losses for the year ended December 31, 2023; allowance for loan losses for the year ended December 31, 2022.

 

 

Loans receivable, net increased $128.37 million, or 9.6%, to $1.47 billion at December 31, 2023 from $1.34 billion at December 31, 2022. Total commercial real estate loans increased $82.86 million, total commercial loans increased $26.72 million, home equity loans increased $12.66 million, total residential loans increased $4.31 million, and consumer loans increased $2.52 million.

 

Total loan originations were $750.68 million for the year ended December 31, 2023. Total residential 1-4 family originations were $400.51 million, which includes $347.71 million of originations of loans held-for-sale. Total commercial originations were $162.18 million. Total commercial real estate originations were $140.60 million. Home equity loan originations totaled $30.41 million. Consumer loan originations totaled $16.98 million. Loans held-for-sale increased by $3.18 million, to $11.43 million at December 31, 2023 from $8.25 million at December 31, 2022.

 

The following table includes the composition of the commercial real estate loan category:

 

   

December 31,

 
   

2023

   

2022

 
   

(In Thousands)

 

Non-owner occupied:

               

Multifamily

  $ 86,980     $ 75,472  

Industrial/warehouse

    43,983       28,279  

Office space

    20,150       20,891  

Lessors of nonresidential buildings

    63,515       62,727  

Hotels and other traveler accommodations

    58,157       47,846  

Construction and related industries

    17,530       9,754  

Wholesale and retail trade

    14,575       12,589  

Lessors of mini warehouses and self-storage units

    13,959       11,255  

Car washes

    10,792       -  

Healthcare and social assistance

    10,206       9,603  

Lessors of other real estate property

    9,778       10,782  

Bars and restaurants

    5,565       3,853  

Other real estate rental and leasing

    4,877       7,473  

Other

    54,556       45,956  

Total CRE non-owner occupied

    414,623       346,480  
                 

Owner occupied:

               

Office space

    40,657       36,457  

Real estate leasing activities

    28,998       28,140  

Automotive related

    22,241       23,974  

Healthcare and social assistance

    21,564       23,333  

Bars and restaurants

    14,954       12,500  

Hospitality industry related

    14,756       6,035  

Wholesale and retail trade

    13,861       4,138  

Construction and related

    11,840       9,123  

Other

    25,197       50,205  

Total CRE owner occupied

    194,068       193,905  

Deferred loan fees

    -       (1,315 )

Total commercial real estate

  $ 608,691     $ 539,070  

 

(1) Deferred loan fees, net included in individual loan categories above for the year ended December 31, 2023.

 

Loan Maturities. The following table sets forth the estimated maturity of the loan portfolio of the Bank at December 31, 2023. Balances exclude deferred loan fees and allowance for credit 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. 

 

   

One Year or Less

   

After One Year to Five Years

   

After Five Years to Fifteen Years

   

After Fifteen Years

   

Total

 
                                         

Total residential 1-4 family (1)

  $ 36,220     $ 13,180     $ 24,665     $ 125,947     $ 200,012  

Total commercial real estate

    72,612       34,672       186,346       615,783       909,413  

Home equity

    4,826       28,637       52,288       1,181       86,932  

Consumer

    2,071       19,881       7,799       374       30,125  

Total Commercial

    89,461       83,978       77,324       7,244       258,007  

Total loans (1)

  $ 205,190     $ 180,348     $ 348,422     $ 750,529     $ 1,484,489  

 

(1) Excludes loans held-for-sale

 

 

The following table includes loans by fixed or adjustable rates at December 31, 2023:  

 

   

Fixed

   

Adjustable

   

Total

 
   

(Dollars in Thousands)

 

Due after December 31, 2023

                       

Total residential 1-4 family (1)

  $ 43,207     $ 120,585     $ 163,792  

Total commercial real estate

    145,412       691,389       836,801  

Home equity

    5,694       76,412       82,106  

Consumer

    26,656       1,398       28,054  

Total commercial

    98,049       70,497       168,546  

Total due after December 31, 2023

    319,018       960,281       1,279,299  
                         

Due in less than one year

    109,140       96,050       205,190  
                         

Total loans (1)

  $ 428,158     $ 1,056,331     $ 1,484,489  
                         

Percent of total

    28.84 %     71.16 %     100.00 %

 

(1) Excludes loans held-for-sale

 

Delinquent Loans. The following table provides information regarding the Bank’s delinquent loans:

 

   

December 31, 2023

 
   

30-89 Days

   

90 Days and Greater

 
   

Number

   

Amount

   

Percentage of Total

   

Number

   

Amount

   

Percentage of Total

 
   

(Dollars in Thousands)

   

(Dollars in Thousands)

 

Loan type:

                                               

Real estate loans:

                                               

Residential 1-4 family

    3     $ 305       16.74 %     -     $ -       0.00 %

Commercial real estate

    1       697       38.28       -       -       0.00  

Commercial construction and development

    1       194       10.65       -       -       0.00  

Farmland

    1       404       22.19       1       26       100.00  

Other loans:

                                               

Home equity

    1       32       1.76       -       -       0.00  

Consumer

    57       115       6.32       -       -       0.00  

Agricultural

    2       74       4.06                       0.00  

Total

    66     $ 1,821       100.00 %     1     $ 26       100.00 %

 

 

Nonperforming Assets. The following table sets forth information regarding nonperforming assets:

 

   

December 31,

 
   

2023

   

2022

   

2021

   

2020

   

2019

 
   

(Dollars in Thousands)

 

Non-accrual loans

                                       

Real estate loans:

                                       

Residential 1-4 family

  $ 297     $ 483     $ 616     $ 684     $ 618  

Residential 1-4 family construction

    757       -       337       337       337  

Commercial real estate

    340       350       497       631       583  

Commercial construction and development

    -       -       -       36       50  

Farmland

    3,716       143       989       2,245       323  

Other loans:

                                       

Home equity

    182       96       100       94       78  

Consumer

    60       25       62       151       156  

Commercial

    27       44       516       537       750  

Agricultural

    3,016       1,059       1,718       1,542       499  

Accruing loans delinquent 90 days or more

                                       

Real estate loans:

                                       

Residential 1-4 family

    -       330       -       34       4  

Residential 1-4 family construction

    -       -       -       170       -  

Farmland

    26       -       -       -       -  

Other loans:

                                       

Commercial

    -       746       -       6       -  

Agricultural

    -       -       -       182       1,805  

Restructured loans

    -       4,502       2,224       1,824       247  

Total nonperforming loans

    8,421       7,778       7,059       8,473       5,450  

Real estate owned and other repossessed property, net

    5       -       4       25       26  

Total nonperforming assets

  $ 8,426     $ 7,778     $ 7,063     $ 8,498     $ 5,476  
                                         

Total nonperforming loans to total loans

    0.57 %     0.57 %     0.76 %     1.00 %     0.70 %

Total nonperforming loans to total assets

    0.41 %     0.40 %     0.49 %     0.67 %     0.52 %

Total nonaccrual loans to total loans

    0.57 %     0.24 %     0.59 %     0.74 %     0.47 %

Total nonperforming assets to total assets

    0.41 %     0.40 %     0.49 %     0.68 %     0.52 %

 

Nonaccrual loans as of December 31, 2023 and 2022 include $1,681,000 and $694,000, respectively of acquired loans that deteriorated subsequent to the acquisition date. 

 

During the year ended December 31, 2023, the Bank had one real estate owned and other repossessed asset. There were no subsequent write-downs on real estate owned or other repossessed assets during the year ended December 31, 2023. 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 subsequent write-up on real estate owned and other repossessed assets for a gain of $18,000 during the year ended December 31, 2022.

 

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. Management utilizes relevant available information to establish an allowance for credit losses on loans. The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans considered to have different risk characteristics that do not fall within any pool will be analyzed individually on a quarterly basis for potential individual reserve requirements. Collateral-dependent loans and nonperforming loans will generally be evaluated individually.

 

 

Management’s evaluation of classification of assets and adequacy of the allowance for credit 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, 2023

 
              Special                          
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

 
   

(In Thousands)

 

Real estate loans:

                                       

Residential 1-4 family

  $ 155,235     $ 1,168     $ 175     $ -     $ 156,578  

Residential 1-4 family construction

    42,677       -       757       -       43,434  

Commercial real estate

    600,492       7,860       339       -       608,691  

Commercial construction and development

    156,056       2,076       -       -       158,132  

Farmland

    140,848       -       1,742       -       142,590  

Other loans:

                                       

Home equity

    86,735       -       197       -       86,932  

Consumer

    30,038       18       69       -       30,125  

Commercial

    129,644       3,006       59       -       132,709  

Agricultural

    123,542       -       1,756       -       125,298  

Total loans

    1,465,267       14,128       5,094       -       1,484,489  
                                         

Real estate owned/repossessed property, net

                                    5  
                                         
                                    $ 1,484,494  

 

 

   

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  

 

 

 

Allowance for Credit Losses. The Bank segregates its loan portfolio for credit 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 expected losses 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 expected 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 credit losses on specific loans when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectability may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality.

 

Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. At December 31, 2023, we had $16.44 million in allowance for credit losses. At December 31, 2022, we had $14.00 million in allowance for loan losses.

 

While we believe we have established our existing allowance for credit 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 credit losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for credit 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.

 

 

The following table includes information for allowance for credit losses: 

 

   

Years Ended

 
   

December 31,

 
   

2023

   

2022

   

2021

 
   

(Dollars in Thousands)

 
                         

Beginning balance

  $ 14,000     $ 12,500     $ 11,600  

Impact of adopting ASC 326

    700       -       -  
                         

Provision for credit losses

    1,666       2,001       861  

Charge-offs

                       

Residential 1-4 Family

    -       (199 )     -  

Commercial real estate

    -       -       (35 )

Home equity

    -       (32 )     -  

Consumer

    (50 )     (31 )     (16 )

Commercial

    (129 )     (299 )     (6 )

Recoveries

                       

Residential 1-4 Family

    195       4       -  

Commercial real estate

    23       30       21  

Home equity

    13       -       -  

Consumer

    3       4       8  

Commercial

    19       22       67  

Net loan charge-offs (recoveries)

    74       (501 )     39  
                         

Ending balance

  $ 16,440     $ 14,000     $ 12,500  
                         

Allowance for credit losses to total loans excluding loans held-for-sale

    1.11 %     1.03 %     1.34 %

Allowance for credit losses to total nonperforming loans

    195.23 %     179.99 %     177.08 %

Allowance for credit losses to nonaccrual loans

    249.96 %     424.50 %     199.23 %

Net charge-offs (recoveries) to average loans outstanding during the period

    0.01 %     -0.04 %     0.00 %

 

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 credit losses by loan category and the percentage of loans in each category to total loans:

 

   

December 31,

 
   

2023

   

2022

   

2021

 
   

Amount

   

Percentage of Allowance to Total Allowance

   

Loan Category to Total Loans

   

Amount

   

Percentage of Allowance to Total Allowance

   

Loan Category to Total Loans

   

Amount

   

Percentage of Allowance to Total Allowance

   

Loan Category to Total Loans

 
   

(Dollars in Thousands)

 

Real estate loans:

                                                                       

Residential 1-4 family

  $ 1,866       11.35 %     13.48 %   $ 1,472       10.51 %     14.44 %   $ 1,596       12.77 %     15.70 %

Commercial real estate

    10,691       65.03       61.25       9,037       64.55       60.97       7,470       59.76       60.97  

Total real estate loans

    12,557       76.38       74.73       10,509       75.06       75.41       9,066       72.53       76.67  
                                                                         

Other loans:

                                                                       

Home equity

    540       3.28       5.86       509       3.64       5.48       533       4.26       5.54  

Consumer

    304       1.85       2.03       342       2.44       2.04       365       2.92       1.97  

Commercial

    3,039       18.49       17.38       2,640       18.86       17.07       2,536       20.29       15.82  

Total other loans

    3,883       23.62       25.27       3,491       24.94       24.59       3,434       27.47       23.33  
                                                                         

Total

  $ 16,440       100.00 %     100.00 %   $ 14,000       100.00 %     100.00 %   $ 12,500       100.00 %     100.00 %

 

 

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 $1.21 billion or 74.2% of the Bank’s total deposits at December 31, 2023 ($1.19 billion or 72.8% excluding IRA certificates of deposit). The presence of a high percentage of core deposits and, in particular, transaction accounts reflects in part due to 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 is in certificate of deposit form and there was growth in this area during 2023. This shift to certificate of deposits has added to our overall cost of funds and could continue to in the future. 

 

The following table includes deposit accounts and associated weighted average interest rates for each category of deposits:

 

   

December 31,

 
   

2023

   

2022

   

2021

 
                   

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

  $ 418,727       25.61 %     0.00 %   $ 468,955       28.68 %     0.00 %   $ 368,846       30.16 %     0.00 %

Interest-bearing checking

    211,101       12.91       0.05       252,922       15.47       0.11       203,410       16.64       0.02  

Savings

    230,711       14.11       0.06       273,790       16.74       0.06       223,069       18.25       0.06  

Money market

    330,274       20.20       1.66       387,947       23.7       1.12       277,469       22.7       0.25  

Total

    1,190,813       72.83       0.40       1,383,614       84.61       0.34       1,072,794       87.75       0.08  

Certificates of deposit accounts:

                                                                       

IRA certificates

    22,960       1.40       0.75       24,907       1.52       0.48       25,333       2.07       0.44  

Brokered certificates

    72,168       4.41       5.28       -       0.00       0.00       -       0.00       0.00  

Other certificates

    349,254       21.36       4.04       226,751       13.87       1.51       134,422       10.18       0.38  

Total certificates of deposit

    444,382       27.17       4.08       251,658       15.39       1.41       149,755       12.25       0.39  

Total deposits

  $ 1,635,195       100.00 %     1.45 %   $ 1,635,272       100.00 %     0.50 %   $ 1,222,549       100.00 %     0.12 %

 

Overall deposits remained consistent year over year at $1.64 billion. Certificates of deposits increased $192.72 million and includes $72.17 million in brokered certificates. All other categories of deposits decreased as follows: money market decreased by $57.67 million, noninterest checking decreased by $50.23 million, savings decreased $43.08 million and interest-bearing checking decreased $41.82 million. There was migration during the year from lower yielding deposit accounts to certificates of deposit as consumers shifted funds to higher yielding deposits. 

 

At December 31, 2023 and 2022, the Company held $618.78 million and $642.02 million, respectively, in deposit accounts that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") requirements of $250,000 and greater. However, the estimated amount of uninsured deposits was approximately $275.00 million or 17% of total deposits at December 31, 2023 considering other factors such as joint accounts, deposits collateralized by Bank securities and deposit sharing programs like Intrafi Cash Service. 

 

The following table shows the amount of certificates of deposit with balances of $250,000 and greater by time remaining until maturity as of December 31, 2023:

 

   

Balance

 
   

$250,000

 
   

and Greater

 
   

(In Thousands)

 

3 months or less

  $ 104,172  

Over 3 to 6 months

    39,107  

Over 6 to 12 months

    33,343  

Over 12 months

    3,988  

Total

  $ 180,610  

 

Our depositors are primarily residents of the state of Montana.

 

 

 

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 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 with Bell Bank.

 

Advances from FHLB and other borrowings increased by $106.35 million to $175.74 million at December 31, 2023 from $69.39 million at December 31, 2022. The increase was related to funding loan growth. The weighted average rate for borrowings was 5.48% as of December 31, 2023, compared to 4.52% at December 31, 2022. 

 

Other Long-Term Debt. The following table summarizes other long-term debt activity:

 

   

December 31,

   

December 31,

 
   

2023

   

2022

 
   

Net

   

Percent

   

Net

   

Percent

 
   

Amount

   

of Total

   

Amount

   

of Total

 
   

(Dollars in Thousands)

 

Subordinated debentures fixed at 5.50% to floating, due 2030

  $ 14,781     $ 25.05     $ 14,751     $ 25.07  

Subordinated debentures fixed at 3.50% to floating, due 2032

    39,063       66.21       38,938       66.17  

Subordinated debentures variable at 3-Month Secured Overnight Financing Rate plus 1.68%, due 2035

    5,155       8.74       5,155       8.76  

Total other long-term debt, net

  $ 58,999       100.00 %   $ 58,844       100.00 %

 

Total other long-term debt was $59.00 million at December 31, 2023 compared to $58.84 million at December 31, 2022.

 

Shareholders’ Equity

 

Total shareholders’ equity increased by $10.85 million or 6.8%, to $169.27 million at December 31, 2023 from $158.42 million at December 31, 2022. This increase was primarily the result of net income of $10.06 million and other comprehensive income of $6.41 million. These increases were partially offset by dividends paid of $4.44 million and a net of tax cumulative adjustment of $1.62 million related to the adoption of the CECL standard. 

 

 

 

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, 2023

   

Year Ended December 31, 2022

   

Year Ended December 31, 2021

 
   

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

  $ 328,533     $ 11,376       3.46 %   $ 336,779     $ 8,579       2.55 %   $ 215,978     $ 4,238       1.96 %

FHLB and FRB stock

    12,851       727       5.66       6,369       302       4.74       4,831       255       5.28  

Loans receivable(1)

    1,436,672       79,423       5.53       1,194,788       60,353       5.05       914,804       45,134       4.93  

Other earning assets

    2,671       89       3.33       34,170       228       0.67       74,102       120       0.16  

Total interest earning assets

    1,780,727       91,615       5.14       1,572,106       69,462       4.42       1,209,715       49,747       4.11  

Noninterest earning assets

    234,859                       196,813                       147,534                  

Total assets

  $ 2,015,586                     $ 1,768,919                     $ 1,357,249                  
                                                                         

Liabilities and equity:

                                                                       

Interest-bearing liabilities:

                                                                       

Deposit accounts:

                                                                       

Checking

  $ 237,006     $ 595       0.25 %   $ 244,208     $ 173       0.07 %   $ 190,645     $ 47       0.02 %

Savings

    238,695       146       0.06       269,033       128       0.05       198,648       117       0.06  

Money market

    331,199       5,548       1.68       358,122       1,711       0.48       244,113       545       0.22  

Certificates of deposit

    357,573       11,568       3.24       188,954       1,112       0.59       158,959       765       0.48  

FHLB advances and other borrowings

    159,667       8,562       5.36       14,627       514       3.51       9,411       175       1.86  

Other long-term debt

    58,930       2,719       4.61       59,807       2,512       4.2       29,834       1,558       5.22  

Total interest-bearing liabilities

    1,383,070       29,138       2.11       1,134,751       6,150       0.54       831,610       3,207       0.39  

Noninterest checking

    439,388                       453,841                       346,243                  

Other noninterest-bearing liabilities

    34,321                       24,672                       22,382                  

Total liabilities

    1,856,779                       1,613,264                       1,200,235                  
                                                                         

Total equity

    158,807                       155,655                       157,014                  
                                                                         

Total liabilities and equity

  $ 2,015,586                     $ 1,768,919                     $ 1,357,249                  

Net interest income/interest rate spread(2)

          $ 62,477       3.04 %           $ 63,312       3.88 %           $ 46,540       3.72 %
                                                                         

Net interest margin(3)

                    3.51 %                     4.03 %                     3.85 %

Total interest earning assets to interest-bearing liabilities

                    128.75 %                     138.54 %                     145.47 %

 

(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 credit losses (for year ended December 31, 2023) or provision for loan losses (for the year ended December 31, 2022) divided by average interest-earning assets.

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

 

 

 

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, 2023

   

Year Ended December 31, 2022

 
           

Due to

                   

Due to

         
   

Volume

   

Rate

   

Net

   

Volume

   

Rate

   

Net

 
   

(In Thousands)

 

Interest earning assets:

                                               

Investment securities

  $ (210 )   $ 3,007     $ 2,797     $ 2,370     $ 1,971     $ 4,341  

FHLB and FRB stock

    307       118       425       81       (34 )     47  

Loans receivable(1)

    12,218       6,852       19,070       13,814       1,405       15,219  

Other earning assets

    (210 )     71       (139 )     (65 )     173       108  

Total interest earning assets

    12,105       10,048       22,153       16,200       3,515       19,715  
                                                 

Interest-bearing liabilities:

                                               

Checking

   

(5)

     

427

     

422

     

13

     

113

     

126

 

Savings

   

(14)

     

32

     

18

     

41

     

(30)

     

11

 

Money market

   

(129)

     

3,966

     

3,837

     

255

     

911

     

1,166

 

Certificates of deposit

    992       9,464       10,456       144       203       347  

FHLB advances and other borrowings

    5,097       2,951       8,048       97       242       339  

Other long-term debt

    (37 )     244       207       1,565       (611 )     954  

Total interest-bearing liabilities

    5,904       17,084       22,988       2,115       828       2,943  
                                                 

Change in net interest income

  $ 6,201     $ (7,036 )   $ (835 )   $ 14,085     $ 2,687     $ 16,772  

 

(1)     Includes loans held-for-sale.

 

Results of Operations 

 

Comparison of Operating Results for the Years Ended December 31, 2023 and 2022

 

Net Income

 

Eagle’s net income for the year ended December 31, 2023 was $10.06 million compared to $10.70 million for the year ended December 31, 2022. The decrease of $645,000 of 6.0% was driven by a decrease in noninterest income of $3.50 million. This decrease was largely offset by a decrease in noninterest expense of $1.59 million and a decrease in provision for income taxes of $1.55 million. Basic and diluted earnings per common share were both $1.29 for the year ended December 31, 2023. Basic and diluted earnings per common share were both $1.45 for the prior period.

 

Net Interest Income

 

Net interest income decreased slightly to $62.48 million for the year ended December 31, 2023, from $63.31 million for the year ended December 31, 2022. This decrease of $835,000, or 1.3%, was primarily the result of an increase in interest expense of $22.99 million largely offset by an increase in interest and dividend income of $22.16 million.

 

Interest and Dividend Income 

 

Interest and dividend income was $91.62 million for the year ended December 31, 2023, compared to $69.46 million for the year ended December 31, 2022, an increase of $22.16 million, or 31.9%. Interest and fees on loans increased to $79.42 million for the year ended December 31, 2023 from $60.35 million for the same period ended December 31, 2022. This increase of $19.07 million, or 31.6%, was due in part to an increase in the average balance of loans. Average balances for loans receivable, including loans held-for-sale, for the year ended December 31, 2023 were $1.44 billion, compared to $1.19 billion for the year ended December 31, 2022. This represents an increase of $241.88 million, or 20.2%. In addition, the average interest rate earned on loans receivable increased by 48 basis points, from 5.05% for the year ended December 31, 2022, to 5.53% for the year ended December 31, 2023. Interest accretion on purchased loans was $1.01 million for the year ended December 31, 2023, which resulted in a 6 basis point increase in net interest margin compared to $1.56 million for the year ended December 31, 2022, which resulted in a 10 basis point increase in net interest margin. Interest on investment securities available-for-sale increased by $2.80 million or 32.6% period over period. This was driven by an increase in average interest rates earned on investments from 2.55% for the year ended December 31, 2022, to 3.46% for the year ended December 31, 2023. Average balances for investments decreased modestly from $336.78 million for the year ended December 31, 2022, to $328.53 million for the year ended December 31, 2023

 

 

Interest Expense 

 

Total interest expense was $29.14 million for the year ended December 31, 2023, increasing from $6.15 million for the year ended December 31, 2022. The increase of $22.99 million, was due to an increase of $14.74 million in interest expense on deposits and a net increase of $8.26 million in interest expense on total borrowings. The overall average rate on total deposits was 1.11% for the year ended December 31, 2023, compared to 0.21% for the year ended December 31, 2022. In addition, the average balance for total deposits was $1.60 billion for the year ended December 31, 2023, compared to $1.51 billion for the year ended December 31, 2022. The average balance for total borrowings increased from $74.43 million for the year ended December 31, 2022 to $218.60 million for the year ended December 31, 2023. The increase was due to FHLB advances and other borrowings being deployed to fund loan growth. The average rate paid on total borrowings also increased from 4.07% for the year ended December 31, 2022, to 5.16% for the year ended December 31, 2023 due to FHLB advances and other borrowings. 

 

Provision for Credit Losses

 

Provision for credit losses was $1.46 million for the year ended December 31, 2023, compared to $2.00 million in loan loss provisions, prior to the adoption of the Current Expected Credit Losses standard, for the year ended December 31, 2022. The provision for credit losses for the year ended December 31, 2023 includes a provision for credit losses on loans of $1.67 million and a decrease in the provision for unfunded commitments of $210,000.

 

Noninterest Income

 

Total noninterest income was $22.72 million for the year ended December 31, 2023, compared to $26.22 million for the year ended December 31, 2022. The decrease of $3.50 million, or 13.3% was primarily due to a decrease in a mortgage banking, net of $4.52 million for the year ended December 31, 2023. Mortgage banking, net includes net gain on sale of mortgage loans which decreased $7.21 million to $11.40 million for the year ended December 31, 2023, compared to $18.61 million for the year ended December 31, 2022. During the year ended December 31, 2023, $344.31 million residential mortgage loans were sold compared to $551.02 million in the prior year. Gross margin on sale of mortgage loans remained relatively consistent year over year. Gross margin was 3.31% for the year ended December 31, 2023 compared to 3.38% for the year ended December 31, 2022. 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 gain of $194,000 million for the year ended December 31, 2023 compared to a loss of $1.84 million for the year ended December 31, 2022.

 

Noninterest Expense

 

Noninterest expense was $72.09 million for the year ended December 31, 2023, compared to $73.68 million for the year ended December 31, 2022, a decrease of $1.59 million, or 2.2%. The largest driver of the decrease was acquisition costs of $2.30 million incurred during the year ended December 31, 2022 related to the completed merger with FCB. In addition, salaries and employee benefits decreased $1.55 million due to lower commissions paid on residential mortgage originations.

 

Provision for Income Taxes

 

Provision for income taxes was $1.60 million for the year ended December 31, 2023, compared to $3.15 million for the year ended December 31, 2022 due to the increase in proportion of tax-exempt income compared to pretax earnings. In addition, during the year ended December 31, 2023, the Company recorded tax credits and other tax benefits related to Low-Income Housing Tax Credit ("LIHTC") projects. The effective tax rate was 13.7% for the year ended December 31, 2023 compared to 22.7% for the prior year.

 

 

 

Liquidity and Capital Resources

 

Liquidity

 

The Bank is required by regulation to maintain sufficient levels of liquidity for safety and soundness purposes. Appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Des Moines. The Bank exceeded those minimum ratios as of December 31, 2023 and 2022.

 

The Company’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Des Moines and other borrowings. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Company uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit and demand deposit withdrawals, for investment purposes, to meet operating expenses and capital expenditures, for dividend payments, for 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.

 

The Bank's available borrowing capacity was approximately $398.50 million as of December 31, 2023 and $419.20 million as of December 31, 2022.

 

   

December 31,

   

December 31,

 
   

2023

   

2022

 
   

Borrowings

   

Remaining Borrowing

   

Borrowings

   

Remaining Borrowing

 
   

Outstanding

   

Capacity

   

Outstanding

   

Capacity

 
   

(Dollars in Thousands)

 

Federal Home Loan Bank advances

  $ 175,737     $ 266,017     $ 69,394     $ 296,200  

Federal Reserve Bank discount window

    -       32,472       -       38,000  

Correspondent bank lines of credit

    -       100,000       -       85,000  

Total

  $ 175,737     $ 398,489     $ 69,394     $ 419,200  

 

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

 

Brokered deposits are another source of funding the Bank may utilize from time to time. As of December 31, 2023, the Bank had $72.17 million in brokered certificates and $5.3 million in brokered money market deposits. As of December 31, 2022, the Bank had no brokered certificates and $5.3 million in brokered money market deposits. Policy limits for brokered deposits are set at 10% of assets. 

 

In addition to Bank level liquidity management, Eagle must manage liquidity at the parent company level for various operating needs, including the servicing of debt, the payment of dividends on our common stock, share repurchases, payment of general corporate expense, and potential capital infusions into subsidiaries. The primary source of liquidity for Eagle consists of dividends from the Bank, which is governed by certain rules and regulations of the Montana Division of Banking and Financial Institutions and the Federal Reserve, and access to capital markets. Eagle also has a line of credit with a correspondent bank, which was increased from $10.00 million to $15.00 million as of October 30, 2023. There was no outstanding balance for this line of credit at December 31, 2023 or December 31, 2022. Eagle's ability to receive dividends from the Bank in future periods will depend on several factors, including, without limitation, the Bank's future profits, asset quality, liquidity, and overall condition. In addition, both the Montana Division of Banking and Financial Institutions and Federal Reserve may require approval to pay dividends, based on certain regulatory statutes and limitations.

 

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

 

 

Comparison of Cash Flow for Years Ended December 31, 2023 and 2022

 

Net cash provided by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was $9.35 million for the year ended December 31, 2023 compared to $41.91 million for the prior year. Net cash provided by operating activities was lower for the year ended December 31, 2023 primarily due to changes in loans held-for-sale activity. Mortgage volumes have been impacted by the current interest rate environment. 

 

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 $108.21 million for the year ended December 31, 2023 compared to $235.04 million for the year ended December 31, 2022. Net cash used in investing activities for the year ended December 31, 2023, was impacted by loan originations being higher than loan pay-off and principal payments during the year. Loan origination and principal collection, net was $130.74 million for the year ended December 31, 2023. Pay-off activity has slowed with current interest rate levels. Available-for-sale securities sales and maturities, principal payments and calls were $66.72 million for the year ended December 31, 2023. A portion of the proceeds were used to purchase additional available-for-sale securities totaling $28.13 million. Net cash used in investing activities for the year ended December 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 ended December 31, 2022. In addition, available-for-sale securities purchases were $77.07 million during the year ended December 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. 

 

Net cash provided by the Company’s financing activities was $101.59 million for the year ended December 31, 2023 compared to $153.51 million for the year ended December 31, 2022. Net cash provided by financing activities for the year ended December 31, 2023 was driven by borrowings of $106.34 million utilized to fund continued loan growth. Net cash provided by financing activities for the year ended December 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. 

 

Capital Resources 

 

At December 31, 2023, the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200-basis point rise in interest rates scenario, decreased the economic value of equity (“EVE”) by 1.3% compared to an decrease of 12.6% at December 31, 2022. The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity.

 

The Bank’s Tier 1 leverage ratio, as measured under State of Montana and FRB rules, decreased from 9.82% as of December 31, 2022 to 9.75% as of December 31, 2023. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

 

As of December 31, 2023, the Company’s regulatory capital was in excess of all applicable regulatory requirements and is deemed “well capitalized” pursuant to State of Montana and FRB rules. At December 31, 2023, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios amounted to 13.01%, 11.96%, 11.96% and 9.75%, 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.

 

 

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

 

Changes in Market

 

Rate Sensitivity

   

Interest Rates

 

As of December 31, 2023

 

Policy

(Basis Points)

 

Year 1

 

Year 2

 

Limits

             

+200

 

-8.4%

 

6.3%

 

-15.0%

+100   -3.8%   9.0%   -10.0%

-100

 

4.0%

 

12.0%

 

-10.0%

-200   7.7%   12.6%   -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, 2023

 

Board Policy

(Basis Points)

 

Projected EVE

 

Limit

       

Maximum % change:

+400

 

-3.1%

 

-40.0%

+300

 

-1.9%

 

-35.0%

+200

 

-1.3%

 

-30.0%

+100

 

0.4%

 

-20.0%

0

 

0.0%

 

0.0%

-100

 

-3.1%

 

-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,

 
   

2023

   

2022

 
   

(In Thousands)

 

Commitments to extend credit

  $ 271,552     $ 367,494  

Letters of credit

    9,457       10,563  
 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

This item has been omitted based on Eagle’s status as a smaller reporting company.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part III of this report.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

 

 

ITEM 9A.

CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended, as of December 31, 2023, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of December 31, 2023, our disclosure controls and procedures were effective. 

 

Management Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in the 2013 Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. Based on this assessment, management concluded that, as of December 31, 2023, the Company’s internal control over financial reporting was effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2023 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
 

ITEM 9B.

OTHER INFORMATION.

 

Adoption or Termination of Trading Arrangements by Directors and Executive Officers.

 

During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K. 

 

ITEM 9C.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION.

 

Not applicable.

 

 

 

PART III

 

Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our year ended December 31, 2023.

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the 2024 Annual Meeting of Stockholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Board Attendance and Committees,” “Board Leadership Structure,” “The Board’s Role in Risk Oversight” and “Code of Ethics” is incorporated herein by reference. 

 

Information about our executive officers may be found under the caption "Executive Officers" in our Proxy Statement and is incorporated herein by reference.

 

Code of Ethics

 

We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at www.opportunitybank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or executive officers.

 

ITEM 11.

EXECUTIVE COMPENSATION.

 

The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information in the Proxy Statement set forth under the caption of “Beneficial Ownership of Common Stock” is incorporated herein by reference.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and “Board Independence” is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information in the Proxy Statement set forth under the caption of “Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” is incorporated herein by reference.

 

 

PART IV

ITEM 15.

EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.

 

(a)

(1)

The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiaries as of December 31, 2023 and 2022 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Shareholders' Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and Report of Independent Registered Public Accounting Firm.

 

 

(2)

Schedules omitted as they are not applicable.

 

 

(3)

Exhibits.

 

 

Exhibits 10.1 through 10.16 and 10.23 through 10.36 are management contracts or compensatory plans or arrangements.

 

  2.1 Agreement and Plan of Merger, dated as of September 30, 2021, by and among Eagle Bancorp Montana, Inc., Opportunity Bank of Montana, First Community Bancorp, Inc. and First Community bank (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed on October 1, 2021)*

 

 

3.1

Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on February 23, 2010).

     
 

3.2

Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q filed on May 9, 2019).

 

 

 

 

3.3 

Bylaws of Eagle Bancorp Montana, Inc., amended as of August 20, 2015 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 25, 2015).

 

 

 

 

4.1 

Form of Common Stock Certificate of Eagle Bancorp Montana, Inc. (incorporated by reference to Exhibit 4 of our Registration Statement on Form S-1 filed on December 17, 2009).

 

 

 

 

4.2

Form of 6.75% Subordinated Note due 2025 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on June 19, 2015).

     
 

4.3

Form of 5.75% Subordinated Note due 2022 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on February 13, 2017).

     
 

4.4

Description of Eagle Bancorp Montana, Inc.’s Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.4 of our Annual Report on Form 10-K filed on March 11, 2020).

     
  4.5 Form of 3.50% Subordinated Note due 2032 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on January 24, 2022). 
     
  4.6 Indenture dated January 21, 2022, by and between Eagle Bancorp Montana, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on January 24, 2022).
     
 

10.1 

Employment Contract, effective as of April 27, 2015, among Peter J. Johnson, Eagle Bancorp Montana, Inc. and Opportunity Bank of Montana (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on April 29, 2015).

     
 

10.2

Form of Change in Control Agreement entered into between Opportunity Bank of Montana and its executive officers (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September 28, 2022).

     
 

10.3

Amended Salary Continuation Agreement, dated April 27, 2015, between Peter J. Johnson and Opportunity Bank of Montana (incorporated by reference to Exhibit 10.7 of our Current Report on Form 8-K filed on August 24, 2015).

     
 

10.4

Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Peter J. Johnson (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on October 11, 2018).

     
  10.5 Second Amendment to the Salary Continuation Agreement between Opportunity Bank of Montana and Peter J. Johnson dated August 20, 2021 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on August 24, 2021). 
     
 

10.6

Salary Continuation Agreement, dated November 1, 2014, between Laura F. Clark and Opportunity Bank of Montana (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed on May 9, 2019).

     
 

10.7

Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Laura F. Clark (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on October 11, 2018).

     
  10.8 Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Laura F. Clark (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September 22, 2020).
     
 

10.9

Salary Continuation Agreement, dated November 16, 2006, between Rachel R. Amdahl and American Federal Savings Bank (incorporated by reference to Exhibit 10.18 of our Amendment No. 1 to Registration Statement on Form S-1 filed on February 1, 2010).

 

 

 

10.10

American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004 (incorporated by reference to Exhibit 10.19 of our Amendment No. 1 to Registration Statement on Form S-1 filed on February 1, 2010).

     
 

10.11

Summary of American Federal Savings Bank Bonus Plan (incorporated by reference to Exhibit 10.20 of our Amendment No. 2 to Registration Statement on Form S-1 filed on February 16, 2010).

     
 

10.12

2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-8 (File No. 333-182360) filed with the SEC on June 27, 2012).

     
 

10.13

Amendment No. 1 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers, and Employees (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K filed on March 15, 2016).

     
 

10.14

Amendment No. 2 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 21, 2017).

     
  10.15 Amendment No. 3 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed on May 11, 2020).
     
  10.16 Amendment No. 4 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 27, 2022.
     
 

10.17

Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 19, 2015).

     
 

10.18

Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 13, 2017).

     
  10.19 Form of Subordinated Note Purchase Agreement dated June 10, 2020, by and among Eagle Bancorp Montana, Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 10, 2020).
     
  10.20 Form of Subordinated Note Purchase Agreement dated January 21, 2022, by and among Eagle Bancorp Montana, Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on January 24, 2022). 
     
  10.21 Form of Registration Rights Agreement dated January 21, 2022, by and among Eagle Bancorp Montana, Inc. and the Purchasers (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on January 24, 2022). 
     
 

10.22

Form of Eagle Bancorp Montana, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.15 of our Annual Report on Form 10-K filed on March 12, 2019).

     
 

10.23

Salary Continuation Agreement between Opportunity Bank of Montana and Patrick D. Rensmon (incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on October 11, 2018).

     
 

10.24

Salary Continuation Agreement between Opportunity Bank of Montana and Mark O’Neill (incorporated by reference to Exhibit 10.4 of our Quarterly Report on Form 10-Q filed on November 14, 2018).

     
 

10.25

Salary Continuation Agreement between Opportunity Bank of Montana and Dale Field (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed on May 9, 2019).

     
  10.26 Second Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Dale Field (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed on November 4, 2022).
     
 

10.27

Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Dale Field (incorporated by reference to Exhibit 10.5 of our Quarterly Report on Form 10-Q filed on November 14, 2018).

     
 

10.28

Salary Continuation Agreement between Opportunity Bank of Montana and Chantelle Nash (incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q filed on May 9, 2019).

     
 

10.29

Amendment to Salary Continuation Agreement between Opportunity Bank of Montana and Chantelle Nash (incorporated by reference to Exhibit 10.6 of our Quarterly Report on Form 10-Q filed on November 14, 2018).

     
  10.30 Salary Continuation Agreement between Opportunity Bank of Montana and Linda Chilton (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed on November 5, 2020).
     
  10.31 2020 Non-Employee Director Award Plan (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed on May 11, 2020).
     
  10.32 Amendment No. 1 to the 2020 Non-Employee Director Award Plan (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 26, 2023).
     
  10.33 Salary Continuation Agreement between Opportunity Bank of Montana and Alana Binde (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed on November 4, 2022).

 

 

  10.34 Salary Continuation Agreement between Opportunity Bank of Montana and Miranda Spaulding (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q filed on November 9, 2022).
     
  10.35 Deferred Compensation Agreement between Eagle Bancorp Montana, Inc. and Peter J. Johnson (incorporated by reference to Exhibit 10.34 of our Annual Report on Form 10-K filed on March 8, 2023).
     
  10.36 Employment Agreement, effective as of May 25, 2023, among Laura F. Clark, Eagle Bancorp Montana, Inc., and Opportunity Bank of Montana (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on June 1, 2023).
     
 

21.1

Subsidiaries of Registrant.

     
 

23.1

Consent of Moss Adams LLP.

     
 

31.1

Certification by Laura F. Clark, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
 

31.2

Certification by Miranda J. Spaulding, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
 

32.1

Certification by Laura F. Clark, Chief Executive Officer and Miranda J. Spaulding, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
  97.1 Eagle Bancorp Montana, Inc. Clawback Policy

 

 

 


 

*

The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Eagle Bancorp Montana agrees to furnish supplementally a copy of such schedules, or any section thereof, to the SEC upon request.

   
(b) See item 15(a)(3) above.
   
(c) See Item 15(a)(1) and 15(a)(2) above.

 

101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
   
101.SCH Inline XBRL Taxonomy Extension Schema Document
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 

ITEM 16.

FORM 10-K SUMMARY.

 

None.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 EAGLE BANCORP MONTANA, INC.

 

 

 

 

 

 

 

/s/ Laura F. Clark 

 

 

 

Laura F. Clark

 

 

 

President and Chief Executive Officer

 

    March 6, 2024  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures

 

Title

 

Date

         

  /s/ Laura F. Clark 

 

President and Chief Executive Officer

  March 6, 2024
Laura F. Clark  

Director (Principal Executive Officer)

   
         

 /s/ Miranda J. Spaulding

 

Chief Financial Officer

  March 6, 2024

Miranda J. Spaulding

 

(Principal Financial Officer and

Principal Accounting Officer)

   
         

/s/ Rick F. Hays

 

Chairman

  March 6, 2024

Rick F. Hays

       
         

/s/ Thomas J. McCarvel

 

Vice Chairman

  March 6, 2024

Thomas J. McCarvel

       
         
/s/ Peter J. Johnson   Director   March 6, 2024
Peter J. Johnson        
         

/s/ Maureen J. Rude

 

Director

  March 6, 2024

Maureen J. Rude

       
         

/s/ Shavon R. Cape

 

Director

  March 6, 2024

Shavon R. Cape

       
         

 /s/ Tanya J. Chemodurow

 

Director

  March 6, 2024

Tanya J. Chemodurow

       
         

/s/ Kenneth M. Walsh

 

Director

  March 6, 2024

Kenneth M. Walsh

       
         

/s/ Corey Jensen

 

Director

  March 6, 2024

Corey Jensen

       
         

/s/ Benjamin G. Ruddy

 

Director

  March 6, 2024

Benjamin G. Ruddy

       
         
/s/ Cynthia A. Utterback   Director   March 6, 2024
Cynthia A. Utterback        
         

/s/ Samuel D. Waters

 

Director

  March 6, 2024

Samuel D. Waters

       

 

 

 

ebmt20191231_10kimg001.jpg

 

AND SUBSIDIARIES

 


 

CONSOLIDATED FINANCIAL STATEMENTS

 

and

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

December 31, 2023 and 2022

 


 

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

Contents

 

 Page
  
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB ID: 659)1
  
Financial Statements 
  
Consolidated Statements of Financial Condition 3
  
Consolidated Statements of Income 4
  
Consolidated Statements of Comprehensive Income5
  
Consolidated Statements of Changes in Shareholders’ Equity6
  
Consolidated Statements of Cash Flows 7
  
Notes to Consolidated Financial Statements9

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

Eagle Bancorp Montana, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial condition of Eagle Bancorp Montana, Inc. (and subsidiaries) (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principle

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the allowance for credit losses as of January 1, 2023 due to the adoption of Accounting Standards Update No. 2016-13, which established Accounting Standards Codification Topic 326, Financial Instruments Credit Losses.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

 

 

Allowance for Credit Losses Qualitative Factors

 

As described in Note 4 to the consolidated financial statements, the Company’s allowance for credit losses (ACL) on loans was $16.4 million at December 31, 2023. The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL on loans is measured on a collective pool basis when similar risk characteristics exist. The Company utilizes the Weighted Average Remaining Maturity (WARM) methodology, which applies historical loss rates over the estimated remaining life of each loan pool. Modeled expected losses are adjusted to reflect current economic conditions and reasonable and supportable forecasts through the use of quantitative models and qualitative factors. Loans considered to have different risk characteristics that do not fall within any pool are analyzed individually.

 

We identified management’s estimation of qualitative factors used to adjust the modeled expected losses as a critical audit matter.   The estimation of these factors, based on management’s evaluation of available internal and external data, is subjective in nature and requires significant judgment by management. Auditing management’s judgments regarding the determination of qualitative factors applied to the ACL on loans involves a high degree of subjectivity.

 

The primary procedures we performed to address this critical audit matter included:

 

 

Testing the methodology used in the ACL calculation and evaluating whether the qualitative factors used in the calculation are supported by management’s analysis, including testing the key underlying information utilized by management; or by performing an independent analysis of significant assumptions;

 

 

Testing the mathematical accuracy of the ACL calculation and the application of the qualitative factors within the calculation;

 

 

Developing an independent expectation of the ACL using a combination of internal and external data and comparing the expected balance to the Company’s recorded amounts.

 

Goodwill Impairment

 

As described in Note 1 to the consolidated financial statements, the Company’s goodwill balance was $34.7 million as of December 31, 2023. The Company assesses goodwill for impairment annually, or more often if events or circumstances indicate there may be impairment. During the year ended December 31, 2023, the Company identified a triggering event and performed an interim impairment test as of August 31, 2023 in addition to its annual impairment test as of October 31, 2023. The impairment tests did not result in any goodwill impairment for the year ended December 31, 2023.

 

We identified the goodwill impairment tests performed during the period as a critical audit matter. The determination of the fair value of the Company’s reporting unit requires management to make significant assumptions that are subject to estimation uncertainty. The performance of audit procedures related to management’s estimates for the interim and annual impairment tests required extensive audit effort, including the use of personnel with specialized skill and knowledge pertaining to valuation techniques. Additionally, the evaluation of audit evidence of more sensitive assumptions required especially challenging and subjective auditor judgment, including those assumptions underlying the projections of future cash flows utilized in the income approach.

 

The primary procedures we performed to address this critical audit matter included:

 

 

With the assistance of our valuation specialist, (1) testing the reasonableness of the methods and certain key assumptions used and (2) performing a shadow calculation to recreate the results of the valuation model;

 

 

Evaluating the relative weight assigned to the valuations indicated by the market and income approaches;

 

 

Validating the completeness, accuracy, and reliability of underlying data used in our analysis;

 

 

Evaluating the reasonableness of the assumptions utilized by management in the determination of the estimated projected cash flows used in the income approach and the reasonableness of the selection of peer data utilized in the market approach.

 

/s/ Moss Adams LLP

 

Everett, Washington

March 6, 2024

 

We have served as the Company’s auditor since 2019.

 

  

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

 

  

December 31,

 
  

2023

  

2022

 

ASSETS:

        

Cash and due from banks

 $23,243  $19,321 

Interest-bearing deposits in banks

  1,302   2,490 

Federal funds sold

  -   - 

Total cash and cash equivalents

  24,545   21,811 
         

Securities available-for-sale, at fair value (amortized cost of $345,355 and $385,275 at December 31, 2023 and December 31, 2022, respectively)

  318,279   349,495 

Federal Home Loan Bank ("FHLB") stock

  9,191   5,089 

Federal Reserve Bank ("FRB") stock

  4,131   4,131 

Mortgage loans held-for-sale, at fair value

  11,432   8,250 

Loans receivable, net of allowance for credit losses of $16,440 and $14,000 at December 31, 2023 and December 31, 2022, respectively (1)

  1,468,049   1,339,678 

Accrued interest and dividends receivable

  12,485   11,284 

Mortgage servicing rights, net

  15,853   15,412 

Assets held-for-sale, at fair value

  -   1,305 

Premises and equipment, net

  94,282   84,323 

Cash surrender value of life insurance, net

  47,939   47,724 

Goodwill

  34,740   34,740 

Core deposit intangible, net

  5,880   7,459 

Deferred tax asset, net

  9,771   10,808 

Other assets

  19,089   6,875 

Total assets

 $2,075,666  $1,948,384 
         

LIABILITIES:

        

Deposit accounts:

        

Noninterest-bearing

 $418,727  $468,955 

Interest-bearing

  1,216,468   1,166,317 

Total deposits

  1,635,195   1,635,272 
         

Accrued expenses and other liabilities

  36,462   26,458 

FHLB advances and other borrowings

  175,737   69,394 

Other long-term debt:

        

Principal amount

  60,155   60,155 

Unamortized debt issuance costs

  (1,156)  (1,311)

Total other long-term debt, net

  58,999   58,844 
         

Total liabilities

  1,906,393   1,789,968 
         

COMMITMENTS AND CONTINGENCIES (NOTE 11)

          
         

SHAREHOLDERS' EQUITY:

        

Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; no shares issued or outstanding)

  -   - 

Common stock ($0.01 par value; 20,000,000 shares authorized; 8,507,429 shares issued at December 31, 2023 and 2022 respectively; 8,016,784 and 8,006,033 shares outstanding at December 31, 2023 and 2022, respectively)

  85   85 

Additional paid-in capital

  108,819   109,164 

Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")

  (4,583)  (5,156)

Treasury stock, at cost (490,645 and 501,396 shares at December 31, 2023 and 2022, respectively)

  (11,124)  (11,343)

Retained earnings

  96,021   92,023 

Accumulated other comprehensive loss, net of tax

  (19,945)  (26,357)

Total shareholders' equity

  169,273   158,416 
         

Total liabilities and shareholders' equity

 $2,075,666  $1,948,384 
         

(1) Allowance for credit losses at December 31, 2023; allowance for loan losses at December 31, 2022.

        

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 

INTEREST AND DIVIDEND INCOME:

        

Interest and fees on loans

 $79,423  $60,353 

Securities available-for-sale

  11,376   8,579 

FHLB and FRB dividends

  727   302 

Other interest income

  89   228 

Total interest and dividend income

  91,615   69,462 
         

INTEREST EXPENSE:

        

Deposits

  17,857   3,124 

FHLB advances and other borrowings

  8,562   514 

Other long-term debt

  2,719   2,512 

Total interest expense

  29,138   6,150 
         

NET INTEREST INCOME

  62,477   63,312 
         

Provision for credit losses (1)

  1,456   2,001 
         

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

  61,021   61,311 
         

NONINTEREST INCOME:

        

Service charges on deposit accounts

  1,757   1,668 

Mortgage banking, net

  14,970   19,489 

Interchange and ATM fees

  2,524   2,375 

Appreciation in cash surrender value of life insurance

  1,466   1,035 

Net loss on sale of available-for-sale securities

  (222)  (6)

Other noninterest income

  2,227   1,659 

Total noninterest income

  22,722   26,220 
         

NONINTEREST EXPENSE:

        

Salaries and employee benefits

  42,973   44,521 

Occupancy and equipment expense

  8,072   7,601 

Data processing

  5,943   5,995 

Advertising

  1,375   1,419 

Amortization

  1,587   1,334 

Loan costs

  1,887   2,036 

Federal Deposit Insurance Corporation ("FDIC") insurance premiums

  1,150   559 

Professional and examination fees

  1,922   1,469 

Acquisition costs

  -   2,296 

Other noninterest expense

  7,180   6,453 

Total noninterest expense

  72,089   73,683 
         

INCOME BEFORE PROVISION FOR INCOME TAXES

  11,654   13,848 
         

Provision for income taxes

  1,598   3,147 
         

NET INCOME

 $10,056  $10,701 
         

BASIC EARNINGS PER COMMON SHARE

 $1.29  $1.45 
         

DILUTED EARNINGS PER COMMON SHARE

 $1.29  $1.45 
         

(1) Provision for credit losses for the year ended December 31, 2023; provision for loan losses for the year ended December 31, 2022.

        

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
         

NET INCOME

 $10,056  $10,701 
         

OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS) BEFORE TAX:

        

Change in fair value of investment securities available-for-sale

  8,482   (40,526)

Reclassification for net realized losses on investment securities available-for-sale

  222   6 

Total other comprehensive income (loss)

  8,704   (40,520)
         

Income tax (provision) benefit related to securities available-for-sale

  (2,292)  10,670 
         

COMPREHENSIVE INCOME (LOSS)

 $16,468  $(19,149)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands, Except for Per Share Data)

 

                          

Accumulated

     
          

Additional

  

Unallocated

          

Other

     
  

Preferred

  

Common

  

Paid-In

  

ESOP

  

Treasury

  

Retained

  

Comprehensive

     
  

Stock

  

Stock

  

Capital

  

Shares

  

Stock

  

Earnings

  

(Loss) Income

  

Total

 
                                 

Balance at January 1, 2023

 $-  $85  $109,164  $(5,156) $(11,343) $92,023  $(26,357) $158,416 

Net income

  -   -   -   -   -   10,056   -   10,056 

Impact of the adoption of ASC 326 Credit Losses

                 (1,616)     (1,616)

Other comprehensive income

  -   -   -   -   -   -   6,412   6,412 

Dividends paid ($0.555 per share)

  -   -   -   -   -   (4,442)  -   (4,442)

Stock compensation expense

  -   -   347   -   -   -   -   347 

Treasury stock reissued for stock incentive plans (28,652 shares at $15.72 average cost per share)

  -   -   (450)  -   450   -   -   - 

ESOP shares allocated (23,990 shares)

  -   -   (242)  573   -   -   -   331 

Treasury stock purchased (17,901 shares at $12.89 average cost per share)

  -   -   -   -   (231)  -   -   (231)

Balance at December 31, 2023

 $-  $85  $108,819  $(4,583) $(11,124) $96,021  $(19,945) $169,273 
                                 
                                 

Balance at January 1, 2022

 $-  $71  $80,832  $(5,729) $(7,321) $85,383  $3,493  $156,729 

Net income

  -   -   -   -   -   10,701   -   10,701 

Other comprehensive loss

  -   -   -   -   -   -   (29,850)  (29,850)

Dividends paid ($0.525 per share)

  -   -   -   -   -   (4,061)  -   (4,061)

Stock issued in connection with First Community Bancorp, Inc. acquisition

  -   14   28,337   -   -   -   -   28,351 

Stock compensation expense

  -   -   491   -   -   -   -   491 

Treasury stock reissued for stock incentive plans (25,751 shares at $15.85 average cost per share)

  -   -   (408)  -   408   -   -   - 

ESOP shares allocated (23,990 shares)

  -   -   (88)  573   -   -   -   485 

Treasury stock purchased (211,125 shares at $20.98 average cost per share)

  -   -   -   -   (4,430)  -   -   (4,430)

Balance at December 31, 2022

 $-  $85  $109,164  $(5,156) $(11,343) $92,023  $(26,357) $158,416 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

 $10,056  $10,701 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Provision for credit losses (1)

  1,456   2,001 

Recovery of servicing rights

  -   (56)

Depreciation

  3,934   3,576 

Net amortization of investment securities premiums and discounts

  1,051   1,486 

Amortization of mortgage servicing rights

  1,706   2,118 

Amortization of right-of-use assets

  664   681 

Amortization of core deposit intangibles

  1,587   1,334 

Compensation expense related to restricted stock awards

  347   491 

ESOP compensation expense for allocated shares

  331   485 

Deferred income tax (benefit) provision

  (671)  2,069 

Net gain on sale of loans

  (11,396)  (18,610)

Originations of loans held-for-sale

  (347,711)  (532,558)

Proceeds from sales of loans held-for-sale

  353,778   568,737 

Net gain on sale of real estate owned and other repossessed assets

  -   (203)

Net gain on sale/disposal of premises and equipment

  (61)  (105)

Net appreciation in cash surrender value of life insurance

  (1,466)  (1,035)

Net change in:

        

Accrued interest and dividends receivable

  (1,201)  (2,779)

Other assets

  (9,990)  14 

Accrued expenses and other liabilities

  6,932   3,564 

Net cash provided by operating activities

  9,346   41,911 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Activity in available-for-sale securities:

        

Sales

  34,020   43,794 

Maturities, principal payments and calls

  32,695   39,157 

Purchases

  (28,126)  (77,073)

FHLB stock purchased

  (4,102)  (2,762)

FRB stock purchased

  -   (317)

Net cash received from acquisitions

  -   13,397 

Loan origination and principal collection, net

  (130,742)  (234,255)

Proceeds (purchase) of bank owned life insurance

  1,230   (1,600)

Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans

  -   535 

Proceeds from sale of premises and equipment

  1,009   845 

Purchases of premises and equipment, net

  (14,189)  (16,762)

Net cash used in investing activities

  (108,205)  (235,041)
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Net (decrease) increase in deposits

  (77)  91,616 

Net decrease in repurchase agreements

  -   (22,853)

Net short-term advances from FHLB and other borrowings

  91,343   69,394 

Long-term advances from FHLB and other borrowings

  15,000   - 

Payments on long-term FHLB and other borrowings

  -   (5,000)

Proceeds from issuance of subordinated debentures

  -   40,000 

Repayment of subordinated debentures

  -   (10,000)

Payments for debt issuance costs

  -   (1,159)

Purchase of treasury stock

  (231)  (4,430)

Dividends paid

  (4,442)  (4,061)

Net cash provided by financing activities

  101,593   153,507 
         

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  2,734   (39,623)
         

CASH AND CASH EQUIVALENTS, beginning of period

  21,811   61,434 
         

CASH AND CASH EQUIVALENTS, end of period

 $24,545  $21,811 
         
(1) Provision for credit losses for the year ended December 31, 2023; provision for loan losses for the year ended December 31, 2022.        

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands)

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

SUPPLEMENTAL CASH FLOW INFORMATION:

        

Cash paid during the year for interest

 $24,815  $4,951 

Cash paid during the year for income taxes, net of refunds

  3,009   2,930 

Acquisitions:

        

Assets acquired, excluding cash

  -   346,739 

Liabilities assumed

  -   345,727 
         

NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:

        

Increase (decrease) in fair value of securities available-for-sale

 $8,704  $(40,520)

Mortgage servicing rights recognized

  2,147   3,781 

Right-of-use assets obtained in exchange for lease liabilities

  11   204 

Loans transferred to real estate and other assets acquired in foreclosure

  5   328 

Stock issued in connection with acquisitions

  -   28,351 

Commitments to invest in Low-Income Housing Tax Credit projects

  2,660   - 

Cumulative effect adjustment to retained earnings due to the adoption of ASC 326 Credit Losses

  (1,616)  - 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:Organization and Summary of Significant Accounting Policies   

 

Organization

 

Eagle Bancorp Montana, Inc. (“Eagle” or the “Company”), is a Delaware corporation that holds 100% of the capital stock of Opportunity Bank of Montana (“OBMT” or the “Bank”), formerly American Federal Savings Bank (“AFSB”). The Bank was founded in 1922 as a Montana chartered building and loan association and has conducted operations and maintained its administrative office in Helena, Montana since that time. In 1975, the Bank adopted a federal thrift charter and in October 2014 converted to a Montana chartered commercial bank and became a member bank in the Federal Reserve System.

 

Eagle Bancorp Statutory Trust I (the “Trust”) was established in September 2005 and is owned 100% by Eagle.

 

In September 2021, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with First Community Bancorp, Inc. ("FCB"), a Montana corporation, and FCB's wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, FCB would merge with and into Eagle, with Eagle continuing as the surviving corporation. The merger closed on April 30, 2022. First Community Bank operated nine branches in Ashland, Culbertson, Froid, Glasgow, Helena, Hinsdale, Three Forks and Wolf Point, Montana. 

 

In March 2021, the Bank established a subsidiary, Opportunity Housing Fund, LLC (“OHF”), to invest in Low-Income Housing Tax Credit (“LIHTC”) projects. The LIHTC program is designed to encourage capital investment in construction and rehabilitation of low-income housing. During the year ended December 31, 2021, OHF made investments in two LIHTC projects. Investments in LIHTC projects are included in other assets on the statement of financial condition and totaled $7,644,000 and $1,261,000 as of December 31, 2023 and 2022, respectively. Outstanding funding obligations for LIHTC projects are included in other liabilities on the statement of financial condition and totaled $2,660,000 at December 31, 2023. The majority of these obligations are expected to be funded in 2024.  

 

On January 1, 2020, the Company acquired Western Holding Company of Wolf Point (“WHC”), a Montana corporation, and WHC’s wholly-owned subsidiary, Western Bank of Wolf Point ("WB"), a Montana chartered commercial bank. The acquisition included one branch in Wolf Point, Montana. In addition, Western Financial Services, Inc. ("WFS") was acquired through the WHC merger. In December 2023, WFS changed its name to Opportunity Financial Services, Inc. ("OFS"). OFS facilitates deferred payment contracts for customers that produce agricultural products.

 

The Bank is headquartered in Helena, Montana, and has additional branches in Ashland, Big Timber, Billings, Bozeman, Butte, Choteau, Culbertson, Denton, Dutton, Froid, Glasgow, Great Falls, Hamilton, Hinsdale, Livingston, Missoula, Sheridan, Three Forks, Townsend, Twin Bridges, Winifred and Wolf Point, Montana. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities.

 

Basis of Financial Statement Presentation and Use of Estimates

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and the potential impairment of goodwill. 

 

Principles of Consolidation

 

The consolidated financial statements include Eagle, the Bank, the Trust, OFS and OHF. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Reclassifications

 

Certain prior period amounts were reclassified to conform to the presentation for 2023. These reclassifications had no impact on net income or total shareholders’ equity.

 

Subsequent Events

 

The Company has evaluated events and transactions subsequent to  December 31, 2023 for recognition and/or disclosure.

 

Significant Group Concentrations of Credit Risk

 

Most of the Company’s business activity is with customers located within Montana. Note 3: Investment Securities discusses the types of securities that the Company invests in. Note 4: Loans discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer.

 

- 9 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:Organization and Summary of Significant Accounting Policies – continued

 

Cash and Cash Equivalents 

 

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the statements of financial condition captions “cash and due from banks,” “interest-bearing deposits in banks” and federal funds sold,” all of which mature within ninety days. 

 

Investment Securities

 

The Company can designate debt and equity securities as held-to-maturity, available-for-sale or trading. At December 31, 2023 and 2022 all securities were designated as available-for-sale.

 

Held-to-Maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts.

 

Available-for-Sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. In general, premiums are amortized and discounts are accreted over the period remaining to maturity, except for premiums on callable bonds which are amortized to the earliest call date.

 

Trading – Investments that are purchased with the intent of selling them within a short period of time.

 

Allowance for Credit Losses - Available-for-Sale Securities

 

For available-for-sale securities in an unrealized loss position, the Company will first determine whether it intends to sell the security or will more likely than not be required to sell the security before recovery of its amortized cost basis. The security’s amortized cost basis will be written down to fair value through other expense if either of the criteria regarding intent or requirement to sell is met. If neither of the aforementioned criteria are met, the Company will determine whether the decline in fair value has resulted from credit losses. If a credit loss exists, the Company will report the portion of impairment related to credit losses in an allowance for credit losses with an offsetting entry to net income. The amount of ACL is limited to the amount fair value is less than the amortized cost basis. Any portion of estimated credit losses that have not been recorded through an ACL are reported in other comprehensive income net of tax.

 

Federal Home Loan Bank Stock

 

The Company’s investment in Federal Home Loan Bank (“FHLB”) of Des Moines stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on total assets and a specific percentage of its outstanding FHLB advances. The Company had 91,907 and 50,888 FHLB shares at December 31, 2023 and 2022, respectively. Dividends are paid quarterly and are subject to FHLB board approval. Management evaluates FHLB stock for impairment as needed.

 

Federal Reserve Bank Stock

 

The Company’s investment in FRB stock is a restricted investment carried at cost, which approximates its fair value. Although the par value of the stock is $100 per share, banks pay only $50 per share at the time of purchase, with the understanding that the other half of the subscription amount is subject to call at any time. As a member of the Federal Reserve System, the Company is required to maintain a minimum level of investment in FRB stock based on a specific percentage of its capital and surplus. The Company had 82,618 FRB shares at both  December 31, 2023 and 2022. Dividends are received semi-annually at a fixed rate of 6.00% on the total number of shares.

 

Mortgage Loans Held-for-Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Mortgage loans held-for-sale are sold with mortgage servicing rights either released or retained by the Bank. Fair value for loans held-for-sale is determined by commitments from investors or current secondary market prices for loans with similar coupons and maturities. Loan origination fees and costs are recognized in earnings at the time of origination.

 

Loans   

 

The Bank originates mortgage, commercial, agricultural and consumer loans primarily to customers located in Montana. The ability of the Bank’s debtors to honor their contracts is dependent upon the general economic conditions in this area.

 

 

 

- 10 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Loans – continued

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for credit losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method.

 

Nonaccrual and Past Due Loans Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Bank considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Bank's collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. 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.

 

Residential 1-4 Family Loans – The Bank originates 1-4 family residential mortgage loans collateralized by owner-occupied and non-owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80.00% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market.

   

Commercial Real Estate Loans – The Bank makes commercial real estate loans, land loans (both developed and undeveloped) and loans on multi-family dwellings. Commercial real estate loans are collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower.

 

Construction Loans The Bank makes loans to finance the construction of residential properties. The majority of the Bank’s residential construction loans are made to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Bank also originates commercial construction and development loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.

 

Agricultural Loans – The Bank makes agricultural operating loans as well as long term agricultural real estate loans. Agricultural operating loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural real estate loans are secured with farm and ranch real estate. Payments on both types of agricultural loans are dependent on successful operation of the farm and/or ranch. Repayment is also affected by agricultural conditions that may include adverse weather conditions such as drought, hail, flooding and severe winters. Also impacting the borrower’s ability to repay are commodity prices associated with the agricultural operation. When underwriting these loans, the Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the farm or ranch’s operating history, future operating projections, current and projected commodity prices and crop insurance. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower.

 

- 11 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Loans – continued

 

Home Equity Loans The Bank originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Bank. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Bank attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85.00% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan.

 

Consumer Loans Consumer loans made by the Bank include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers.

 

Commercial Loans A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Bank’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Bank also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. 

 

Allowance for Credit Losses  Loans

 

The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The Company has elected to exclude accrued interest receivable from the amortized cost basis of loans, and accrued interest is reported separately on the consolidated statements of financial condition. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and recoveries are credited to the allowance when received. In the case of recoveries, amounts may not exceed the aggregate of amounts previously charged off.

 

Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from 2014 to present. Adjustments to historical loss information are made when historical data is not likely reflective of the current portfolio due to changing economic conditions or when there is a lack of default or loss history. Changes in the allowance for credit losses are recorded as a provision for credit losses.

 

Collective Assessment – The allowance for credit losses on loans is measured on a collective pool basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped first by call report code, then by similar risk characteristics.

 

Determining the Contractual Life – Expected credit losses are estimated over the contractual life of the loans, adjusted for expected prepayments when appropriate. The contractual life excludes expected extensions, renewals and modifications. Prepayment assumptions will be determined by analysis of historical behavior by loan pool.

 

The Company has elected to use the Weighted Average Remaining Maturity (WARM) methodology for all pools. The WARM methodology looks at historical quarterly loss rates for each loan pool over the established “look back” period to determine an average loss rate for each pool. Each pool is analyzed to determine the remaining life using amortization schedules, including prepayments.

 

Historical charge off and recovery activity is compared to loan balances in each pool quarterly and is averaged to determine an estimated annual charge off rate. The average loss rate over this look-back period is applied annually over the remaining life of the pool to determine an expected loss percentage.

 

The Company incorporates current economic conditions based on quantitative models that compare national economic indicators to peer charge off rates and local economic indicators to the Company's charge off rates. The expected loss rate for each pool is adjusted by the difference between the Bank's historical loss rate and the rate determined in the economic models.

 

Additionally, the Company uses reasonable and supportable forecasted economic indicators through a qualitative adjustment. Economic indicators are compared to peer charge off rates through a regression analysis. Predicted loss rates are then determined by applying the forecasted economic indicators to the regression and are compared to the current charge off rates to determine any potential qualitative adjustment. 

 

The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. The methodology primarily relies on historic charge off data to determine a loss rate to apply to each pool and does not inherently consider risks in the loan portfolio. Therefore, the Company adjusts the modeled expected losses by qualitative adjustments to incorporate significant risks to form a sufficient basis to estimate the credit losses.

 

- 12 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Allowance for Credit Losses – continued

 

Individual Analysis – Loans considered to have different risk characteristics that do not fall within any pool will be analyzed individually on a quarterly basis for potential individual reserve requirements.

 

The Company has elected the collateral-dependent practical expedient for its collateral-dependent loans, where estimated credit losses are based upon the fair value of the collateral, less costs to sell if applicable. This practical expedient can be applied to a loan if the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. If it is probable that the Company will foreclose on the collateral, the use of the fair value of the collateral to calculate an allowance for credit loss is required. Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the analysis of a collateral-dependent loan, the appraisal is reviewed internally.

 

Where the primary and/or expected source of repayment of a specific loan is believed to be the receipt of principal and interest payments from the borrower and/or the refinancing of the loan by another creditor, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets actually received by the borrower from other creditors and/or from the Company’s knowledge of terms generally available from other banks.

 

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

 

The Company identifies a modification to a borrower experiencing financial difficulty as a loan where a concession is granted for economic or legal reasons related to the borrower's financial difficulties that it would not otherwise consider. Loan modifications include situations where there is principal forgiveness, interest rate reductions, term extensions, other-than-significant payment delays, or any combinations of these. The allowance for credit losses on loans that are considered modifications to borrowers experiencing financial difficulty are measured by the Company using the same method as all other loans held for investment.

 

Allowance for Credit Losses Unfunded Commitments

 

The Company estimates expected credit losses over the period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is adjusted through a provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the allowance for credit losses on loans and is applied at the same collective pool level.

 

Mortgage Servicing Rights

 

Servicing assets are recognized as separate assets when rights are acquired through sale of financial assets. 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.

 

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

 

- 13 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Premises and Equipment

 

Land is carried at cost. Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets, ranging from 3 to 40 years. The costs of maintenance and repairs are expensed as incurred, while major expenditures for renewals and betterments are capitalized.

 

Leases

 

The Company leases certain premises from third parties under various operating lease agreements. Operating leases are included in premises and equipment, net and other liabilities on the consolidated statements of financial position. Lease expense for lease payments is recognized on a straight-line basis over the life of the lease. Right-of-use assets and corresponding lease liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. If an implicit rate is not available in the lease, the Company uses an incremental borrowing rate to determine the present value of lease payments. Lease and non-lease components are accounted for separately. Leases with a lease term of 12 months or less are not recorded on the consolidated statements of financial condition.

 

Cash Surrender Value of Bank Owned Life Insurance

 

Bank Owned Life Insurance (“BOLI”) policies are reflected on the consolidated statements of financial condition at cash surrender value, net of other charges or amounts due that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in noninterest income on the consolidated statements of income and are not subject to income taxes.

 

Real Estate and Other Repossessed Assets

 

Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new carrying value. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Real estate and other repossessed properties was $5,000 and $0 at December 31, 2023 and 2022, respectively.

 

Revenue Recognition

 

The majority of our revenue-generating transactions are not subject to Accounting Standards Codification (“ASC”) Topic 606, including revenue generated from financial instruments, such as our loans, guarantees, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. ASC Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, interchange and other fees and commodity sales income. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606 and are recorded in noninterest income on the consolidated statements of income are discussed below:

 

Service Charges on Deposit Accounts – Revenue from service charges consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts may be transactional or non-transactional in nature. Transactional service charges occur in the form of a service or penalty and are charged upon the occurrence of an event (e.g., overdraft fees, ATM fees, wire transfer fees). Transactional service charges are recognized as services are delivered to and consumed by the customer, or as penalty fees are charged. Non-transactional service charges are charges that are based on a broader service, such as account maintenance fees and dormancy fees, and are recognized on a monthly basis. Service charges on deposit accounts were $1,757,000 and $1,668,000 for the years ended December 31, 2023 and 2022, respectively.

 

Interchange and ATM Fees Revenue from debit card fees includes interchange fee income from debit cards processed through card association networks. Interchange fees represent a portion of a transaction amount that the Company and other involved parties retain to compensate themselves for giving the cardholder immediate access to funds. Interchange rates are generally set by the card association networks and are based on purchase volumes and other factors. The Company records interchange fees as services are provided. Interchange and ATM fees were $2,524,000 and $2,375,000 for the years ended December 31, 2023 and 2022, respectively.

 

Commodity Sales Income– The Company's subsidiary, OFS, processes deferred payment contracts between suppliers and customers of agricultural commodities. The revenue from these contracts is accounted for in accordance with ASC Topic 606. The Company is considered an agent in these contracts, as: (i) the Company facilitates payment from customer to supplier, (ii) the Company does not take inventory of commodities as they are delivered by supplier to the customer, (iii) pricing of commodities is determined by the market, (iv) consideration on deferred payment contracts is insignificant to the Company and (v) the Company’s exposure to credit risk is minimal. Revenue is recognized net of expenses and reported in other noninterest income in the financial statements. Commodity sales income and the corresponding commodity sales expense were $6,087,000 and $4,279,000 for the years ended  December 31, 2023 and 2022, respectively, for a net impact of $0.

 

 

- 14 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:Organization and Summary of Significant Accounting Policies – continued 

 

Income Taxes

 

The Company adopted authoritative guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

 

The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

The Company recognizes income tax related penalties and interest, if any, in the provision for income taxes in the consolidated statements of income. Based on management's analysis, the Company did not have any uncertain tax positions as of December 31, 2023 and 2022. The Company files tax returns in the U.S. federal jurisdiction and the State of Montana. There are currently no income tax examinations underway for these jurisdictions. The Company's income tax returns are subject to examination by relevant taxing authorities as follows: U.S. Federal income tax returns for tax years 2020 and forward; Montana income tax returns for tax years 2020 and forward. 

 

Employee Stock Ownership Plan

 

Compensation expense recognized for the Company’s Employee Stock Ownership Plan (“ESOP”) equals the fair value of shares that have been allocated or committed to be released for allocation to participants during the year. Any difference between the fair value of the shares at the time and the ESOP’s original acquisition cost is charged or credited to shareholders’ equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from shareholders’ equity.     

 

Treasury Stock

 

Treasury stock is accounted for on the cost method.

 

Advertising Costs

 

The Company expenses advertising costs as they are incurred. Advertising costs were $1,375,000 and $1,419,000 for the years ended December 31, 2023 and 2022, respectively.

 

- 15 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Stock-Based Compensation

 

Compensation cost is recognized for restricted stock awards, based on the fair value of the awards at the grant date. Compensation cost is recognized over the required service period, generally defined as the vesting period. Shares of restricted stock granted through the 2011 Stock Incentive Plan, as amended, vest in equal installments over three or five years beginning one year from the grant date. Shares of restricted stock granted through the 2020 Non-Employee Director Award Plan vest one year from the grant date.

 

Earnings Per Common Share

 

Basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly to equity, such as unrealized holding gains and losses on securities available-for-sale.

 

Loan Commitments and Related Financial Instruments

 

Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

Derivatives 

 

The Company’s derivatives are primarily the result of its mortgage banking activities and are in the form of interest rate lock commitments (“IRLCs), To-Be-Announced (“TBA”) mortgage-backed securities and bulk mandatory forward loan sale commitments. The derivatives are accounted for as free-standing or economic derivatives and are measured at fair value. The derivatives are recognized as either assets or liabilities on the consolidated statements of financial condition and the changes in the fair value of the derivatives are recorded in noninterest income in mortgage banking, net in the on the consolidated statements of income.

 

Fair Value of Financial Instruments

 

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. See Note 18. Fair Value of Financial Instruments for more information.     

 

Transfers of Financial Assets

 

Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. 

 

- 16 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

Goodwill and Other Intangible Assets

 

Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of net identifiable assets acquired. Subsequent to initial recognition, the Company tests goodwill for impairment annually as of October 31, or more often if events or circumstances change that indicate impairment may exist. A goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit's fair value. A blend of both the market and income approaches is used in valuing the reporting unit’s fair value. Weightings are assigned to the approaches regarding fair value and the sensitivity of other weighting scenarios is considered. The market approach incorporates comparable public company information, valuation multiples and consideration of a market control premium along with data related to comparable observed purchase transactions in the financial services industry. The income approach consists of discounting projected future cash flows, which are derived from internal forecasts and economic expectations for the reporting unit. The significant inputs and assumptions for the income approach include projected earnings of the Company in future years for which there is inherent uncertainty and the discount rate. The sensitivity of a range of reasonable discount rates based on the current economic environment is considered.

 

During the quarter ended September 30, 2023, Management determined that a triggering event had occurred because of a decrease in the Company's stock price and a revision in the earnings outlook in comparison to budget. These conditions were primarily due to economic uncertainty and market volatility from the rising interest rate environment. As a result, the Company performed an interim goodwill impairment assessment as of August 31, 2023, and concluded that goodwill was not impaired. Our annual impairment tests as of October 31, 2023 and 2022 also did not result in impairment. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations. Management will continue to monitor events that could influence this conclusion in the future.

 

Goodwill recorded for the FCB acquisition during the second quarter of 2022 was $13,942,000. Goodwill related to acquisitions prior to 2022 totaled $20,798,000. Other identifiable intangible assets recorded by the Company represent the future benefit associated with the acquisition of the core deposits. Core deposit intangible assets are being amortized over 10 years utilizing methods that approximate the expected attrition of the deposits. The amortization expense is included in the noninterest expense section of the consolidated statements of income.

 

Segment Reporting

 

While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the operations are considered by management to be aggregated in one reportable operating segment.

 

Recently Adopted Accounting Pronouncements 

 

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. In computing the implied fair value of goodwill under Step 2, an entity had to determine the fair value at the impairment testing date of its assets and liabilities as if they were acquired in a business combination. 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 adoption of ASU No. 2017-04 did not have a material impact on the consolidated financial statements.
 

Application of New Accounting Guidance Adopted in 2023

 

On January 1, 2023, the Company adopted 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. This guidance is commonly referred to as Current Expected Credit Losses ("CECL"), and the CECL model is based on expected credit losses rather than the model used for periods prior to January 1, 2023, which was based on incurred losses. The allowance for credit losses is established for current expected credit losses on the Company's loan portfolio, including unfunded loan commitments, 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 estimate their credit losses. 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, Topic 326 amends the accounting for credit losses on available-for-sale debt securities, requiring credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down for those securities management does not intend to sell or is not likely to be required to sell.

 

- 17 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1:

Organization and Summary of Significant Accounting Policies – continued

 

On January 1, 2023, the Company also adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This guidance was an update to ASU No. 2016-13, and the Company adopted using the modified retrospective transition method. The amendments in this update eliminated the accounting guidance for troubled debt restructure ("TDR") loans and enhanced the disclosure requirements for certain loan modifications of receivables made to borrowers experiencing financial difficulty.

 

The Company adopted Topic 326 using the modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326. Results from periods prior to January 1, 2023 are presented using previously applicable U.S. GAAP. The adoption resulted in an increase of $700,000 to our allowance for credit losses ("ACL"), an increase of $1,500,000 to our allowance for unfunded loan commitments, and a net-of-tax cumulative effect adjustment of $1,616,000 to decrease the beginning balance of retained earnings.

 

The adoption of this guidance did not have an impact on the Company's available-for-sale securities. However, any subsequent estimated credit losses will be recognized through an allowance for credit losses associated with the applicable securities.

 

The Company finalized the adoption of ASC 326 as of January 1, 2023 as detailed in the following table:

 

  

January 1, 2023 As Reported Under Topic 326

  

January 1, 2023 Pre-Topic 326 Adoption

  

Impact of Topic 326 Adoption

 

Assets

            

Real estate loans:

            

Residential 1-4 family

 $1,493  $1,472  $21 

Commercial real estate

  9,571   9,037   534 
             

Other loans:

            

Home equity

  512   509   3 

Consumer

  343   342   1 

Commercial

  2,781   2,640   141 

Allowance for credit losses on loans

 $14,700  $14,000  $700 
             

Liabilities

            

Allowance for credit losses on unfunded loan commitments

 $1,500  $-  $1,500 
             

Total

         $2,200 

 

 

Recently Issued Accounting Pronouncements 

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate ("SOFR"). The Company evaluated this guidance and identified substitution rates for impacted loans and debt. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 was effective upon issuance and generally can be applied through December 31, 2024. The Company has reviewed all of its LIBOR based products and all products have been adjusted to another index as LIBOR ceased to be published after June 30, 2023. ASU No. 2021-01 did not have a significant impact on the Company's consolidated financial statements.

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Report (Topic 280): Improvements to Reportable Segment Disclosures. The updated accounting guidance requires expanded reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the company's chief operating decision maker. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Retrospective application is required. The Company is currently evaluating the effect the updated guidance will have on the Company's financial statement disclosures as the Company has a single reportable segment.

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The updated accounting guidance requires enhanced income tax disclosures, including the disaggregation of existing disclosures related to the tax rate reconciliation and income taxes paid. This ASU is effective for annual periods beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the effect the updated guidance will have on its consolidated financial statements and related disclosures.

 

- 18 -

   
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2:

Mergers and Acquisitions

 

Effective April 30, 2022, after receipt of regulatory approval, Eagle completed its previously announced merger with FCB. The acquisition closed after receipt of approvals from regulatory authorities, approval of FCB shareholders and the satisfaction of other closing conditions. The total consideration paid was $38,577,000 and included cash consideration of $10,226,000 and common stock issued of $28,351,000.

 

All of the assets acquired and liabilities assumed were recognized at their acquisition-date fair value, while transaction costs associated with the business combination were expensed as incurred. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The goodwill recorded is not deductible for federal income tax purposes. 

 

The following table summarizes the fair values of the assets acquired and liabilities assumed, consideration paid and the resulting goodwill.

 

  

FCB

 
  

April 30,

 
  

2022

 
  

(In Thousands)

 

Assets acquired:

    

Cash and cash equivalents

 $23,623 

Securities available-for-sale

  126,123 

Loans receivable

  190,894 

Premises and equipment

  6,393 

Cash surrender value of life insurance

  8,638 

Core deposit intangible

  7,004 

Other assets

  7,687 

Total assets acquired

 $370,362 
     

Liabilities assumed:

    

Deposits

 $321,107 

Accrued expenses and other liabilities

  1,767 

Other borrowings

  22,853 

Total liabilities assumed

 $345,727 
     

Net assets acquired

 $24,635 
     

Consideration paid:

    

Cash

 $10,226 

Common stock issued (1,396,596 shares)

  28,351 

Total consideration paid

 $38,577 
     

Goodwill resulting from acquisition

 $13,942 

 

FCB investments were written down an additional $4,559,000 to fair value on the date of acquisition based on market prices obtained from an independent third-party. 

 

For acquisitions, the fair value analysis of the loan portfolios resulted in a valuation adjustment for each loan based on an amortization schedule of expected cash flow. Individual amortization schedules were used for each loan over a certain amount and those with specifically identified loss exposure. The remainder of the loans were grouped by type and risk rating into loan pools (based on loans type, fixed or variable interest rate, revolving or term payments and risk rating). Yield inputs for the amortization schedules included contractual interest rates, estimated prepayment speeds, liquidity adjustments and market yields. Credit inputs for the amortization schedules included probability of payment default, loss given default rates and individually identified loss exposure.

 

The total accretable discount on FCB acquired loans was $5,416,000 as of April 30, 2022. During the year ended December 31, 2023, accretion of the loan discount was $853,000 compared to $1,297,000 during the year ended  December 31, 2022. The remaining accretable loan discount was $3,266,000 as of December 31, 2023. Three impaired loans were acquired through the FCB acquisition with insignificant balances as of April 30, 2022. 

 

- 19 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 2:

Mergers and Acquisitions – continued

 

Fair value adjustments recorded for FCB related to premises and equipment were insignificant overall. The Company used independent third-party appraisals in the determination of the fair value of acquired assets.

 

Core deposit intangible assets of $7,004,000 were recorded for FCB and are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years from the date of acquisition. See Note 7. Other Intangible Assets for more information. For acquisitions, the core deposit intangible value is a function of the difference between the cost of the acquired core deposits and the alternative cost of funds. These cash flow streams were discounted to present value. The fair value of other deposit accounts acquired were valued by estimating future cash flows to be received or paid from individual or homogenous groups of assets and liabilities and then discounting those cash flows to a present value using rates of return that were available in financial markets for similar financial instruments on or near the acquisition date.

 

Direct costs related to the acquisitions were expensed as incurred. The Company recorded no acquisition costs related to FCB during the year ended December 31, 2023. The Company recorded acquisition costs related to FCB of $2,296,000 during the year ended December 31, 2022. Acquisition costs included professional fees and data processing expenses incurred related to the acquisitions.

 

Operations of acquired entities have been included in the consolidated financial statements since date of acquisition. The Company does not consider them as separate reporting segments and does not track the amount of revenues and net income attributable since acquisition. As such, it is impracticable to determine such amounts for the period from acquisition date through December 31, 2023.

 

 

NOTE 3:

Investment Securities

 

The amortized cost and fair values of securities, together with unrealized gains and losses, were as follows:

 

  

December 31, 2023

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In Thousands)

 

Available-for-sale:

                

U.S. government and agency obligations

 $6,574  $121  $(152) $6,543 

U.S. treasury obligations

  52,505   -   (5,690)  46,815 

Municipal obligations

  149,168   460   (11,678)  137,950 

Corporate obligations

  4,245   -   (340)  3,905 

Mortgage-backed securities

  28,426   -   (1,673)  26,753 

Collateralized mortgage obligations

  94,709   -   (8,141)  86,568 

Asset-backed securities

  9,728   32   (15)  9,745 

Total

 $345,355  $613  $(27,689) $318,279 

 

  

December 31, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In Thousands)

 

Available-for-sale:

                

U.S. government obligations

 $2,575  $2  $(187) $2,390 

U.S. treasury obligations

  58,715   -   (6,764)  51,951 

Municipal obligations

  190,811   77   (18,039)  172,849 

Corporate obligations

  7,240   1   (251)  6,990 

Mortgage-backed securities

  31,553   -   (1,900)  29,653 

Collateralized mortgage obligations

  90,812   -   (8,681)  82,131 

Asset-backed securities

  3,569   -   (38)  3,531 

Total

 $385,275  $80  $(35,860) $349,495 

 

- 20 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 3:

Investment Securities – continued

 

Proceeds from sales of available-for-sale securities and the associated gross realized gains and losses were as follows:

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 
         

Proceeds from sale of available-for-sale securities

 $34,020  $43,794 
         

Gross realized gain on sale of available-for-sale securities

 $69  $- 

Gross realized loss on sale of available-for-sale securities

  (291)  (6)

Net realized gain on sale of available-for-sale securities

 $(222) $(6)

 

The amortized cost and fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

December 31, 2023

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 
  

(In Thousands)

 

Due in one year or less

 $2,555  $2,546 

Due from one to five years

  42,953   39,686 

Due from five to ten years

  70,225   61,851 

Due after ten years

  106,487   100,875 
   222,220   204,958 
         

Mortgage-backed securities

  28,426   26,753 

Collateralized mortgage obligations

  94,709   86,568 

Total

 $345,355  $318,279 

 

At December 31, 2023 and 2022, securities with a fair value of $23,076,000 and $58,942,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

 

- 21 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 3:

Investment Securities – continued

 

The Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months were as follows:

 

  

December 31, 2023

 
  

Less than 12 Months

  

12 Months or Longer

 
      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

 
  

(In Thousands)

 

U.S. government and agency obligations

 $402  $-  $1,800  $(152)

U.S. treasury obligations

  -   -   46,816   (5,690)

Municipal obligations

  12,000   (63)  91,869   (11,615)

Corporate obligations

  -   -   3,905   (340)

Mortgage-backed securities and collateralized mortgage obligations

  11,452   (156)  101,869   (9,658)

Asset-backed securities

  2,521   (10)  2,202   (5)

Total

 $26,375  $(229) $248,461  $(27,460)

 

 

  

December 31, 2022

 
  

Less than 12 months

  

12 months or Longer

 
      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

 
  

(In Thousands)

 

U.S. government and agency obligations

 $1,773  $(187) $-  $- 

U.S. treasury obligations

  10,969   (196)  40,982   (6,568)

Municipal obligations

  128,036   (8,781)  33,092   (9,258)

Corporate obligations

  4,994   (246)  995   (5)

Mortgage-backed securities and collateralized mortgage obligations

  67,310   (3,647)  44,444   (6,934)

Asset-backed securities

  3,531   (38)  -   - 

Total

 $216,613  $(13,095) $119,513  $(22,765)

 

As of December 31, 2023 and December 31, 2022, there were, respectively, 286 and 388 securities in unrealized loss positions. Based on analysis of available-for-sale debt securities with unrealized losses as of December 31, 2023, the Company determined the decline in value was unrelated to credit losses and was primarily caused by changes in interest rates and market spreads subsequent to the initial purchase of the securities. Management does not intend to sell and the Company is not likely to be required to sell these securities prior to maturity. As a result, no ACL was recorded on available-for-sale securities at December 31, 2023 and no other-than-temporary impairment was recorded at December 31, 2022. As part of this determination, consideration was given to the extent to which fair value was less than amortized cost, adverse security ratings by a rating agency and other factors.

 

- 22 -

     

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4:

Loans

 

Loans receivable consisted of the following:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Real estate loans:

        

Residential 1-4 family

 $200,012  $195,703 

Commercial real estate

  909,413   826,549 
         

Other loans:

        

Home equity

  86,932   74,271 

Consumer

  30,125   27,609 

Commercial

  258,007   231,291 
         

Total

  1,484,489   1,355,423 
         

Deferred loan fees, net(1)

  -   (1,745)

Allowance for credit losses (2)

  (16,440)  (14,000)

Total loans, net

 $1,468,049  $1,339,678 
         

(1) Deferred loan fees, net of $1,389 included in individual loan buckets above for the year ended December 31, 2023.

        

(2) Allowance for credit losses for the year ended December 31, 2023; allowance for loan losses for the year ended December 31, 2022.

        

 

Included in the above are loans guaranteed by U.S. government agencies totaling $23,215,000 and $24,605,000 at December 31, 2023 and  December 31, 2022, respectively.

 

The following table provides allowance for credit losses activity for the year ended December 31, 2023. 

 

  

Residential

  

Commercial

  

Home

             
  

1-4 Family

  

Real Estate

  

Equity

  

Consumer

  

Commercial

  

Total

 
  

(In Thousands)

 

Allowance for credit losses on loans:

                        

Beginning balance, December 31, 2022, prior to adoption of ASC 326

 $1,472  $9,037  $509  $342  $2,640  $14,000 

Impact of adopting ASC 326

  21   534   3   1   141   700 

Charge-offs

  -   -   -   (50)  (129)  (179)

Recoveries

  195   23   13   3   19   253 

Provision

  178   1,097   15   8   368   1,666 

Total ending allowance balance, December 31, 2023

 $1,866  $10,691  $540  $304  $3,039  $16,440 

 

- 23 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

The following table provides allowance for loan losses activity for the year ended December 31, 2022. 

 

  

Residential

  

Commercial

  

Home

             
  

1-4 Family

  

Real Estate

  

Equity

  

Consumer

  

Commercial

  

Total

 
  

(In Thousands)

 

Allowance for loan losses:

                        

Balance, January 1, 2022

 $1,596  $7,470  $533  $365  $2,536  $12,500 

Charge-offs

  (199)  -   (32)  (31)  (299)  (561)

Recoveries

  4   30   -   4   22   60 

Provision

  71   1,537   8   4   381   2,001 

Balance, December 31, 2022

 $1,472  $9,037  $509  $342  $2,640  $14,000 
                         

Balance, December 31, 2022 allocated to loans individually evaluated for impairment

 $-  $-  $-  $-  $150  $150 
                         

Balance, December 31, 2022 allocated to loans collectively evaluated for impairment

 $1,472  $9,037  $509  $342  $2,490  $13,850 
                         

Loans receivable:

                        

Balance, December 31, 2022

 $195,703  $826,549  $74,271  $27,609  $231,291  $1,355,423 
                         

Balance, December 31, 2022 of loans individually evaluated for impairment

 $483  $4,368  $107  $25  $1,719  $6,702 
                         

Balance, December 31, 2022 of loans collectively evaluated for impairment

 $195,220  $822,181  $74,164  $27,584  $229,572  $1,348,721 

 

The Company utilizes an 8-point internal loan rating system, largely based on regulatory classifications, as follows:

 

Loans Rated Pass – these are loans in categories 15 that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

 

Loans Rated Special Mention – these loans in category 6 have potential weaknesses and are watched closely by management. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

 

Loans Rated Substandard – these loans in category 7 are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Loans Rated Doubtful – these loans in category 8 have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans Rated Loss – these loans are considered uncollectible and are not part of the 8-point rating system. They are of such small value that their continuance as assets without establishment of a specific reserve is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be affected in the future.

 

- 24 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

The following table presents the internal classification of the loan portfolio by amortized cost and based on year originated. Generally, current period renewals of credit are re-underwritten and considered current period originations for purposes of the table below.

 

  

December 31, 2023

 
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving Loans

  

Total Loans

 
  

(In Thousands)

 

RESIDENTIAL 1-4 FAMILY

                                

Pass

 $10,987  $15,696  $24,575  $38,738  $28,122  $30,938  $6,179  $155,235 

Special Mention

  -   -   -   940   -   228   -   1,168 

Substandard

  -   -   -   -   -   175   -   175 

Total Residential 1-4 family

  10,987   15,696   24,575   39,678   28,122   31,341   6,179   156,578 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

RESIDENTIAL 1-4 FAMILY CONSTRUCTION

                                

Pass

  -   -   6,088   21,889   14,700   -   -   42,677 

Substandard

  -   -   757   -   -   -   -   757 

Total Residential 1-4 family construction

  -   -   6,845   21,889   14,700   -   -   43,434 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

COMMERCIAL REAL ESTATE

                                

Pass

  55,820   50,408   141,407   154,941   63,174   103,620   31,122   600,492 

Special Mention

  2,593   1,948   493   1,512   1,314   -   -   7,860 

Substandard

  -   -   -   -   -   339   -   339 

Total Commercial real estate

  58,413   52,356   141,900   156,453   64,488   103,959   31,122   608,691 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

COMMERCIAL CONSTRUCTION AND DEVELOPMENT

                                

Pass

  6,900   6,399   19,500   80,061   31,149   3,762   8,285   156,056 

Special Mention

  -   -   441   511   134   990   -   2,076 

Total Commercial construction and development

  6,900   6,399   19,941   80,572   31,283   4,752   8,285   158,132 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

FARMLAND

                                

Pass

  9,551   21,728   19,795   36,291   19,452   29,551   4,480   140,848 

Substandard

  483   65   -   407   -   787   -   1,742 

Total Farmland

  10,034   21,793   19,795   36,698   19,452   30,338   4,480   142,590 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

HOME EQUITY

                                

Pass

  621   565   376   3,630   1,736   2,398   77,409   86,735 

Substandard

  -   -   -   -   -   107   90   197 

Total Home Equity

  621   565   376   3,630   1,736   2,505   77,499   86,932 

Current-period gross charge-offs

  -   -   -   -   -   -   -   - 

CONSUMER

                                

Pass

  449   1,953   3,398   8,109   13,083   1,069   1,977   30,038 

Special Mention

  -   -   -   18   -   -   -   18 

Substandard

  -   37   -   8   -   22   2   69 

Total Consumer

  449   1,990   3,398   8,135   13,083   1,091   1,979   30,125 

Current-period gross charge-offs

  1   -   28   2   16   4   -   51 

COMMERCIAL

                                

Pass

  2,834   20,496   22,804   23,581   31,661   6,354   21,914   129,644 

Special Mention

  -   25   33   109   -   98   2,741   3,006 

Substandard

  -   -   17   9   -   33   -   59 

Total Commercial

  2,834   20,521   22,854   23,699   31,661   6,485   24,655   132,709 

Current-period gross charge-offs

  -   -   26   -   -   8   -   34 

AGRICULTURAL

                                

Pass

  1,473   5,818   7,241   16,856   40,176   1,517   50,461   123,542 

Substandard

  427   55   435   282   -   557   -   1,756 

Total Agricultural

  1,900   5,873   7,676   17,138   40,176   2,074   50,461   125,298 

Current-period gross charge-offs

  -   -   -   1   -   93   -   94 

TOTAL LOANS

                                

Pass

  88,635   123,063   245,184   384,096   243,253   179,209   201,827   1,465,267 

Special Mention

  2,593   1,973   967   3,090   1,448   1,316   2,741   14,128 

Substandard

  910   157   1,209   706   -   2,020   92   5,094 

Total

 $92,138  $125,193  $247,360  $387,892  $244,701  $182,545  $204,660  $1,484,489 

 

- 25 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

Internal classification of the loan portfolio was as follows (prior to the adoption of ASU No. 2016-13):

 

  

December 31, 2022

 
      

Special

                 
  

Pass

  

Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 
  

(In Thousands)

 

Real estate loans:

                        

Residential 1-4 family

 $135,079  $515  $353  $-  $-  $135,947 

Residential 1-4 family construction

  59,756   -   -   -   -   59,756 

Commercial real estate

  520,505   16,833   1,732   -   -   539,070 

Commercial construction and development

  150,101   1,044   -   -   -   151,145 

Farmland

  131,646   2,232   2,456   -   -   136,334 

Other loans:

                        

Home equity

  74,147   -   124   -   -   74,271 

Consumer

  27,560   10   39   -   -   27,609 

Commercial

  125,035   1,476   736   8   -   127,255 

Agricultural

  101,441   311   2,182   102   -   104,036 

Total

 $1,325,270  $22,421  $7,622  $110  $-  $1,355,423 

 

The following tables include information regarding delinquencies within the loan portfolio.

 

  

December 31, 2023

 
  

Loans Past Due and Still Accruing

                 
      

90 Days

      

Nonaccrual

  

Nonaccrual

         
  

30-89 Days

  

and

      

Loans with

  

Loans with

  

Current

  

Total

 
  

Past Due

  

Greater

  

Total

  

no ACL

  

ACL

  

Loans

  

Loans

 
  

(In Thousands)

 

Real estate loans:

                            

Residential 1-4 family

 $305  $-  $305  $297  $-  $155,976  $156,578 

Residential 1-4 family construction

  -   -   -   757   -   42,677  $43,434 

Commercial real estate

  697   -   697   340   -   607,654  $608,691 

Commercial construction and development

  194   -   194   -   -   157,938  $158,132 

Farmland

  404   26   430   1,982   1,734   138,444  $142,590 

Other loans:

                         $- 

Home equity

  32   -   32   182   -   86,718  $86,932 

Consumer

  115   -   115   45   15   29,950  $30,125 

Commercial

  -   -   -   27   -   132,682  $132,709 

Agricultural

  74   -   74   2,947   69   122,208  $125,298 

Total

 $1,821  $26  $1,847  $6,577  $1,818  $1,474,247  $1,484,489 

 

  

December 31, 2022

 
  

Loans Past Due and Still Accruing

             
      

90 Days

                 
  

30-89 Days

  

and

      

Non-Accrual

  

Current

  

Total

 
  

Past Due

  

Greater

  

Total

  

Loans

  

Loans

  

Loans

 
  

(In Thousands)

 

Real estate loans:

                        

Residential 1-4 family

 $1,798  $330  $2,128  $483  $133,336  $135,947 

Residential 1-4 family construction

  500   -   500   -   59,256   59,756 

Commercial real estate

  780   -   780   350   537,940   539,070 

Commercial construction and development

  -   -   -   -   151,145   151,145 

Farmland

  1,620   -   1,620   754   133,960   136,334 

Other loans:

                        

Home equity

  226   -   226   107   73,938   74,271 

Consumer

  93   -   93   25   27,491   27,609 

Commercial

  597   746   1,343   44   125,868   127,255 

Agricultural

  -   -   -   1,535   102,501   104,036 

Total

 $5,614  $1,076  $6,690  $3,298  $1,345,435  $1,355,423 

 

 

Interest income recognized on nonaccrual loans for the year ended December 31, 2023 was considered insignificant. Interest payments received on a cash basis related to nonaccrual loans was $471,000 at December 31, 2023.

 

- 26 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

The following tables presents the amortized cost basis of collateral-dependent loans by class of loans.

 

  

December 31, 2023

 
  

Real Estate

  

Business Assets

  

Other

 
  

(In Thousands)

     

Real estate loans:

            

Residential 1-4 family

 $264  $-  $- 

Residential 1-4 family construction

  757   -   - 

Commercial real estate

  39   300   - 

Farmland

  4,116   -   - 

Other loans:

            

Home equity

  44   -   - 

Consumer

  -   -   36 

Commercial

  -   -   - 

Agricultural

  -   2,465   - 

Total

 $5,220  $2,765  $36 

 

 

 

Prior to the implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2023, a loan was considered impaired when the Company determined it was probable that it would be unable to collect all amounts due to the contractual terms of the loan agreement, including scheduled interest payments. Various factors determined impairment such as the financial condition of the borrower, value of the underlying collateral, and general economic conditions.

 

The implementation of ASU No. 2016-13 significantly changed disclosures related to loans and, as a result, certain disclosures are no longer required. The following tables represent disclosures for the prior period that are no longer required as of January 1, 2023, but are included in this Form 10-K since the Company is required to disclose comparative information.

 

The following table provides additional information on impaired loans with and without related allowance reserves at December 31, 2022:

 

  

December 31, 2022

 
      

Unpaid

      

Average

 
  

Recorded

  

Principal

  

Related

  

Recorded

 
  

Investment

  

Balance

  

Allowance

  

Investment

 
  

(In Thousands)

 

Real estate loans:

                

Residential 1-4 family

 $483  $585  $-  $550 

Residential 1-4 family construction

  -   -   -   169 

Commercial real estate

  3,614   3,697   -   2,818 

Commercial construction and development

  -   -   -   - 

Farmland

  754   866   -   1,192 

Other loans:

                

Home equity

  107   133   -   111 

Consumer

  25   30   -   44 

Commercial

  184   232   35   350 

Agricultural

  1,535   1,633   115   1,647 

Total

 $6,702  $7,176  $150  $6,881 

 

Interest income recognized on impaired loans for the year ended December 31, 2022 was considered insignificant. Interest payments received on a cash basis related to impaired loans was $415,000 at  December 31, 2022.

 

- 27 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

The Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, term extensions, other than insignificant payment delays, or any combination of these.

 

During the year ended December 31, 2023, the Company modified two commercial real estate loans. The first loan was modified by consolidating two lines of credit and refinancing into one long term loan for ten years. The loan had an amortized cost of $524,000 or 0.09% of commercial real estate loans at December 31, 2023. The second loan was modified by consolidating four loans and refinancing into one short-term, interest only loan for 12 months. The second loan was paid off during the year ended December 31, 2023. There was no forgiveness of principal for either of the loans, and the remaining loan was considered current with its modified terms as of December 31, 2023.

 

Prior to the adoption of ASU No. 2022-02, during the year ended December 31, 2022, there were eight new TDR loans. Four of the eight loans were commercial real estate loans and the recorded investments at time of restructure were $471,000, $1,552,000, $812,000 and $429,000No charge-offs were incurred, and the loans continue to be on accrual status. Two of the loans were commercial loans. The first commercial loan had a recorded investment at time of restructure of $6,000 and was paid off in the year ended December 31, 2023. The second commercial loan had a recorded investment at time of restructure of $134,000. No charge-off was incurred and the loan continues to be on accrual status. The remaining two loans were agricultural loans. The first agricultural loan had a recorded investment at time of restructure of $145,000 and was paid off in the year ended December 31, 2023. The second agricultural loan had a recorded investment at the time of restructure of $331,000. No charge-off was incurred and the loan is on accrual status. 

 

There were two farmland loans modified as TDRs that defaulted during the year ended December 31, 2022 where the default occurred within 12 months of restructuring. However, subsequent payments were made and the loans were no longer in default as of December 31, 2022. 

 

Loans are granted to directors and officers of the Company in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. 

 

Loans receivable (including loans sold and serviced for others) from related parties, including directors and executive officers were as follows:

 

  

(In Thousands)

 

Balance, January 1, 2022

 $1,925 

Principal additions

  241 

Principal payments

  (282)

Balance, December 31, 2022

 $1,884 

Principal additions

  2,315 

Principal payments

  (233)

Balance, December 31, 2023

 $3,966 

 

 

In addition to the balances included above, available lines of credit were $1,649,000 and $314,000 at December 31, 2023 and 2022, respectively, and includes the ending balances from the tables above. 

 

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 
         

Loans serviced, for the benefit of others, for directors, executive officers and their related parties

 $1,373  $1,480 

 

- 28 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 4:

Loans – continued

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 
         

Interest income from loans owned for directors, executive officers and their related parties

 $96  $67 

  

 

NOTE 5:

Mortgage Servicing Rights

 

The Company is servicing mortgage loans for the benefit of others which are not included in the consolidated statements of financial condition and have unpaid principal balances of $2,066,505,000 and $2,022,066,000 at December 31, 2023 and 2022, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Mortgage loan servicing fees were $5,086,000 and $4,839,000 for the years ended December 31, 2023 and 2022, respectively. These fees, net of amortization, are included in mortgage banking, net which is a component of noninterest income on the consolidated statements of income.

 

Custodial balances maintained in connection with the foregoing loan servicing are included in noninterest checking deposits and were $8,539,000 and $11,912,000 at December 31, 2023 and 2022, respectively.

 

The following table is a summary of activity in mortgage servicing rights:

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Mortgage servicing rights:

        

Beginning balance

 $15,412  $13,749 

Mortgage servicing rights capitalized

  2,147   3,781 

Amortization of mortgage servicing rights

  (1,706)  (2,118)

Ending balance

  15,853   15,412 

Valuation allowance:

        

Beginning balance

  -   (56)

Recovery of mortgage servicing rights

  -   56 

Ending balance

  -   - 

Mortgage servicing rights, net

 $15,853  $15,412 

 

Recovery of servicing rights is included in other noninterest expense on the consolidated statements of income.

 

- 29 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 5:

Mortgage Servicing Rights – continued

 

The fair values of these rights were $20,388,000 and $19,288,000 at December 31, 2023 and 2022, respectively. The fair value of servicing rights was determined at loan level, depending on the interest rate and term of the specific loan, using the following valuation assumptions:

 

  

December 31,

 
  

2023

  

2022

 

Key assumptions:

      

Discount rate

 

12%

  12% 

Prepayment speed range

 104-526%  116-210% 

Weighted average prepayment speed

 119%  131% 

  

 

NOTE 6:

Premises and Equipment

 

The cost and accumulated depreciation of premises and equipment was as follows:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Land

 $13,202  $13,070 

Buildings and improvements

  85,369   66,371 

Furniture and equipment

  16,894   15,575 

Construction in progress

  4,299   10,435 
   119,764   105,451 

Accumulated depreciation

  (27,790)  (24,088)

Premises and equipment, net, excluding right-of-use assets

  91,974   81,363 

Right-of-use assets

  2,308   2,960 

Premises and equipment, net

 $94,282  $84,323 

 

Depreciation expense was $3,934,000 and $3,576,000 for the years ended December 31, 2023 and 2022, respectively.

 

The Company leases locations under various operating lease agreements. Leases with a lease term of 12 months at commencement are not recorded on the statements of financial position. The Company’s leases have maturities ranging from 2024 to 2028, some of which include lessee options to extend the leases for up to 10 years.

 

- 30 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 6:

Premises and Equipment – continued

 

The following table summarizes the Company’s leases:

 

  

December 31

 
  

2023

  

2022

 
  

(In Thousands)

 

Right-of-use assets, net of amortization

 $2,308  $2,960 

Lease liabilities

  1,499   1,984 

Operating cash flows

  543   564 

Weighted average remaining lease term (years)

  4.56   5.12 

Weighted average discount rate

  2.69

%

  2.70

%

 

The components of lease cost, which were included in occupancy and equipment expense on the consolidated statements of income, were as follows:

 

  

December 31

 
  

2023

  

2022

 
  

(In Thousands)

 

Operating lease cost

 $710  $734 

Short-term lease cost

  3   1,767 

Total lease cost

 $713  $2,501 

 

The following table presents the maturities of lease liabilities at December 31, 2023 for future periods:

 

  

(In Thousands)

 

2024

 $368 

2025

  342 

2026

  342 

2027

  298 

2028

  238 

Thereafter

  - 

Total lease payments

  1,588 

Less imputed interest

  (89)

Present value of lease liabilities

 $1,499 

 

 

The Company also leases office space to third parties through operating leases. The lease income from these leases for the years ending  December 31, 2023 and 2022 was not significant.

 

- 31 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7:

Other Intangible Assets

 

The components of core deposit intangible assets were as follows:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Core deposit intangible

 $11,840  $11,840 

Accumulated amortization

  (5,960)  (4,381)

Core deposit intangible, net

 $5,880  $7,459 

 

Core deposit intangible assets are amortized on an accelerated basis over their estimated life of 10 years. Amortization expense related to intangible assets was $1,579,000 and $1,325,000 for the years ended December 31, 2023 and 2022. The estimated aggregate future amortization expense for core deposit intangible assets remaining as of December 31, 2023 was as follows:

 

Years ending December 31:

 

(In Thousands)

 

2024

 $1,382 

2025

  1,185 

2026

  989 

2027

  792 

2028

  595 

Thereafter

  937 

Total

 $5,880 

  

 

NOTE 8:

Deposits

 

Deposits are summarized as follows:

 

  

December 31,

 
  

2023

  

2022

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
  

Balance

  

Rate

  

Balance

  

Rate

 
  

(Dollars in Thousands)

 

Noninterest checking

 $418,727   0.00% $468,955   0.00%

Interest-bearing checking

  211,101   0.05   252,922   0.11 

Savings

  230,711   0.06   273,790   0.06 

Money market

  330,274   1.66   387,947   1.12 

Time certificates of deposits

  444,382   4.08   251,658   1.41 

Total

 $1,635,195   1.45% $1,635,272   0.50%

 

At December 31, 2023 and 2022, the Company held $618,784,000 and $642,017,000, respectively, in deposit accounts that met or exceeded the Federal Deposit Insurance Corporation (“FDIC”) requirements of $250,000 and greater.

 

Time certificates of deposits include $0 and $247,000 related to certificates covered by the Certificate of Deposit Account Registry Services ("CDARS") program at December 31, 2023 and 2022, respectively. Time certificates of deposit also include $72,168,000 and $0 of fixed rate brokered certificates at  December 31, 2023 and 2022, respectively.

 

- 32 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 8:

Deposits – continued

 

At December 31, 2023, the scheduled maturities of time deposits were as follows:

 

Years ending December 31:

 

(In Thousands)

 

2024

 $423,997 

2025

  14,673 

2026

  3,353 

2027

  1,122 

2028

  1,237 

Thereafter

  - 

Total

 $444,382 

 

Interest expense on deposits was as follows:

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Checking

 $595  $173 

Savings

  106   99 

Money market

  5,549   1,711 

Time certificates of deposits

  11,607   1,141 

Total

 $17,857  $3,124 

 

At December 31, 2023 and 2022, the Company reclassified $242,000 and $436,000, respectively, in overdrawn deposits as loans.

 

Related party deposits, including directors’ and executive officers’ deposit accounts at December 31, 2023 and 2022 were $5,463,000 and $5,326,000, respectively.

    

 

NOTE 9:

Advances from the Federal Home Loan BankandOther Borrowings

 

At December 31, 2023, advances from the FHLB of Des Moines and other borrowings mature as follows:

 

Years ending December 31:

 

(In Thousands)

 

2024

 $160,737 

2025

  15,000 

2026

  - 

2027

  - 

2028

  - 

Thereafter

  - 

Total

 $175,737 

 

- 33 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 9:

Advances from the Federal Home Loan Bank and Other Borrowings – continued 

    

 

Federal Home Loan Bank Advances

 

FHLB advances may include both amortizing and non-amortizing advances. Non-amortizing advances are due in full at maturity. Advances are subject to prepayment penalties. Interest rates on these advances are fixed. Advances are collateralized by a blanket pledge of the Bank’s loan portfolio. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding available to the Company at December 31, 2023, was 45.00% of total Bank assets as determined by FHLB, or approximately $927,315,000. The balance of advances was $175,737,000 and $69,394,000 at December 31, 2023 and 2022, respectively. The Bank also has a contingent letter of credit with FHLB for $520,000 at both  December 31, 2023 and 2022.

 

Other Borrowings

 

During the first quarter of 2023, the FRB offered a new Bank Term Funding Program ("BTFP") for eligible depository institutions. The BTFP offers loans of up to one year in length to institutions pledging collateral eligible for purchase by FRB such as U.S. treasuries, agency securities, and mortgage-backed securities. These assets are valued at par. The Company did not utilize the program during 2023; however, this is another available funding source. In addition, at December 31, 2023, Eagle had a $15,000,000 line of credit with Bell Bank. The line of credit is secured by Eagle's ownership of the Bank's stock. The balance of this line of credit was $0 at both December 31, 2023 and 2022. 

 

Federal Funds Purchased

 

At  December 31, 2023, the Bank had $85,000,000 in Federal funds lines of credit with unaffiliated institutions, including Pacific Coast Bankers Bank ("PCBB"), PNC Financial Services Group, Inc. ("PNC"), United Bankers' Bank ("UBB") and Texas Independent Bank ("TIB"). The balance of these lines of credit was $0 at both  December 31, 2023 and 2022.

 

All Borrowings Outstanding 

 

For all borrowings outstanding the weighted average interest rate for advances at December 31, 2023 and 2022 was 5.48% and 4.52%, respectively. The average amount outstanding was $159,667,000 and $14,518,000 for 2023 and 2022, respectively. The maximum amount outstanding at any month-end was $199,757,000 and $69,394,000 for 2023 and 2022, respectively.

 

- 34 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10:

Other Long-Term Debt

 

Other long-term debt consisted of the following:

 

  

December 31,

 
  

2023

  

2022

 
      

Unamortized

      

Unamortized

 
      

Debt

      

Debt

 
  

Principal

  

Issuance

  

Principal

  

Issuance

 
  

Amount

  

Costs

  

Amount

  

Costs

 
  

(In Thousands)

 
                 

Subordinated debentures fixed at 5.50% to floating, due 2030

 $15,000  $(219) $15,000  $(249)

Subordinated debentures fixed at 3.50% to floating, due 2032

  40,000   (937)  40,000   (1,062)

Subordinated debentures variable at 3-Month SOFR plus 1.68%, due 2035

  5,155   -   5,155   - 

Total other long-term debt

 $60,155  $(1,156) $60,155  $(1,311)

 

In January 2022, the Company completed the issuance of $40,000,000 in aggregate principal amount of subordinated notes due in 2032 in a private placement transaction to certain institutional accredited investors and qualified buyers. The notes bear interest at an annual fixed rate of 3.50% payable semi-annually. Starting February 1, 2027, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term SOFR plus a spread of 218.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after February 1, 2027. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes. A portion of the net proceeds were used to redeem the $10,000,000 senior notes which matured in February 2022.

 

In June 2020, the Company completed the issuance of $15,000,000 in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction to certain qualified institutional accredited investors. The notes bear interest at an annual fixed rate of 5.50% payable semi-annually. Starting July 1, 2025, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term SOFR plus a spread of 509.0 basis points, payable quarterly. The notes are subject to redemption at the option of the Company on or after July 1, 2025. The subordinated debentures qualify as Tier 2 capital for regulatory capital purposes.

 

In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes which matured on February 15, 2022. The interest was paid semi-annually through maturity date. The notes were not subject to redemption at the option of the Company. 

 

In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to the Trust. The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at three-month LIBOR plus 1.42%, making the rate 6.20% as of December 31, 2022. In December of 2022, Governors of the Federal Reserve System adopted final rule 12 C.F.R. Part 253, Regulation Implementing the Adjustable Interest Rate (LIBOR) Act. Rule 253 identified SOFR-benchmark rates to replace LIBOR in certain financial contracts after June 30, 2023. As a result, the variable rate for interest payable converted to three-month CME Term SOFR plus 1.68% during the year ended December 31, 2023. The rate was 7.01% as of December 31, 2023. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date. The subordinated debentures qualify as Tier 1 capital for regulatory purposes.

 

During the year ended December 31, 2023 and 2022, interest expense on all other long-term debt was $2,719,000 and $2,512,000, respectively, which includes $156,000 and $134,000 in amortization for debt issuance costs, respectively. Debt issuance costs consisting primarily of underwriting discounts and professional fees were capitalized and are being amortized through maturity to interest expense using the straight-line method.                                                                                                                                                                                                                                                                                                                                                              

 

- 35 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11:

Commitments and Contingencies

 

Financial Instruments and Off-Balance-Sheet Activities

 

All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market.

 

In response to marketplace demands, the Bank routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Bank becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor.

 

Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Bank’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses. The Bank uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Bank’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months.

 

Commitments are summarized as follows:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Commitments to extend credit

 $271,552  $367,494 

Letters of credit

  9,457   10,563 

 

Employment Contracts

 

The Company has entered into change of control agreements with its executive officers other than the Chief Executive Officer. The change in control agreements provide a double trigger benefit equal to the sum of the executive’s annual salary and incentive bonus for the most recently completed year. The benefits are payable in the event that four months prior to, in connection with or within 18 months after a change in control the executive’s employment is terminated without cause or if the executive resigns for good reason. The change in control agreements are for two years, renewing automatically for successive one-year periods unless Eagle or the executive provide written notice of nonrenewal 60 days before the contract anniversary date. If the officer timely and properly elects health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Bank will pay the Executive's monthly COBRA premium paid for himself/herself and his/her dependents for all applicable group health plan benefits until the earliest of (i) the expiration of twelve months of coverage, (ii) the date the executive is no longer eligible to receive COBRA continuation coverage, and (iii) the date on which the executive receives or becomes eligible to receive substantially similar coverage from another employer or source.

 

Legal Proceedings

 

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s financial statements.

 

- 36 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12:

Income Taxes

 

The components of the Company’s provision (benefit) for income taxes was as follows:

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Current

        

U.S. federal

 $1,585  $535 

Montana

  684   543 

Total current income tax provision

  2,269   1,078 

Deferred

        

U.S. federal

  (512)  1,650 

Montana

  (159)  419 

Total deferred income tax (benefit) provision

  (671)  2,069 

Total income tax provision

 $1,598  $3,147 

 

The nature and components of deferred tax assets and liabilities were as follows:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Deferred tax assets:

        

Allowance for credit losses (1)

 $4,329  $3,687 

Deferred loan fees

  366   460 

Lease liability

  395   523 

Deferred compensation

  1,818   1,817 

Employee benefits

  678   533 

Unrealized losses on securities available-for-sale

  7,129   9,423 

Acquisition costs

  133   167 

Acquisition fair value adjustments

  3,058   3,513 

Other

  699   257 

Total deferred tax assets

  18,605   20,380 

Deferred tax liabilities:

        

Premises and equipment

  879   757 

Right-of-use asset

  608   779 

FHLB stock

  21   130 

Mortgage servicing rights

  4,174   4,059 

Goodwill

  1,366   1,242 

Intangibles

  1,436   1,964 

Other

  350   641 

Total deferred tax liabilities

  8,834   9,572 

Net deferred tax asset

 $9,771  $10,808 
         
(1) Allowance for credit losses at December 31, 2023; allowance for loan losses at December 31, 2022.        

 

The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance.

 

- 37 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 12:

Income Taxes – continued

 

A reconciliation of the Company’s effective provision (benefit) for income taxes to the statutory federal income tax rate was as follows:

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
      

% of

      

% of

 
      

Pretax

      

Pretax

 
  

Amount

  

Income

  

Amount

  

Income

 
  

(Dollars in Thousands)

 

Federal income taxes at the statutory rate

 $2,447  21.00%  $2,908  

21.00%

 

State income taxes

  684  5.87   738  5.33 

Tax-exempt interest income

  (342) -2.93   (605) -4.37 

Transaction costs

  -  0.00   241  1.74 

Income from bank-owned life insurance

  (308) -2.64   (217) -1.57 

Federal tax credits

  (764) -6.55   -  0.00 

Other, net

  (119) -1.04   82  0.60 

Provision for income taxes and effective tax rate

 $1,598  13.71%  $3,147  22.73% 

 

Investments in LIHTC projects are accounted for using the proportional amortization method. The proportional amortization method allows the investor to amortize the cost of the investment in proportion to tax credits and other tax benefits received. The net investment performance is recognized in the statement of income as a component of income tax provision (benefit). Amortization of the investment in LIHTC projects was $870,000 for the year ended December 31, 2023. The total federal tax credits expected to be received are $9,693,000 and will be claimed over an estimated 10-year credit allowance period.

  

 

 

NOTE 13:

Accumulated Other Comprehensive Income (Loss)

 

The following table includes information regarding the activity in accumulated other comprehensive income (loss):

 

  

Unrealized

 
  

(Losses) Gains

 
  

on Securities

 
  

Available for Sale

 
  

(In Thousands)

 

Balance, January 1, 2023

 $(26,357)

Other comprehensive income, before reclassifications and income taxes

  8,482 

Amounts reclassified from accumulated other comprehensive loss, before income taxes

  222 

Income tax provision

  (2,292)

Total other comprehensive income

  6,412 

Balance, December 31, 2023

 $(19,945)
     

Balance, January 1, 2022

 $3,493 

Other comprehensive loss, before reclassifications and income taxes

  (40,526)

Amounts reclassified from accumulated other comprehensive income, before income taxes

  6 

Income tax benefit

  10,670 

Total other comprehensive loss

  (29,850)

Balance, December 31, 2022

 $(26,357)

 

- 38 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14:

Earnings Per Common Share

 

The computations of basic and diluted earnings per common share are below.

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(Dollars in Thousands, Except for Per Share Data)

 

Basic weighted average shares outstanding

  7,793,352   7,376,275 

Dilutive effect of stock compensation

  4,891   9,978 

Diluted weighted average shares outstanding

  7,798,244   7,386,253 
         

Net income available to common shareholders

 $10,056  $10,701 
         

Basic earnings per common share

 $1.29  $1.45 
         

Diluted earnings per common share

 $1.29  $1.45 
         

Restricted stock units excluded from the diluted average outstanding share calculation

  21,666   - 

  

 

NOTE 15:

Capital Management and Regulatory Matters

 

Federal regulations require Federal Reserve member banks, such as Opportunity Bank of Montana and all other FDIC insured depository institutions, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a Tier 1 capital to total average assets leverage ratio of 4.0%. Federal law establishes a prompt corrective action framework to resolve the problems of undercapitalized depository institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Prompt corrective action provisions are not applicable to bank holding companies.

 

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet each of its minimum risk-based capital requirements. An institution is considered "adequately capitalized" if it has a leverage ratio of 4.0%, and including the conservation buffer, a common equity Tier 1 capital to risk-based assets ratio of 7.0%, a Tier 1 capital to risk-weighted assets ratio of 8.5% and a total capital to risk-weighted assets ratio of 10.5%.

 

- 39 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 15:

Capital Management and Regulatory Matters continued

 

Management believes that, as of December 31, 2023 , the Company and the Bank meet all capital adequacy requirements.

 

As of December 31, 2023, the most recent notification from the FRB categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank's category. The Company's and the Bank’s actual capital amounts and ratios as of December 31, 2023 are presented in the table below and all of the ratios, with the exception of the Tier 1 capital to adjusted total average assets ratio, include the capital conservation buffer of 2.50%:

 

                  

Minimum

 
                  

To Be Well

 
          

Minimum Required

  

Capitalized Under

 
          

for Capital Adequacy

  

Prompt Corrective

 
  

Actual

  

Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

(Dollars in Thousands)

 

December 31, 2023:

                        

Total risk-based capital to risk weighted assets

                        

Consolidated

 $239,228   14.20% $176,863   10.50   N/A   N/A 

Bank

  218,909   13.01   176,692   10.50   168,278   10.00 
                         

Tier 1 capital to risk weighted assets

                        

Consolidated

  166,498   9.88   143,175   8.50   N/A   N/A 

Bank

  201,179   11.96   143,037   8.50   134,623   8.00 
                         

Common equity Tier 1 capital to risk weighted assets

                        

Consolidated

  161,498   9.59   117,909   7.00   N/A   N/A 

Bank

  201,179   11.96   117,795   7.00   109,381   6.50 
                         

Tier 1 capital to adjusted total average assets

                        

Consolidated

  166,498   8.06   82,636   4.00   N/A   N/A 

Bank

  201,179   9.75   82,569   4.00   103,212   5.00 

 

- 40 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 15:

Capital Management and Regulatory Matters continued

 

The Company's and the Bank’s actual capital amounts and ratios as of December 31, 2022 are presented in the table below and all of the ratios, with the exception of the Tier 1 capital to adjusted total average assets ratio, include the capital conservation buffer of 2.50%.

 

                  

Minimum

 
                  To Be Well 
          

Minimum Required

  

Capitalized Under

 
          

for Capital Adequacy

  

Prompt Corrective

 
  

Actual

  

Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

(Dollars in Thousands)

 

December 31, 2022:

                        

Total risk-based capital to risk weighted assets

                        

Consolidated

 $219,595   14.10

%

 $163,560   10.50

%

  N/A   N/A 

Bank

  202,905   13.04   163,444   10.50   155,661   10.00 
                         

Tier 1 capital to risk weighted assets

                        

Consolidated

  150,595   9.67   132,406   8.50   N/A   N/A 

Bank

  188,905   12.14   132,312   8.50   124,529   8.00 
                         

Common equity Tier 1 capital to risk weighted assets

                        

Consolidated

  145,594   9.35   109,040   7.00   N/A   N/A 

Bank

  188,905   12.14   108,962   7.00   101,179   6.50 
                         

Tier 1 capital to adjusted total average assets

                        

Consolidated

  150,595   7.78   77,422   4.00   N/A   N/A 

Bank

  188,905   9.82   76,947   4.00   96,184   5.00 

 

Dividend Limitations

 

Under State of Montana banking regulation, member banks such as the Bank generally may declare annual cash dividends up to an amount equal to the previous two years’ net earnings. Dividends in excess of such amount require approval of the Division of Banking. The Bank paid no dividends during the years ended December 31, 2023 and 2022, respectively, to Eagle. Eagle paid dividends of $0.555 and $0.525 per share to its shareholders during the years ended  December 31, 2023 and 2022, respectively.

 

Stock Repurchase Program

 

On April 20, 2023, Eagle's Board of Directors authorized the repurchase of up to 400,000 shares of its common stock beginning May 1, 2023. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend on market conditions and other corporate considerations. During the second quarter of 2023, 17,901 shares were purchased under this plan at an average price of $12.89. No shares were purchased during the third or fourth quarter of 2023 under this plan. The plan expires on May 1, 2024.

 

On April 21, 2022, Eagle's Board of Directors (the "Board") authorized the repurchase of up to 400,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. There were 288,875 shares available to be repurchased under this plan as of  December 31, 2022. The plan expired on April 21, 2023. 

 

On July 22, 2021, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares could be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchased its shares and the timing of such repurchase depended upon market conditions and other corporate considerations. No shares were purchased during the year ended December 31, 2021 under this plan. The Company repurchased the total authorized amount of 100,000 shares during the first quarter of 2022. The plan expired on July 22, 2022.

 

 

- 41 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 15:

Capital Management and Regulatory Matters continued

 

Liquidation Rights 

 

Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account.

 

After two years from the date of the 2010 conversion and upon the written request of the FDIC, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the FDIC, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution.

  

 

NOTE 16:

Benefit Plans

 

Profit Sharing Plan

 

The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution is determined by the Board. Profit sharing expense was $1,272,000 and $1,365,000 for the years ended December 31, 2023 and 2022, respectively.

 

The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board, the Company may match up to 50.00% of participants’ contributions up to a maximum of 4.00% of participants’ salaries. For the years ended December 31, 2023 and 2022, the Company’s match was $552,000 and $575,000, respectively.

 

Deferred Compensation Plans

 

The Company has entered into deferred compensation contracts with certain key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended December 31, 2023 and 2022, the total expense was $625,000 and $1,039,000, respectively. The liability for the deferred compensation plan was $6,420,000 and $6,410,000 at December 31, 2023 and 2022, respectively, which is included in accrued expenses and other liabilities in the consolidated statements of financial condition.

 

Employee Stock Ownership Plan

 

The Company provides an ESOP for eligible employees who meet certain age and service requirements. 

 

The Company sold 251,256 shares of common stock to the ESOP at a price of $23.88 per share in June 2021. The shares were purchased from Eagle by the ESOP in exchange for a loan totaling $6,000,000. The loan has a ten-year term and bears interest at 3.00%. The Bank makes annual contributions to the ESOP sufficient to satisfy the debt service requirements of the loan. The ESOP uses these contributions, and dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan to the Company. The shares held by the ESOP will be used for allocations to employees of the Company over a ten-year period. 

 

Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. As shares are committed to be released, the Company reports compensation expense equal to the average daily market prices of the shares. The compensation expense is accrued throughout the year. Dividends on ESOP shares are recorded as a reduction to retained earnings.

 

- 42 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 16:

Employee Benefits – continued

 

Employee Stock Ownership Plan – continued

 

Total ESOP expenses of $212,000 and $359,000 were recognized for the years ended December 31, 2023 and 2022, respectively.

 

The following table shows the components of the ESOP shares:

 

  

December 31,

 
  

2023

  

2022

 
         

Allocated shares

  240,266   235,340 

Unallocated shares

  191,922   215,912 

Total ESOP shares

  432,188   451,252 
         

Fair value of unallocated shares (in thousands)

 $3,030  $3,489 

 

Stock Incentive Plans

 

The Company adopted the stock incentive plan on November 1, 2011. This plan provides for different types of awards including stock options, restricted stock and performance shares. Under this plan, awards of Eagle's common stock may be made to eligible directors, officers and employees. This plan was amended multiple times, most recently in 2022 to increase the maximum number of shares of restricted stock for issuance under this plan to 393,571. The number of shares of restricted stock available to award under this plan was 90,062 as of December 31, 2023. This plan also includes shares available to be awarded for stock options totaling 246,427. However, no stock options have been awarded under this plan.

 

The following table shows the activity of the restricted stock awards granted under this plan:

 

  

Number of

 
  

Shares

 
     

Unvested awards as of January 1, 2022

  81,952 

Awards granted

  13,450 

Awards vested

  (23,983)

Awards forfeited

  (1,058)

Unvested awards as of December 31, 2022

  70,361 

Awards granted

  20,870 

Awards vested

  (20,132)

Awards forfeited

  (1,200)

Unvested awards as of December 31, 2023

  69,899 

 

At December 31, 2023, the Company has unrecognized expense of approximately $1,198,000 for this plan, which it expects to recognize ratably through November 2027

 

The Company established a nonemployee director award plan effective April 23, 2020. Under this plan, awards of Eagle's common stock may be made to eligible directors. This plan was amended during 2023 and increased the maximum number of shares of restricted stock for issuance under this plan to 88,000. The number of shares of restricted stock available to award under this plan was 60,397 as of December 31, 2023.

 

- 43 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16:

Employee Benefits – continued

 

The following table shows the activity of the restricted stock awards granted under this plan:

 

  

Number of

 
  

Shares

 
     

Unvested awards as of January 1, 2022

  1,768 

Awards granted

  8,520 

Awards vested

  (1,768)

Awards forfeited

  - 

Unvested awards as of December 31, 2022

  8,520 

Awards granted

  15,291 

Awards vested

  (8,520)

Awards forfeited

  - 

Unvested awards as of December 31, 2023

  15,291 

 

At December 31, 2023, the Company has unrecognized expense of approximately $150,000 for this plan, which it expects to recognize ratably through November 2024.

 

The Company recognized total compensation expense of $347,000 and $491,000 for these plans during the years ended December 31, 2023 and 2022, respectively.

    

 

NOTE 17:

Derivatives and Hedging Activities

 

The Company enters into commitments to originate and sell mortgage loans. The Bank uses derivatives to hedge the risk of changes in fair values of interest rate lock commitments and mortgage loans held-for-sale. An optimal amount of mortgage loans are sold directly into bulk commitments with investors at the time an interest rate is locked, other loans are sold on an individual best efforts basis at the time an interest rate is locked, and the remaining balance of locked loans are hedged using TBA mortgage-backed securities or bulk mandatory forward loan sale commitments.

 

Derivatives are accounted for as free-standing or economic derivatives and are measured at fair value. Derivatives are recorded as either other assets or other liabilities on the consolidated statements of condition.

 

Derivatives are summarized as follows:

 

  

December 31, 2023

  

December 31, 2022

 
  

Notional

  

Fair Value

  

Notional

  

Fair Value

 
  

Amount

  

Asset

  

Liability

  

Amount

  

Asset

  

Liability

 
  

(In Thousands)

 

Interest rate lock commitments

 $15,670  $15  $-  $18,603  $-  $81 

Forward TBA mortgage-backed securities

  12,000   -   75   13,000   11   - 

 

Changes in the fair value of the derivatives are recorded in mortgage banking, net within noninterest income on the consolidated statements of income. A net gain of $10,000 was recorded for the year ended  December 31, 2023 compared to a net loss of $1,194,000 for the year ended December 31, 2022.

  

 

NOTE 18:

Fair Value of Financial Instruments

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 

 

Assets and liabilities that are measured at fair value are grouped in three levels within the fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

The fair value hierarchy is as follows:

 

 

Level 1 Inputs – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 Inputs – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

 

 

Level 3 Inputs – Valuations are based on unobservable inputs that may include significant management judgment and estimation.

 

- 44 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18:

Fair Value of Financial Instruments – continued

 

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy at the reporting date, is set forth below.

 

Available-for-Sale SecuritiesSecurities classified as available-for-sale are reported at fair value utilizing Level 1 (nationally recognized securities exchanges) and Level 2 inputs. For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include but is not limited to dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.

 

Loans Held-for-Sale – These loans are reported at fair value. Fair value is determined based on expected proceeds based on committed sales contracts and commitments of similar loans if not already committed and are considered to be Level 2.

 

Derivative Instruments – The fair value of the interest rate lock commitments, forward TBA mortgage-backed securities and mandatory forward commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. Interest rate lock commitments are considered to be Level 3 and the forward TBA mortgage-backed securities and mandatory forward commitments are considered to be Level 2.

 

Collateral-Dependent Loans – Individually reviewed collateral-dependent loans are reported at the fair value of the underlying collateral less costs to sell. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy.

 

Real Estate and Other Repossessed Assets – Fair values are determined at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based primarily on third-party appraisals, less costs to sell and are considered Level 3 inputs for determining fair value. Repossessed assets are reviewed and evaluated periodically for additional impairment and adjusted accordingly.

 

Mortgage Servicing Rights – The fair value of mortgage servicing rights are estimated using present value of expected cash flows based on a third-party model that incorporated industry assumptions and is adjusted for factors such as prepayment speeds and are considered level 3 inputs.

 

- 45 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18:

Fair Value of Financial Instruments – continued

 

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

  

December 31, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total Fair

 
  

Inputs

  

Inputs

  

Inputs

  

Value

 
  

(In Thousands)

 

Financial assets:

                

Available-for-sale securities

                

U.S. government and agency obligations

 $-  $6,543  $-  $6,543 

U.S. treasury obligations

  46,815   -   -   46,815 

Municipal obligations

  -   137,950   -   137,950 

Corporate obligations

  -   3,905   -   3,905 

Mortgage-backed securities

  -   26,753   -   26,753 

Collateralized mortgage obligations

  -   86,568   -   86,568 

Asset-backed securities

  -   9,745   -   9,745 

Loans held-for-sale

  -   11,432   -   11,432 

Interest rate lock commitments

  -   15   -   15 

Financial liabilities:

                

Forward TBA mortgage-backed securities

  -   -   75   75 

 

  

December 31, 2022

 
  

Level 1

  

Level 2

  

Level 3

  

Total Fair

 
  

Inputs

  

Inputs

  

Inputs

  

Value

 
  

(In Thousands)

 

Financial assets:

                

Available-for-sale securities

                

U.S. government obligations

 $-  $2,390  $-  $2,390 

U.S. treasury obligations

  51,951   -   -   51,951 

Municipal obligations

  -   172,849   -   172,849 

Corporate obligations

  -   6,990   -   6,990 

Mortgage-backed securities

  -   29,653   -   29,653 

Collateralized mortgage obligations

  -   82,131   -   82,131 

Asset-backed securities

  -   3,531   -   3,531 

Loans held-for-sale

  -   8,250   -   8,250 

Forward TBA mortgage-backed securities

  -   11   -   11 

Financial liabilities:

                

Interest rate lock commitments

  -   -   81   81 

 

- 46 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18:

Fair Value of Financial Instruments – continued

 

Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets, such as collateral-dependent loans, real estate and other repossessed assets and mortgage servicing rights.

 

The following tables summarize financial assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods presented:

 

  

December 31, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total Fair

 
  

Inputs

  

Inputs

  

Inputs

  

Value

 
  

(In Thousands)

 

Collateral-dependent loans individually evaluated, net of ACL(1)

 $-  $-  $1,782  $1,782 

Mortgage servicing rights

  -   -   -   - 

 

  

December 31, 2022

 
  

Level 1

  

Level 2

  

Level 3

  

Total Fair

 
  

Inputs

  

Inputs

  

Inputs

  

Value

 
  

(In Thousands)

 

Impaired loans (1)

 $-  $-  $281  $281 

Mortgage servicing rights

  -   -   1,346   1,346 

 

 

(1) The Company adopted ASC 326 as of January 1, 2023, under which the concept of impaired loans went away. The comparable period presents impaired loans under previously applicable GAAP.

 

The following table represents the Bank's financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the valuation techniques used to measure the fair value of those assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs:

 

 

Principal

Significant

Range of

 

Valuation

Unobservable

Significant Input

Instrument

Technique

Inputs

Values

    

Collateral-dependent loans individually evaluated

Fair value of underlying collateral

Discount applied to the obtained appraisal

10 - 30%

Real estate and other repossessed assets

Fair value of collateral

Discount applied to the obtained appraisal

10 - 30%

Interest rate lock commitments

Internal pricing model

Pull-through expectations

85 - 95%

 

- 47 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18:

Fair Value of Financial Instruments – continued

 

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the year ended  December 31, 2023.

 

         
  

December 31, 2023

  

December 31, 2022

 
  

Interest Rate Lock Commitments

 
  

(In Thousands)

 

Balance, January 1, 2023

 $(81) $1,218 

Purchases and issuances

  (339)  227 

Sales and settlements

  435   (1,526)

Balance, December 31, 2023

 $15  $(81)

Unrealized gains (losses) relating to items held at end of period

 $96  $(1,299)

 

The tables below summarize the estimated fair values of financial instruments of the Company, whether or not recognized at fair value on the consolidated statements of condition. The tables are followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

 

  

December 31, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total

  

Carrying

 
  

Inputs

  

Inputs

  

Inputs

  

Fair Value

  

Amount

 
  

(In Thousands)

 

Financial assets:

                    

Cash and cash equivalents

 $24,545  $-  $-  $24,545  $24,545 

FHLB stock

  -   9,191   -   9,191   9,191 

FRB stock

  -   4,131   -   4,131   4,131 

Loans receivable, gross

  -   -   1,416,203   1,416,203   1,484,489 

Mortgage servicing rights

  -   -   20,388   20,388   15,853 

Financial liabilities:

                    

Non-maturing interest-bearing deposits

  -   772,086   -   772,086   772,086 

Time certificates of deposit

  -   -   441,939   441,939   444,382 

FHLB advances and other borrowings

  -   -   175,842   175,842   175,737 

Other long-term debt

  -   -   58,094   58,094   60,155 

 

  

December 31, 2022

 
  

Level 1

  

Level 2

  

Level 3

  

Total

  

Carrying

 
  

Inputs

  

Inputs

  

Inputs

  

Fair Value

  

Amount

 
  

(In Thousands)

 

Financial assets:

                    

Cash and cash equivalents

 $21,811  $-  $-  $21,811  $21,811 

FHLB stock

  -   5,089   -   5,089   5,089 

FRB stock

  -   4,131   -   4,131   4,131 

Loans receivable, gross

  -   -   1,322,814   1,322,814   1,353,678 

Mortgage servicing rights

  -   -   19,288   19,288   15,412 

Financial liabilities:

                    

Non-maturing interest-bearing deposits

  -   914,659   -   914,659   914,659 

Time certificates of deposit

  -   -   246,348   246,348   251,658 

FHLB advances and other borrowings

  -   -   69,373   69,373   69,394 

Other long-term debt

  -   -   56,721   56,721   60,155 

 

- 48 -

  
 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 19:

Condensed Parent Company Financial Statements

 

Included below are the condensed financial statements of the Parent Company, Eagle Bancorp Montana, Inc.:

 

  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

Assets:

        

Cash and cash equivalents

 $2,426  $5,038 

Securities available-for-sale

  796   5,851 

Investment in Eagle Bancorp Statutory Trust I

  155   155 

Investment in Subsidiaries

  219,090   201,734 

Other assets

  6,831   5,526 

Total assets

 $229,298  $218,304 
         

Liabilities and Shareholders' Equity:

        

Accounts payable and accrued expenses

 $1,026  $1,044 

Other long-term debt

  58,999   58,844 

Shareholders' equity

  169,273   158,416 

Total liabilities and shareholders' equity

 $229,298  $218,304 

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 
         

Interest income

 $55  $137 

Interest expense

  (2,729)  (2,598)

Noninterest income

  211   - 

Noninterest expense

  (976)  (3,015)

Loss before income taxes

  (3,439)  (5,476)

Income tax benefit

  (914)  (1,139)

Loss before equity in undistributed earnings of Subsidiaries

  (2,525)  (4,337)

Equity in undistributed earnings of Subsidiaries

  12,581   15,038 

Net income

 $10,056  $10,701 

 

- 49 -

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 19:

Condensed Parent Company Financial Statements – continued

 

  

Years Ended

 
  

December 31,

 
  

2023

  

2022

 
  

(In Thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

 $10,056  $10,701 

Adjustments to reconcile net income to net cash used in operating activities:

        

Equity in undistributed earnings of Subsidiaries

  (12,581)  (15,038)

Other adjustments, net

  (1,302)  (997)

Net cash used in operating activities

  (3,827)  (5,334)
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Cash paid for acquisitions, net of cash received

  -   (10,227)

Activity in available-for-sale securities:

        

Maturities, principal payments and calls

  5,072   18,118 

Purchases

  -   (20,158)

Net cash provided by (used in) investing activities

  5,072   (12,267)
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from issuance of subordinated debentures

  -   40,000 

Repayment of subordinated debentures

  -   (10,000)

Payments for debt issuance costs

  -   (918)

ESOP payments and dividends

  479   585 

Payments to purchase treasury stock

  (231)  (4,430)

Treasury shares reissued for compensation

  337   484 

Dividends paid

  (4,442)  (4,062)

Net cash (used in) provided by financing activities

  (3,857)  21,659 
         

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

  (2,612)  4,058 
         

CASH AND CASH EQUIVALENTS, beginning of period

  5,038   980 
         

CASH AND CASH EQUIVALENTS, end of period

 $2,426  $5,038 

  

- 50 -