Eagle Bancorp Montana, Inc. (EBMT) FY 2021 MD&A

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, 2021 as compared to the year ended December 31, 2020, and also analyzes our financial condition as of December 31, 2021 as compared to December 31, 2020. Like most banking institutions, our principal business consists of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and nonfinancial institutions, account maturities, fee structures and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations.

Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans and investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense.

The Bank has a strong mortgage lending focus, with a large portion of its loan originations represented by single-family residential mortgages, which has enabled it to successfully market home equity loans, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). The Bank has also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of December 31, 2021, commercial real estate and commercial business loans represented 60.97% and 15.82% 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, 2021, we had mortgage servicing rights, net of $13.69 million compared to $10.11 million as of December 31, 2020. Gain on sale of loans also provides significant noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity.

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Fee income is also supplemented with fees generated from deposit accounts. The Bank has a high percentage of non-maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its spread. Non-maturity deposits and certificates of deposit do not automatically reprice as interest rates rise.

Management continues to focus on improving the Bank's earnings. Management believes the Bank needs to continue to concentrate on increasing net interest margin, other areas of fee income and control operating expenses to achieve earnings growth going forward. Management’s strategy of growing the loan portfolio and deposit base is expected to help achieve these goals as follows: loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to the strategy is funding the growth of the statement of financial condition in an efficient manner. Though deposit growth has been steady, it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.

Other than short term residential construction loans, we do not offer “interest only” mortgage loans on residential 1-4 family properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee decreased the federal funds target rate during the year ended December 31, 2020 from 1.75% to 0.25%. The rate remained at 0.25% during the year ended December 31, 2021. The rate reductions add continued pressure on loan yields.

COVID-19

The Company's performance for the year ended December 31, 2021 was solid due to higher loan production, record deposit generation and net interest income growth. However, the Company also continues to see the impact of the COVID-19 pandemic and its consequences on our Montana communities. The Bank remains focused on supporting our customers, communities and employees while prudently managing risk. The Bank is closely monitoring borrowers and businesses serviced and is providing debt service relief for those that have been impacted.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) providing economic relief for the country, including the $349 billion Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. In April 2020, additional funding was approved for the PPP. Eagle began taking loan applications from its small business clients immediately after the program was implemented, and as of the close of the program, had helped764 customers receive $45.71 million in SBA PPP loans. The Bank has processed applications for PPP loan forgiveness for customers, with759 loans representing over $45.31 million now paid in full. The remaining five SBA PPP loans represent $402,000.

On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law, providing new COVID-19 stimulus relief, and it included $284 billion allocated for another round of PPP lending, extending the program to March 31, 2021. On March 31, 2021, the program was extended to May 31, 2021. The program offered new PPP loans for companies that did not receive a PPP loan in 2020, and also “second draw” loans targeted at hard-hit businesses that have already spent their initial PPP proceeds. As of the close of the program, Eagle supported 646 borrowers in receiving $19.51 million in new PPP funding. The Bank has processed applications for PPP loan forgiveness for customers, with514 loans representing$15.45 million now paid in full. The remaining 132 PPP loans represent$4.06 million.

While all industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following impacted industries, as a percentage of loans as of December 31, 2021: hotels and lodging (6.8%), health and social assistance (3.5%), bars and restaurants (2.7%), casinos (0.8%) and nursing homes (0.4%). The Bank continues to reach out to specific borrowers to assess the risks and understand their needs.

The Bank has offered multiple accommodation options to its clients, including 90-day deferrals, forbearances and interest only payments. During 2020, the Montana Board of Investments ("MBOI") began offering 12-months of interest payment assistance to qualified borrowers. As of December 31, 2021, there way only one remaining loan modification for a nonresidential borrower representing a loan for $6,000, compared to40 nonresidential borrowers representing $29.00 million, or 3.5% of gross loans excluding loans held-for-sale, as of December 31, 2020. The Bank qualified32 borrowers for the MBOI program representing$27.25 million in loans, all of which had aged out of the program as of the third quarter of 2021. Only one loan in the hotel and lodging industry was approved in the MBOI loan program and was considered a troubled debt restructured (“TDR”) loan as of December 31, 2020, prior to aging out of the program. No other loans that had been modified related to COVID-19 were reported as TDR's due to the CARES Act exemption. As of December 31, 2021 there remain approximately 15 forbearances approved for residential mortgage loans, all of which are sold and serviced. Utilization of credit lines were78.6% at December 31, 2021 to 82.7% at December 31, 2020, which has declined slightly compared to historical usage rates.

Our fee income could still be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, early withdrawal fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.

As of December 31, 2021, our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.

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While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

As of December 31, 2021, our goodwill was not impaired. COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a noncash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At December 31, 2021 we had goodwill of $20.8 million.

The State of Montana ended their phased approach to reopening and lifted the state-wide mask mandate on February 12, 2021. On March 22, 2021, all of our lobbies opened while still requiring everyone to practice necessary safeguards. As of May 7, 2021, masks were no longer required for the Bank's branches, customers or vendors. The Company remains committed to assisting our customers and communities as the vaccine rollout continues and COVID-19 restrictions lift in Montana. Management is encouraging its employees to receive the COVID-19 vaccine.

Acquisitions

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

In January 2019, the Company acquired Big Muddy Bancorp, Inc. (“BMB”), a Montana corporation, and BMB’s wholly-owned subsidiary, The State Bank of Townsend, a Montana chartered commercial bank (“SBOT”). SBOT operated four branches in Townsend, Dutton, Denton and Choteau, Montana. The transaction provided an opportunity to expand market presence and lending activities throughout the state.

In January 2020, Eagle 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. In the transaction, Eagle acquired one retail bank branch in Wolf Point, Montana.

On October 1, 2021, Eagle announced that it had reached an agreement to acquire First Community Bancorp, Inc. ("FCB"), a Montana corporation and its wholly-owned subsidiary, First Community Bank, a Montana chartered commercial bank. The agreement provides that, upon the terms and subject to the conditions set forth in the agreement, FCB will merge with and into Eagle, with Eagle continuing as the surviving corporation. Upon completion of the transaction, Eagle will have an additional $377 million of assets, $306 million of deposits and $208 million in gross loans, based on September 30, 2021 information. Headquartered in Glasgow, Montana, FCB currently operates nine branches and two mortgage loan production offices. The transaction is subject to the approvals of bank regulatory agencies, the shareholders of Eagle and FCB and other customary closing conditions. As of March 9, 2022, the Company received approval of the pending merger from the Montana Department of Banking and Financial Institutions, and the shareholders of both Eagle and FCB have approved the transaction. The Company is awaiting the approval of the Federal Reserve Board. The acquisition is expected to close during the first quarter of 2022. Upon approval, a Form 8-K will be filed to disclose the anticipated closing date.

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Critical Accounting Policies

Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical.

Allowance for Loan Losses

We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. This allowance is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions.

In addition, as an integral part of their examination process, banking regulators will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.

Goodwill and Other Intangible Assets

The Company accounts for business combinations under the acquisition method of accounting. The Company records assets acquired, including identifiable intangible assets and liabilities assumed at their fair values as of the acquisition date. Transaction costs related to the acquisition are expensed in the period incurred. Results of operations of the acquired entity are included in the consolidated statements of income from the date of acquisition. Any measurement-period adjustments are recorded in the period the adjustment is identified.

The excess of consideration paid over fair value of net assets acquired is recorded as goodwill. Determining the fair value of assets acquired, including identifiable intangible assets and liabilities assumed often requires significant use of estimates and assumptions. This may involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques such as estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. Goodwill is not amortized, but is tested at least annually for impairment.

Other intangible assets are assigned useful lives and amortized. The determination of useful lives is subjective. See Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for further information.

The Company's accounting policies and discussion of recent accounting pronouncements is included in Note 1 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data".

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Financial Condition

December 31, 2021 compared to December 31, 2020

Total assets were $1.44 billion at December 31, 2021, an increase of $178.30 million, or 14.2% from $1.26 billion at December 31, 2020.Securities available-for-sale increased by $108.31 million from $162.95 million at December 31, 2020. In addition, loans receivable, net increased by $91.14 million from December 31, 2020. Total liabilities were $1.28 billion at December 31, 2021, an increase of $174.50 million, or 15.8%, from $1.10 billion at December 31, 2020. The increase was largely due to an increase in deposits slightly offset by a reduction in FHLB advances and other borrowings. Total deposits increased by $189.47 million from December 31, 2020. However, FHLB advances and other borrowings decreased $12.07 million from December 31, 2020. Total shareholders’ equity increased by $3.79 million from December 31, 2020.

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, 2021 or 2020. 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 $1.70 million and $2.06 million at December 31, 2021 and 2020, respectively. FRB stock was $2.97 million at both December 31, 2021 and 2020.

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The following table summarizes investment activities:

Securities available-for-sale were $271.26 million at December 31, 2021, an increase of $108.31 million, or 66.5%, from $162.95 million at December 31, 2020. The increase was largely driven by purchase activity due to excess liquidity levels.

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.

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Lending Activities

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

(1) Excludes loans held-for-sale

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Loans receivable, net increased $91.14 million to $920.64 million at December 31, 2021. The increase was largely driven by an increase in total commercial real estate loans of $122.11 million. Construction projects were slow to start in 2020 and early 2021 due to COVID-19 concerns and supply chain issues. This increase was offset by decreases in total commercial loans of $13.58 million, total residential 1- 4 family loans of $10.27 million, home equity loans of $4.81 million and consumer loans of $1.71 million.

Total loan originations were $1.56 billion for the year ended December 31, 2021. Total residential 1-4 family originations were $1.14 billion, which includes $1.04 billion of originations of loans held-for-sale. Total commercial real estate originations were $274.40 million. Total commercial originations were $110.58 million, which includes $19.51 million of SBA PPP loans. Home equity loan originations totaled $25.59 million. Consumer loan originations totaled $8.94 million. Loans held-for-sale decreased by $28.80 million, to $25.82 million at December 31, 2021 from $54.62 million at December 31, 2020 after a robust refinancing period in 2020.

Loan Maturities. The following table sets forth the estimated maturity of the loan portfolio of the Bank at December 31, 2021. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give the Bank the right to declare loans immediately due and payable in the event, among other things, the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted.

Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months.

(1) Excludes loans held-for-sale

The following table includes loans by fixed or adjustable rates at December 31, 2021:

(1) Excludes loans held-for-sale

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Nonperforming Assets. Generally, our collection procedures provide that when a loan is 15 or more days delinquent, the borrower is sent a past due notice. If the loan becomes 30 days delinquent, the borrower is sent a written delinquency notice requiring payment. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower, including face to face meetings and counseling to resolve the delinquency. All collection actions are undertaken with the objective of compliance with the Fair Debt Collection Act.

For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. Subsequent write-downs are recorded as a charge to operations. As of December 31, 2021 and 2020, the Bank had $4,000 and $25,000, respectively, of real estate owned and other repossessed property.

The State of Montana placed a freeze on foreclosures on March 28, 2020. Subsequently the State of Montana released the freeze effective May 24, 2020 with the exception of continued protections for those individuals deemed vulnerable to the coronavirus. The Federal foreclosure moratorium that began March 18, 2020 was later extended to July 31, 2021. On June 28, 2021, the Consumer Financial Protection Bureau finalized a rule requiring loan servicers to enhance their efforts to help homeowners affected by the COVID-19 pandemic. As a result, servicers could not initiate a foreclosure until the borrower was more than 120 days delinquent and were effectively prohibited from beginning the foreclosure process before January 1, 2022. However, the Bank has had minimal impact due to foreclosures affected by these freezes.

Loans are reviewed on a quarterly basis and are placed on nonaccrual status when they are 90 days or more delinquent. Loans may be placed on nonaccrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. At December 31, 2021, the Bank had $5.49 million ($4.89 million net of specific reserves for loan losses) of loans that were nonperforming and held on nonaccrual status. At December 31, 2020, the Bank had $6.27 million ($5.92 million net of specific reserves for loan losses) of loans that were nonperforming and held on nonaccrual status.

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

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The following table sets forth information regarding nonperforming assets:

Nonaccrual loans as of December 31, 2021 and 2020 include $492,000 and $1.28 million, respectively of acquired loans that deteriorated subsequent to the acquisition date.

During the year ended December 31, 2021, the Bank sold three real estate owned and other repossessed assets resulting in a net loss of $12,000. There was one write-down on real estate owned and other repossessed assets for a loss of $10,000 during the year ended December 31, 2021. During the year ended December 31, 2020, the Bank sold five real estate owned and other repossessed assets resulting in a net loss of $9,000. There were no write-down on real estate owned and other repossessed assets during the year ended December 31, 2020. During the year ended December 31, 2021 and 2020, an insignificant amount of interest was recorded on loans previously accounted for on a nonaccrual basis.

Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to evaluate the loan for impairment and establish an allowance for loan loss if deemed necessary. When management classifies a loan as a loss asset, an allowance equaling up to 100.0% of the loan balance is required to be established or the loan is required to be charged-off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and specific problem assets.

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Management’s evaluation of classification of assets and adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by regulatory agencies as part of their examination process. We also utilize a third party review as part of our loan classification process. In addition, on an annual basis or more often if needed, the Company formally reviews the ratings of all commercial real estate, real estate construction, and commercial business loans that have a principal balance of $750,000 or more.

The following table reflects our classified assets:

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Allowance for Loan Losses. The Bank segregates its loan portfolio for loan losses into the following broad categories: residential 1-4 family, commercial real estate, home equity, consumer and commercial. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above. General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local and national economy.

At least quarterly, the management of the Bank evaluates the need to establish an allowance for losses on specific loans when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectability may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality.

Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. At December 31, 2021, we had $12.50 million in allowances for loan losses.

While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings.

In originating loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan.

It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis.

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The following table includes information for allowance for loan losses:

Net charge-offs to average loans outstanding for each loan category are considered insignificant for the periods presented in the table above.

The following table presents allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans:

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Deposits and Other Sources of Funds

Deposits. Deposits are the Company’s primary source of funds. Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are checking, savings, money market and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits were $1.10 billion or 89.8% of the Bank’s total deposits at December 31, 2021 ($1.07 billion or 87.9% excluding IRA certificates of deposit). The presence of a high percentage of core deposits and, in particular, transaction accounts reflects in part our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds.

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

Deposits increased by $189.47 million, or 18.3%, to $1.22 billion at December 31, 2021 from $1.03 billion at December 31, 2020. Money market increased by $75.06 million, noninterest checking increased by $50.46 million, savings increased by $43.20 million, and interest-bearing checking increased by $42.80 million. However, certificates of deposit decreased by $22.05 million. The decrease was driven by a decrease in other certificates of $22.20 million. Due to the continued low interest rate environment, some depositors have been compelled to move funds from other certificates to non-maturity deposits upon maturity.

At December 31, 2021 and 2020, the Company held $444.89 million and $326.53 million, respectively, in deposit accounts that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") requirements of $250,000 and greater.

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, 2021:

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. In addition, during the year ended December 31, 2020, the Bank utilized the FRB's Payroll Protection Program Loan Funding ("PPPLF") facility as a partial source of funding for its SBA PPP loans. The Bank has Federal funds lines of credit with PCBB, PNC, TIB and UBB. Eagle has a line of credit with Bell Bank.

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The following table includes information related to FHLB of Des Moines and other borrowings:

Advances from FHLB and other borrowings decreased by $12.07 million to $5.00 million at December 31, 2021 compared to $17.07 million at December 31, 2020. This decrease is due to maturities.

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

Total other long-term debt was $29.87 million at December 31, 2021 compared to $29.79 million at December 31, 2020.

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Shareholders’ Equity

Total shareholders’ equity increased slightly by $3.79 million or 2.5%, to $156.73 million at December 31, 2021 from $152.94 million at December 31, 2020. The increase was impacted by net income of $14.42 million. This increase was largely offset due to treasury stock purchased through the Tender Offer of $6.28 million, dividends paid of $3.02 million and other comprehensive loss of $2.36 million.

Analysis of Net Interest Income

The Bank’s earnings have historically depended primarily upon net interest income, which is the difference between interest income earned on loans and investments and interest paid on deposits and any borrowed funds. It is the single largest component of Eagle’s operating income. Net interest income is affected by (i) the difference between rates of interest earned on loans and investments and rates paid on interest-bearing deposits and borrowings (the “interest rate spread”) and (ii) the relative amounts of loans and investments and interest-bearing deposits and borrowings.

The following table includes average balances for statement of financial position items, as well as, interest and dividends and average yields related to the average balances. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.

(1)     Includes loans held-for-sale.

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

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

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

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Rate/Volume Analysis

The following 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.