# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Sep 30, 2011

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2011-11-14
- Accepted by EDGAR: Nov 14, 2011, 12:05 ET
- Period: 2011-09-30
- Accession: 0001157523-11-006770
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000115752311006770/a50056428.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000115752311006770/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2011-07-01 to 2011-09-30 | $894.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $187.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | $428.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-01 to 2011-09-30 | 3,912,326 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-07-01 to 2011-09-30 | $1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-07-01 to 2011-09-30 | $60.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2011-07-01 to 2011-09-30 | $278.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2011-07-01 to 2011-09-30 | $185.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-09-30 | $10.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2011-09-30 | $335.9m | us-gaap:Assets |
| Total liabilities | at 2011-09-30 | $282.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-09-30 | $53.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,563 characters.

### Note Regarding Forward-Looking Statements

This report 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 our management 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 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;
- general economic conditions, either nationally or in our market areas, that are worse than expected;
- competition among depository and other financial institutions;
- 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;
- changes in the securities markets;
- our ability to enter new markets successfully and capitalize on growth opportunities;
- our ability to successfully integrate acquired entities, if any;
- changes in consumer spending, borrowing and savings habits;
- changes in our organization’s compensation and benefit plans;
- 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 premium assessments;
- the impact of the current economic conditions on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;
- the impact of recently enacted legislation to restructure the U.S. financial and regulatory system, including proposals to reform the housing markets and government-sponsored enterprises serving such markets;
- the failure of assumptions underlying the establishment of allowance for possible loan 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 standard setters.

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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, 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.

### Overview

The Company’s primary activity is its ownership of its wholly owned subsidiary, American Federal Savings Bank (the “Bank”). The Bank is a federally chartered savings bank, engaging in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. The Company, as a unitary thrift holding company, and the Bank, as a federally chartered savings bank currently operate under a consolidated regulatory regime in which the Office of Thrift Supervision (the “OTS”), has served as the principal federal regulator for both entities. Recent federal legislation mandated that the consolidated regulatory functions of the OTS be transferred to two federal agencies and that the OTS be merged into the Office of the Comptroller of the Currency (the “OCC”). Thus, as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) effective July 21, 2011, the Federal Reserve Board (the “FRB”) became the principal federal bank regulatory agency for the Company and the OCC the principal federal regulator for the Bank. The Bank’s charter will not be affected and the Bank will continue to operate, as a federal stock savings bank. Its deposits will remain insured by the Federal Deposit Insurance Corporation. Because the Dodd-Frank Act did not eliminate the thrift charter under which the Bank has historically operated, the Bank’s traditional lending and investment activities should not be affected. Further, to ensure regulatory continuity, the Dodd-Frank Act requires that the OCC designate a new Deputy Comptroller who will be responsible for the supervision and examination of federal savings associations.

The Bank’s primary component of earnings is its net interest margin (also called spread or margin), the difference between interest income and interest expense. The net interest margin is managed by management (through the pricing of its products and by the types of products offered and kept in portfolio), and is affected by moves in interest rates. Noninterest income in the form of fee income and gain on sale of loans adds to the Bank’s income.

The Bank has a strong mortgage lending focus, with the majority of its loans represented by single-family residential mortgages. The Bank has also successfully marketed home equity loans to its customers, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years the Bank has focused on adding commercial loans to its portfolio, both real estate and non-real estate. The purpose of this diversification is to mitigate the Bank’s dependence on the mortgage market, as well as to improve its ability to manage its spread. The Bank’s management recognizes the need for sources of fee income to complement its margin, and the Bank now maintains a significant loan servicing portfolio which provides income. The gain on sale of loans also provides significant fee income in periods of high mortgage loan origination volumes. Fee income is also supplemented with fees generated from the Bank’s 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 do not automatically reprice as interest rates rise, as do certificates of deposit.

For the past several years, management’s focus has been on improving the Bank’s core earnings. Core earnings can be described as income before taxes, with the exclusion of gain on sale of loans and adjustments to the market value of the Bank’s loan servicing portfolio. Management believes that the Bank will need to continue to focus on increasing net interest margin, other areas of fee income, and control of operating expenses to achieve earnings growth going forward. Management’s strategy of growing the bank’s 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 Bank’s balance sheet in an efficient manner. Deposit growth will be difficult to maintain due to fierce competition and wholesale funding (which is usually more expensive than retail deposits) will likely be needed to supplement it.

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Reserve’s Federal Open Market Committee (“FOMC”) did not change the federal funds target rate which remained at 0.25% during the three months ended September 30, 2011.

### Financial Condition

Comparisons of financial condition in this section are between September 30, 2011 and June 30, 2011.

Total assets at September 30, 2011 were $335.91 million, an increase of $4.82 million, or 1.45%, from $331.09 million at June 30, 2011. This increase in assets was primarily attributable to increases in cash and equivalents and in commercial real estate loans.

### Financial Condition - continued

Loans receivable increased $766,000, or 0.41%, to $186.2 million at September 30, 2011, from $185.5 million at June 30, 2011. Commercial loans was the loan category with the largest increase, $1.78 million. Commercial real estate loans also increased by $1.19 million. Both home equity and consumer loans decreased moderately, while construction loans decreased by $743,000. Residential mortgages decreased $1.32 million. Total loan originations were $28.7 million for the three months ended September 30, 2011, with single family mortgages accounting for $17.0 million of the total. Home equity and construction loan originations totaled $1.8 million and $815,000, respectively, for the same period. Commercial real estate and land loan originations totaled $4.7 million. Loans held-for-sale increased to $3.2 million at September 30, 2011 from $1.8 million at June 30, 2011.

Total cash and cash equivalents increased by $1.1 million, and securities available-for-sale increased $188,000.

Deposits increased $4.4 million, or 2.12%, to $213.62 million at September 30, 2011 from $209.19 million at June 30, 2011. Growth occurred in all deposit products except certificates of deposits which decreased $1.28 million. Management attributes the increase in these deposits to increased marketing of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts.

Advances from the Federal Home Loan Bank and other borrowings decreased $2.05 million, or 3.37%, to $58.85 million from $60.90 million as a result of continued growth in deposits.

Total shareholders’ equity increased $913,000 or 1.74%, to $53.40 million at September 30, 2011 from $52.49 million at June 30, 2011. This was a result of net income for the period of $428,000 in addition to an increase in accumulated other comprehensive income of $905,000 (mainly due to an increase in net unrealized gains on securities available-for-sale). The increase was also partially offset by dividends paid for the period.

### Results of Operations for the Three Months Ended September 30, 2011 and 2010

*Net Income.* Eagle’s net income was $428,000 versus $876,000 for the three months ended September 30, 2011 and 2010, respectively. The decrease of $448,000 or 51.14%, was due to decreases in noninterest income of $881,000 caused by a decline in home mortgage refinancing activity. This was offset by an increase in net interest income of $101,000, and decreases in the provision for loan losses of $25,000, and noninterest expense of $110,000. Eagle’s tax provision was $182,000 lower in the current quarter. Basic earnings per share were $0.11 for the current period, compared to $0.22 for the previous year’s period.

*Net Interest Income.* Net interest income increased to $2.76 million for the quarter ended September 30, 2011, from $2.66 million for the previous year’s quarter. This increase of $101,000 was the result of a decrease in interest expense of $220,000 offset by a decrease in interest and dividend income of $119,000.

*Interest and Dividend Income.* Total interest and dividend income was $3.65 million for the quarter ended September 30, 2011, compared to $3.77 million for the quarter ended September 30, 2010, a decrease of $119,000, or 3.15%. Interest and fees on loans decreased to $2.78 million for the three months ended September 30, 2011 from $2.81 million for the same period ended September 30, 2010. This decrease of $30,000, or 1.07%, was due primarily to the decrease in the average yield on loans for the quarter ended September 30, 2011. Average balances for loans receivable, net, for the quarter ended September 30, 2011 were $187.64 million, compared to $179.21 million for the previous year. This represents an increase of $8.43 million, or 4.70%. The average interest rate earned on loans receivable decreased by 34 basis points, from 6.26% to 5.92%. Interest and dividends on investment securities available-for-sale (AFS) decreased to $872,000 for the quarter ended September 30, 2011 from $963,000 for the same quarter last year. Average balances on investments decreased to $102.89 million for the quarter ended September 30, 2011, compared to $112.61 million for the quarter ended September 30, 2010. The average interest rate earned on investments decreased to 3.39% from 3.42%. Interest on deposits with banks increased to $6,000 from $4,000, due to an increase in the average balances. Average balances on deposits with banks increased to $8.96 million for the quarter ended September 30, 2011, compared to $2.52 million for the quarter ended September 30, 2010. The average rates on deposit with banks decreased from 0.27% at September 30, 2010 to 0.32% at September 30, 2011.

### Results of Operations for the Three Months Ended September 30, 2011 and 2010 - continued

*Interest Expense.* Total interest expense declined significantly in the quarter to $894,000 from $1.11 million for the quarter ended September 30, 2010, a decrease of $220,000, or 19.75%. The decrease was attributable to decreases in interest on deposits and borrowings offset by growth in average deposit balances. Decreases in rates on deposits caused a decline in deposit interest expense of $114,000, or 28.29% over the quarter ended September 30, 2010. The decrease was attributable to a decrease in average rates paid on all deposit products. For example, interest bearing checking account rates declined from 0.09% to 0.06%, and money market accounts decreased from 0.22% to 0.11%. This decline was offset by increases in average balances during the period. Average balances in interest-bearing deposit accounts increased to $191.44 million for the quarter ended September 30, 2011, compared to $183.27 million for the same quarter in the previous year. Average balances in borrowings decreased to $65.53 million for the quarter ended September 30, 2011, compared to $68.13 million for the same quarter in the previous year. A decrease in the average rate paid, along with the decrease in average balances resulted in a decrease in interest paid on borrowings to $583,000 for the quarter ended September 30, 2011 versus $636,000 paid in the previous year’s quarter. The average rate paid on borrowings decreased from 4.18% last year to 3.69% this year. The average rate paid on all liabilities decreased 38 basis points from the quarter ended September 30, 2010 to the quarter ended September 30, 2011.

*Provision for Loan Losses.* Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank, national and local economic conditions, and past due loans in portfolio. The Bank’s policies require a review of assets on a quarterly basis. The Bank classifies loans as well as other assets if warranted. While the Bank believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. The Bank recorded $258,000 in provision for loan losses for the quarter ended September 30, 2011 and $283,000 in the quarter ended September 30, 2010. This slight decrease over 2010 was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total nonperforming loans increased from $2.13 million at September 30, 2010 to $5.21 million at September 30, 2011. The Bank currently has $1.49 million in foreclosed real estate property and other repossessed property with a net book value of $1.30 million.

*Noninterest Income.* Last year due to significant declines in long term interest rates, the Bank experienced significant refinancing activity in residential real estate. Though long-term rates remain at historic low levels, the refinance activity declined in the current quarter compared to the prior year’s period. This decreased activity had a significant effect on the amount of non-interest income with total noninterest income decreasing to $569,000 for the quarter ended September 30, 2011, from $1.44 million for the quarter ended September 30, 2010, a decrease of $866,000 or 60.35%. Of this amount net gain on sale of loans decreased to $236,000 for the quarter ended September 30, 2011 from $827,000 for the quarter ended September 30, 2010. During this period, $17.05 million 1-4 family mortgage loans were originated compared to $43.3 million in the quarter ended September 30, 2010. In addition, $12.64 million of mortgage loans were sold during the period compared to $35.60 million sold in the quarter ended September 30, 2010. Also, a net loss on the fair value hedge was incurred during this period of $330,000 compared to a net gain in the prior year of $15,000.

*Noninterest Expense.* Noninterest expense decreased by $110,000 or 4.29% to $2.46 million for the quarter ended September 30, 2011, from $2.57 million for the quarter ended September 30, 2010. This decrease was primarily due to decreases in the amortization of the mortgage servicing rights of $166,000 which were due to the decrease in the refinance activity described above. Salaries and employee benefits increased by $6,000 or 0.52%. Federal insurance premiums decreased by 33,000 or 52.38% due to the reduction in statutory rates implemented by the Federal Deposit Insurance Corporation. A similar decrease was likely experienced by other deposit insured institutions. Other expense categories showed minor changes.

*Income Tax Expense.* Eagle’s income tax expense was $187,000 for the quarter ended September 30, 2011, compared to $369,000 for the quarter ended September 30, 2010. The effective tax rate for the quarter ended September 30, 2011 was 30.41% and was 29.64% for the quarter ended September 30, 2010.

### Results of Operations for the Three Months Ended September 30, 2011 and 2010 - continued

### Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency (“OCC”) regulations. The OCC has eliminated the statutory requirement based upon a percentage of deposits and short-term borrowings. The OCC states that the liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. “Basic surplus with FHLB” adds to “basic surplus” the additional borrowing capacity the Bank has with the FHLB of Seattle. The Bank exceeded those minimum ratios as of both September 30, 2011 and September 30, 2010.

The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed and collateralized mortgage obligation securities, maturities of investments, funds provided from operations, and advances from the Federal Home Loan Bank of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed and collateralized mortgage obligation securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses.

Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on commitments to make loans and management’s assessment of the Bank’s ability to generate funds.

At June 30, 2011 (the most recent report available), the Bank’s measure of sensitivity to interest rate movements, as measured by its principal federal bank regulator at the time, the Office of Thrift Supervision (“OTS”) in a 200 basis point rise in interest rates scenario, decreased to 187 basis points from 217 basis points at September 30, 2010. The Bank is well within the guidelines set forth by the Board of Directors for interest rate risk sensitivity. The Bank’s tier I core capital ratio, as measured under OCC rules, decreased from 13.21% as of September 30, 2010 to 12.92% as of September 30, 2011. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

### Liquidity, Interest Rate Sensitivity and Capital Resources - continued

As of September 30, 2011, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. At September 30, 2011, the Bank’s tangible, core, and risk-based capital ratios amounted to 12.92%, 12.92%, and 19.71%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively. See the following table (amounts in thousands):

*(Unaudited)*

| Tangible capital: | At September 30, 2011 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| Capital level | $41,063 | 12.92 |
| Requirement | 4,767 | 1.50 |
| Excess | 36,296 | 11.42 |
| Core capital: |  |  |
| Capital level | 41,063 | 12.92 |
| Requirement | 9,533 | 3.00 |
| Excess | 31,530 | 9.92 |
| Risk-based capital: |  |  |
| Capital level | 42,162 | 19.71 |
| Requirement | 17,111 | 8.00 |
| Excess | 25,051 | 11.71 |

### Impact of Inflation and Changing Prices

Our financial statements and the accompanying notes 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Controls and procedures

As filed, 1,387 characters.

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2011, our disclosure controls and procedures were effective. During the last fiscal quarter, 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 have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 175 characters.

There have not been any material changes in the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Filed Nov 14, 2011.
Source: SEC EDGAR, the filing index for accession 0001157523-11-006770. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.