# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Mar 31, 2014

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2014-05-13
- Accepted by EDGAR: May 13, 2014, 12:01 ET
- Period: 2014-03-31
- Accession: 0001157523-14-002135
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000115752314002135/a50857953.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000115752314002135/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2014-01-01 to 2014-03-31 | $502.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-07-01 to 2014-03-31 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-01-01 to 2014-03-31 | $7.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-07-01 to 2014-03-31 | $73.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $108.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-07-01 to 2014-03-31 | $1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-07-01 to 2014-03-31 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-07-01 to 2014-03-31 | $0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 3,973,202 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-07-01 to 2014-03-31 | 3,976,599 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-07-01 to 2014-03-31 | $15.3m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2013-07-01 to 2014-03-31 | $1.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2013-07-01 to 2014-03-31 | $852.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2014-03-31 | $9.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2014-03-31 | $519.8m | us-gaap:Assets |
| Total liabilities | at 2014-03-31 | $470.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-03-31 | $49.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,953 characters.

### 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. Recent federal legislation mandated that the consolidated regulatory functions of The Office of Thrift Supervision (“OTS”) over the Bank and the Company 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 in July of 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve Board (the “FRB”) became, as of July 21, 2011, the principal federal bank regulatory agency for the Company and the OCC the principal federal regulator for the Bank. The Bank’s charter was not affected and the Bank continues to operate as a federal stock savings bank. Its deposits are 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 have not been affected.

The primary component of the Bank’s 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 changes in market interest rates. The Bank also generates noninterest income in the form of fee income and gain on sale of loans.

The Bank has a strong mortgage lending focus, with the majority of its loan originations 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 residential 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 generates income. Gain on sale of loans also provides significant fee or noninterest income in periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage activity. Fee income is also supplemented with fees generated from the Bank’s deposit accounts, its mortgage banking business and its wealth management business. 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 significant competition for deposits in the Bank’s market area, and it is likely that wholesale funding (which is usually more expensive than retail deposits) will 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 nine months ended March 31, 2014.

#### Acquisition of Sterling Savings Bank Branches

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this connection, on June 29, 2012, the Bank entered into a definitive agreement with Sterling Savings Bank, a Washington state-chartered bank, to acquire Sterling’s banking operations in the state of Montana, including seven branch locations, certain deposit liabilities, loans and other assets and liabilities associated with such branch locations. As a result of this acquisition, which closed on November 30, 2012, the Bank acquired approximately $182.5 million in additional assets, including approximately $41.3 million of pass-rated performing loans and assumed $181.6 million in new deposits. The Bank has experienced an increase in mortgage loan originations due to the Sterling acquisition. Deposit fee income has also increased due to the increase in the number of accounts. Operating expenses, primarily salaries and employee benefits have increased as a result of the acquisition. The Bank is currently engaged in a review of staffing and other efficiency measures which it expects will reduce operating expenses in the upcoming fiscal year. The Bank received approximately $130.0 million in cash in the transaction, which may not be able to be immediately used to fund loans. While a substantial amount of the cash has been invested in securities, it may require additional time to deploy all of the proceeds to fund loans.

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### Overview – continued

#### Acquisition of Sterling Savings Bank Branches – continued

The branch acquisition complements the Bank’s existing growth strategy by expanding into the southern Montana market and more than doubling the Bank’s retail branch network from six to 13 locations. Of the seven acquired branches six are in new markets for the Bank, including two in Missoula, one in Billings, and one each in Hamilton, Livingston and Big Timber. The seventh is in Bozeman where the Bank already has a presence. After the acquisition, the Bank became the sixth largest Montana-based banking institution.

In addition, the transaction also strengthens the Bank’s mortgage origination franchise and adds a wealth management business headquartered in Bozeman, Montana. The addition of Sterling’s Montana mortgage banking unit will double the Bank’s mortgage banking business. This increase in the mortgage banking business and the addition of a wealth management business is expected to increase the Bank’s noninterest income and further the Bank’s strategy to increase fee income to complement its margin.

### Financial Condition

Comparisons of financial condition in this section are between March 31, 2014 and June 30, 2013.

Total assets at March 31, 2014 were $519.83 million, an increase of $9.30 million, or 1.8%, from $510.53 million at June 30, 2013. Loans receivable increased by $43.91 million, or 20.5%, to $258.59 million at March 31, 2014, from $214.68 million at June 30, 2013. The components of the increase were residential mortgage loans increasing by $18.06 million, commercial real estate loans increasing by $15.50 million and commercial loans increasing by $7.70 million. Home equity, consumer loans and construction loans also increased. Total loan originations were $217.79 million for the nine months ended March 31, 2014, with single family mortgages accounting for $155.51 million of the total. Home equity and construction loan originations totaled $9.06 million and $10.27 million, respectively, for the same period. Commercial real estate and land loan originations totaled $27.76 million. Consumer loans originated totaled $5.79 million. Commercial loans originated totaled $9.40 million, with $3.34 million originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased $11.4 million, to $9.41 million at March 31, 2014 from $20.81 million at June 30, 2013. One of the chief objectives of the Sterling branch acquisition was to expand the Bank’s footprint across southern Montana. The amount of loans acquired was relatively small in comparison to the deposits, which led to the Bank’s loan to deposit ratio declining substantially. The Bank’s strategy has been to actively market and solicit commercial and commercial real estate loans while using investment portfolio proceeds to help fund the loan growth.

Total cash and cash equivalents increased by $3.13 million, and securities available-for-sale decreased $27.68 million. Almost all security categories decreased during the period with the largest decrease in the collateralized mortgage obligation category of $12.77 million, or 26.8%.

Deposits increased $21.05 million, or 5.0%, to $438.80 million at March 31, 2014 from $417.75 million at June 30, 2013. Growth occurred across most deposit products with the exception of time certificates of deposits which decreased slightly during the period. Management attributes the organic increase in deposits to increased marketing of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts.

The ability of the Bank to continue to attract retail deposits during the period enabled the Bank to decrease wholesale funding. Advances from the Federal Home Loan Bank and other borrowings decreased $11.65 million, or 33.4%, to $23.21 million at March 31, 2014 from $34.86 million at June 30, 2013.

Total stockholders’ equity increased $267,000 or 0.5%, to $49.50 million at March 31, 2014 from $49.23 million at June 30, 2013. This was a result of net income of $1.25 million, partially offset by an increase in accumulated other comprehensive loss of $459,000 (mainly due to an increase in net unrealized losses on securities available-for-sale) and dividends paid of $852,000.

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### Results of Operations for the Three Months Ended March 31, 2014 and 2013

*Net Income.* Eagle’s net income was $108,000 versus $907,000 for the quarter ending March 31, 2013. The decrease of $799,000 was due to a significant decline in noninterest income of $1.15 million and a reduction in an income tax benefit of $636,000 in the third quarter of 2013. The decline in noninterest income was partially offset by an increase in net interest income of $245,000 and a decrease in noninterest expense of $754,000. Basic earnings per share were $0.03 per share for the current period and $0.24 per share for the prior comparable period.

*Net Interest Income.* Net interest income increased to $3.82 million for the quarter ended March 31, 2014, from $3.57 million for the previous year’s quarter. This increase of $245,000 was the result of an increase in interest and dividend income of $212,000 and a decrease in interest expense of $33,000.

*Interest and Dividend Income.* Total interest and dividend income was $4.32 million for the quarter ended March 31, 2014, compared to $4.11 million for the quarter ended March 31, 2013, an increase of $212,000, or 5.1%. Interest and fees on loans increased to $3.25 million for the three months ended March 31, 2013 from $3.01 million for the same period ended March 31, 2013. This increase of $242,000, or 8.0%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended March 31, 2014. The average interest rate earned on loans receivable decreased by 27 basis points, from 5.23% to 4.96%. Average balances for loans receivable, net, including loans held for sale, for the quarter ended March 31, 2014 were $262.58 million, compared to $230.24 million for the prior year period. This represents an increase of $32.34 million, or 14.0%. Average balances on investments decreased to $196.39 million for the quarter ended March 31, 2014, from $219.38 million for the quarter ended March 31, 2013. The average interest rate earned on investments increased to 2.17% from 1.98%. Average balances on deposits with banks decreased to $3.94 million for the quarter ended March 31, 2014, compared to $7.09 million for the quarter ended March 31, 2013 and the average rates on such deposits with banks decreased from 0.56% at March 31, 2013 to 0.09% at March 31, 2014.

*Interest Expense.* Total interest expense declined in the quarter to $502,000 from $535,000 for the quarter ended March 31, 2013, a decrease of $33,000, or 6.2%. The decrease was attributable to decreases in interest on borrowings. The average rates on deposits, which include noninterest bearing deposits, increased slightly from 29 basis points to 30 basis points. Average deposit balances also increased. This increase in average balances is the result of both the Sterling branch acquisition and organic growth. The average balances increased from $415.79 million to $433.14 million, an increase of $17.35 million. Changes in rates varied among the various deposit accounts. Money market accounts remained the same at 13 basis points. Interest bearing checking account rates declined one basis point to 4 basis points down from 5 basis points. Savings account rates declined to 0.05% from 0.07%. Certificates of deposit rates increased from 0.65% to 0.73%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased to $29.80 million for the quarter ended March 31, 2014, compared to $33.95 million for the same quarter in the previous year. A decline in the average rate paid to 2.33% from 2.72%, along with the decrease in average borrowing balances, resulted in a decrease in the interest expense for such borrowings to $173,000 for the quarter ended March 31, 2014 versus $230,000 in the previous year. The average rate paid on all interest-bearing liabilities decreased 5 basis points from the quarter ended March 31, 2013 to the quarter ended March 31, 2014.

*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 management of 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 $128,000 in provision for loan losses for the quarter ended March 31, 2014 and $116,000 in the quarter ended March 31, 2013. This increase was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total nonperforming loans, including restructured loans, net decreased from $973,000 at March 31, 2013 to $618,000 at March 31, 2014. The Bank currently has $458,000 in foreclosed real estate property and other repossessed property.

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### Results of Operations for the Three Months Ended March 31, 2014 and 2013 – continued

*Noninterest Income.* Total noninterest income decreased to $2.12 million for the quarter ended March 31, 2014, from $3.27 million for the quarter ended March 31, 2013, a decrease of $1.15 million or 35.2%. The decrease is primarily due to a decrease in gain on sale of loans of $882,000 and a decrease in gain on sale of securities of $269,000. This significant change in loan sale fees was the result of a decline in mortgage refinancing activity from the 2013 period.

*Noninterest Expense.* Noninterest expense was $5.70 million for the quarter ended March 31, 2014, and $6.45 million for the quarter ended March 31, 2013. The primary cause of this decrease was due to Sterling acquisition costs of $712,000 incurred in the prior comparable period.

*Income Tax Expense.* Our income tax expense was $7,000 for the quarter ended March 31, 2014, compared to income tax benefit of $629,000 for the quarter ended March 31, 2013. The income tax benefit of $629,000 was principally attributable to a tax credit investment by the Company in 2013. The effective tax rate for the quarter ended March 31, 2014 was 6.09% and was negative 226.62% for the quarter ended March 31, 2013. The Company made an investment in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. In addition, the deductibility for tax purposes of goodwill resulting from the Sterling acquisition has helped reduce the Company’s effective tax rate.

### Results of Operations for the Nine Months Ended March 31, 2014 and 2013

*Net Income.* Eagle’s net income for the nine months ended March 31, 2014 was $1.25 million compared to $1.29 million for the nine months ended March 31, 2013. The slight decrease of $40,000 was due to increases in noninterest expense of $2.50 million and changes in income taxes of $663,000. These were largely offset by increases in net interest income of $2.09 million and noninterest income of $925,000 and reductions in provision for loan losses of $98,000. Basic earnings per share were $0.32 per share for the current period and $0.34 per share for the prior comparable period.

*Net Interest Income.* Net interest income increased to $11.24 million for the nine months ended March 31, 2014, from $9.15 million for the previous year. This increase of $2.09 million was the result of an increase in interest and dividend income of $1.95 million and by a decrease in interest expense of $145,000.

*Interest and Dividend Income.* Total interest and dividend income was $12.78 million for the nine months ended March 31, 2014, compared to $10.83 million for the nine months ended March 31, 2013, an increase of $1.95 million, or 18.0%. Interest and fees on loans increased to $9.61 million for the nine months ended March 31, 2014 from $8.32 million for the same period ended March 31, 2013. This increase of $1.29 million, or 15.5%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the nine months ended March 31, 2014. The average interest rate earned on loans receivable decreased by 48 basis points, from 5.52% to 5.04%. Average balances for loans receivable, net, including loans held for sale, for the nine months ended March 31, 2014 were $253.91 million, compared to $200.91 million for the prior year period. This represents an increase of $53.00 million, or 26.4%. Interest and dividends on investment securities AFS increased by $677,000 for the nine months ended March 31, 2014 from $2.49 million for the same period last year. Average balances on investments increased to $202.27 million for the nine months ended March 31, 2014, from $145.77 million for the nine months ended March 31, 2013. The average interest rate earned on investments decreased to 2.09% from 2.28%. Interest on deposits with banks decreased to $5,000 from $26,000, due to a decrease in average balances partially offset by an increase in the average rates. Average balances on deposits with banks decreased to $2.60 million for the nine months ended March 31, 2014, compared to $14.80 million for the nine months ended March 31, 2013 and the average rates on such deposits with banks increased from 0.23% at March 31, 2013 to 0.25% at March 31, 2014.

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### Results of Operations for the Nine Months Ended March 31, 2014 and 2013 – continued

*Interest Expense.* Total interest expense declined for the nine months ended March 31, 2014 to $1.54 million from $1.69 million for the nine months ended March 31, 2013, a decrease of $145,000, or 8.6%. The decrease was attributable to decreases in interest on borrowings partially offset by an increase in interest expense on deposits. The average rates on deposits, which include noninterest bearing deposits, decreased from 39 basis points to 30 basis points, but this was offset by the growth in average deposit balances. This increase in average balances is the result of both the Sterling branch acquisition and organic growth. The organic growth was likely the result of the Bank’s customers continuing to opt for the safety of federally insured deposits, notwithstanding historically low rates on such deposits, over the risks and uncertainty of the capital markets. The average balances increased from $307.33 million to $427.40 million, an increase of $120.07 million. All account types experienced some decrease in average rates. Money market accounts declined three basis points to 11 basis points down from 14 basis points. Interest bearing checking account rates declined one basis point to 4 basis points down from 5 basis points. Savings account rates declined to 0.06% from 0.09%, and certificates of deposit rates decreased from 0.90% to 0.72%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased to $34.53 million for the nine months ended March 31, 2014, compared to $37.24 million for the same period in the previous year. The average rate paid, along with the decrease in average borrowing balances, resulted in a decrease in interest expense for borrowings to $580,000 for the nine months ended March 31, 2014 versus $801,000 in the previous period. The average rate paid on borrowings decreased from 2.87% last year to 2.24% for the nine months ended March 31, 2014. The average rate paid on all interest-bearing liabilities decreased 23 basis points from the nine months ended March 31, 2013 to the nine months ended March 31, 2014.

*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 management of 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 $440,000 in provision for loan losses for the nine months ended March 31, 2014 and $538,000 for the nine months ended March 31, 2013. This decrease from 2013 was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total nonperforming loans, including restructured loans, decreased from $973,000 at March 31, 2013 to $618,000 at March 31, 2014. The Bank currently has $458,000 in foreclosed real estate property and other repossessed property.

*Noninterest Income.* Total noninterest income increased to $7.69 million for the nine months ended March 31, 2014, from $6.77 million for the nine months ended March 31, 2013, an increase of $925,000 or 13.6%. The increase was due to fee income on deposit accounts increasing by $222,000 to $769,000 for the nine months ended March 31, 2014 attributable to the Sterling acquisition. Mortgage loan servicing fees also increased for the period by $269,000 to $1.01 million for the nine months ended March 31, 2014 primarily due to the higher balances of residential mortgage loans serviced by the Company. Gain on sale of securities available for sale also contributed to the increase in noninterest income. The gain on sale of such securities increased to $1.03 million from the prior period amount of $777,000. Net gains on sale of loans decreased by $102,000 from the comparable nine month period in 2013.

*Noninterest Expense.* Noninterest expense was $17.17 million for the nine months ended March 31, 2014, and $14.67 million for the nine months ended March 31, 2013. The primary cause of this increase was the increase in salaries and employee benefits of $2.87 million resulting from the increase in staff from the Sterling acquisition. Occupancy and equipment expense and data processing also increased by $1.08 million as the result of the Sterling acquisition and now operating a larger entity. There were no acquisition costs for the nine months ended March 31, 2014 compared to $1.92 million for the same period last year as the acquisition was fully completed by the third quarter of fiscal year 2013.

*Income Tax Expense.* Our income tax expense was $73,000 for the nine months ended March 31, 2014, compared to an income tax benefit of $590,000 for the nine months ended March 31, 2013. The effective tax rate for the nine months ended March 31, 2014 was 5.52% and was negative 84.44% for the nine months ended March 31, 2013. The Company’s tax rate has been impacted by the new market tax credit project initiated in the previous year. The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. Also, the deductibility for tax purposes of goodwill resulting from the Sterling acquisition has helped reduce the effective tax rate.

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### 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 March 31, 2014 and March 31, 2013.

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 February 28, 2014, the Bank’s measure, as internally determined, 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 18.0%. 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, increased from 8.54% as of March 31, 2013 to 8.56% as of March 31, 2014. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of March 31, 2014, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. At March 31, 2014, the Bank’s tangible, core, and risk-based capital ratios amounted to 8.56%, 8.56%, and 14.95%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively. See the following table:

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

*(Unaudited)*

*(Dollars in Thousands)*

| Tangible capital: | At March 31, 2014 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| Capital level | $43,830 | 8.56 |
| Requirement | 7,679 | 1.50 |
| Excess | $36,151 | 7.06 |
| Core capital: |  |  |
| Capital level | $43,830 | 8.56 |
| Requirement | 15,357 | 3.00 |
| Excess | $28,473 | 5.56 |
| Risk-based capital: |  |  |
| Capital level | $46,005 | 14.95 |
| Requirement | 24,624 | 8.00 |
| Excess | $21,381 | 6.95 |

### 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.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Controls and procedures

As filed, 1,280 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 March 31, 2014, 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 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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## 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, 2013.

Filed May 13, 2014.
Source: SEC EDGAR, the filing index for accession 0001157523-14-002135. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.