# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Sep 30, 2014

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2014-11-12
- Accepted by EDGAR: Nov 12, 2014, 12:01 ET
- Period: 2014-09-30
- Accession: 0001157523-14-004535
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000115752314004535/a50975580.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000115752314004535/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2014-07-01 to 2014-09-30 | $515.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $47.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $718.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 3,944,406 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-07-01 to 2014-09-30 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2014-07-01 to 2014-09-30 | $228.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2014-07-01 to 2014-09-30 | $290.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2014-07-01 to 2014-09-30 | $533.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-09-30 | $3.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2014-09-30 | $553.9m | us-gaap:Assets |
| Total liabilities | at 2014-09-30 | $501.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-09-30 | $52.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,179 characters.

### Overview

The Company’s primary activity is its ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”), formerly American Federal Savings Bank. The Bank was previously a federally chartered savings bank with the Federal Reserve Board (the “FRB”) as the principal federal bank regulatory agency for the Company and the Office of the Comptroller of the Currency (“OCC”) the principal federal regulator for the Bank. The Company applied to the State of Montana to form an interim bank for the purpose of facilitating the conversion of the Bank from a federally chartered savings bank to a Montana-chartered commercial bank. All approvals from the Montana Division of Banking and Financial Institutions and the federal banking agencies for the conversion have been obtained, and the conversion became effective on October 14, 2014. As a result of the conversion, the Company’s subsidiary changed its name to Opportunity Bank of Montana and the Montana Division of Banking and Financial Institutions is now the principal state regulator for the Bank. The Bank engages in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. Its deposits are insured by the Federal Deposit Insurance Corporation.

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 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 a large portion 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. We have made significant progress in this initiative. 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 investment portfolio grew substantially with the Sterling branch acquisition. As such, management is also focused on decreasing the investment portfolio as a percentage of total assets and offsetting this with growth in the loan portfolio. The Bank’s management recognizes that fee income will also enable it to be less dependent on specialized lending and it now maintains a significant loan serviced portfolio which provides a steady source of fee income. 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 and certificates of deposits do not automatically reprice as interest rates rise. 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.

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. Though deposit growth for the previous year was 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.

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, 2014.

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. The Sterling branch acquisition was completed in November 2012. The Bank has experienced an increase in mortgage loan originations due to the Sterling branch acquisition. Deposit fee income has also increased due to the increase in the number of accounts. The addition of the wealth management division from the acquisition has also increased noninterest income. Operating expenses, primarily salaries and employee benefits also increased as a result of the acquisition. The Bank is currently engaged in a review of staffing and other efficiency measures which is anticipated to reduce operating expenses during the year.

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### Financial Condition

Comparisons of financial condition in this section are between September 30, 2014 and June 30, 2014.

Total assets at September 30, 2014 were $553.87 million, an increase of $14.76 million, or 2.7%, from $539.11 million at June 30, 2014. Loans receivable increased by $24.62 million, or 9.0%, to $298.61 million at September 30, 2014, from $273.99 million at June 30, 2014. Commercial real estate loans increased by $10.34 million, residential mortgage loans increased by $6.22 million and commercial loans increased by $3.98 million. These were the largest increases among the various loan types. Construction loans, consumer loans and home equity loans increased more moderately. Total loan originations were $92.02 million for the three months ended September 30, 2014, with single family mortgages accounting for $66.02 million of the total. Commercial real estate and land loan originations totaled $17.98 million. Home equity and construction loan originations totaled $2.88 million and $980,000, respectively, for the same period. Consumer loans originated totaled $2.30 million. Commercial loans originated totaled $1.86 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale increased $4.41 million, to $21.66 million at September 30, 2014 from $17.25 million at June 30, 2014.

Total cash and cash equivalents decreased by $2.91 million and securities available-for-sale decreased $11.12 million or 5.9%. Almost all categories of available-for-sale securities decreased during the period. The only increase during the period was in municipal obligations which increased $1.39 million.

Deposits increased $13.10 million, or 3.1%, to $440.15 million at September 30, 2014 from $427.05 million at June 30, 2014. Growth occurred across most deposit products with the exception of time certificates of deposits and savings 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.

Total shareholders’ equity increased $940,000 or 1.8%, to $52.65 million at September 30, 2014 from $51.71 million at June 30, 2014. This was a result of a decrease in accumulated other comprehensive loss of $1.00 million mainly due to a decrease in net unrealized losses on securities available-for-sale and net income of $718,000, partially offset by treasury stock purchased of $533,000 and dividends paid of $290,000.

### Results of Operations for the Three Months Ended September 30, 2014 and 2013

*Net Income.* Eagle’s net income for the quarter was $718,000 compared to $667,000 of net income for the three months ended September 30, 2013. The increase of $51,000, or 7.6%, was primarily due to increases in net interest income of $571,000 partially offset by decreases in noninterest income of $441,000. Basic and diluted earnings per share were $0.18 for the current period and $0.17 per share for the prior comparable period.

*Net Interest Income.* Net interest income increased to $4.19 million for the quarter ended September 30, 2014, from $3.62 million for the previous year’s quarter. This increase of $571,000 was primarily the result of an increase in interest and dividend income of $562,000.

*Interest and Dividend Income.* Interest and dividend income was $4.70 million for the quarter ended September 30, 2014, compared to $4.14 million for the quarter ended September 30, 2013, an increase of $562,000, or 13.6%. Interest and fees on loans increased to $3.66 million for the three months ended September 30, 2014 from $3.12 million for the same period ended September 30, 2013. This increase of $537,000, or 17.2%, 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 September 30, 2014. Average balances for loans receivable, net, including loans held-for-sale, for the quarter ended September 30, 2014 were $304.79 million, compared to $244.57 million for the prior year period. This represents an increase of $60.22 million, or 24.6%. The average interest rate earned on loans receivable decreased by 32 basis points, from 5.10% to 4.78%. Interest and dividends on investment securities available-for-sale only increased by $25,000 for the quarter ended September 30, 2014. Average interest rate earned on investments increased to 2.22% from 1.93%. However, average balances on investments decreased to $189.47 million for the quarter ended September 30, 2014, from $210.77 million for the quarter ended September 30, 2013.

*Interest Expense.* Total interest expense declined in the quarter to $515,000 from $524,000 for the quarter ended September 30, 2013, a decrease of $9,000, or 1.7%. The decrease was attributable to slight decreases in interest on borrowings partially offset by slight increases in interest on deposits. Although the average borrowing balance increased, the average rate paid decreased resulting in a decrease in interest paid on borrowings to $177,000 for the quarter ended September 30, 2014 compared to $203,000 paid in the previous year’s quarter. The average rate paid on borrowings decreased from 2.01% last year to 1.27% for the quarter ended September 30, 2014. The slight increase in interest on deposits is due to higher overall average balances for interest-bearing deposits. The overall average rate on interest-bearing deposits was consistent with the previous year’s quarter.

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### Results of Operations for the Three Months Ended September 30, 2014 and 2013 – continued

*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 $215,000 in provision for loan losses for the quarter ended September 30, 2014 and $159,000 in the quarter ended September 30, 2013. This increase from 2013 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 $959,000 at September 30, 2013 to $536,000 at September 30, 2014. The Bank currently has $619,000 in foreclosed real estate property and other repossessed property.

*Noninterest Income.* Total noninterest income decreased to $2.66 million for the quarter ended September 30, 2014, from $3.10 million for the quarter ended September 30, 2013, a decrease of $441,000 or 14.2%. Net gain on sale of loans decreased to $1.40 million for the quarter ended September 30, 2014 from $1.59 million for the quarter ended September 30, 2013. In addition, gain on sale of securities decreased to $194,000 from the prior period’s amount of $431,000.

*Noninterest Expense.* Noninterest expense was $5.87 million for the quarter ended September 30, 2014 compared to $5.85 million for the quarter ended September 30, 2013. The slight increase is primarily due to increased legal, accounting and examination fees and consulting fees partially offset by a decrease in salaries and employee benefits. Consulting fees increased $90,000 due to a continued review of staffing and efficiency measures.

*Income Tax Expense.* Our income tax expense was $47,000 for the quarter ended September 30, 2014, compared to $36,000 for the quarter ended September 30, 2013. The effective tax rate for the quarter ended September 30, 2014 was 6.14% compared to 5.12% for the quarter ended September 30, 2013. Tax free municipal bond income and Bank owned life insurance income contributed to the lower effective tax rates for the periods. In addition, the deductibility of goodwill that resulted from the Sterling branch acquisition, for tax purposes has helped to reduce the effective tax rate. The effective tax rate was furthered reduced by new markets tax credits that were first taken during the second quarter of fiscal year 2013. 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. The federal tax credit benefits were $95,000 for the quarters ended September 30, 2014 and 2013.

### Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank was required to maintain minimum levels of liquid assets as defined by the OCC regulations. The OCC eliminated the statutory requirement based upon a percentage of deposits and short-term borrowings. The OCC states that liquidity requirement are 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, 2014 and September 30, 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.

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

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 August 31, 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 13.9%. 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 slightly from 8.62% as of September 30, 2013 to 8.38% as of September 30, 2014. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of September 30, 2014, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. At September 30, 2014, the Bank’s tangible, core, and risk-based capital ratios amounted to 8.38%, 8.38%, and 13.81%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively.

*(Unaudited)*

*(Dollars in Thousands)*

| Tangible capital: | At September 30, 2014 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| Capital level | $45,427 | 8.38% |
| Requirement | 8,133 | 1.50 |
| Excess | $37,294 | 6.88% |
| Core capital: |  |  |
| Capital level | $45,427 | 8.38% |
| Requirement | 16,266 | 3.00 |
| Excess | $29,161 | 5.38% |
| Risk-based capital: |  |  |
| Capital level | $47,727 | 13.81% |
| Requirement | 27,653 | 8.00 |
| Excess | $20,074 | 5.81% |

### 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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## Controls and procedures

As filed, 1,279 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, 2014, our disclosure controls and procedures were effective. During the last 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, 2014.

Filed Nov 12, 2014.
Source: SEC EDGAR, the filing index for accession 0001157523-14-004535. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.