# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Mar 31, 2015

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2015-05-13
- Accepted by EDGAR: May 13, 2015, 12:01 ET
- Period: 2015-03-31
- Accession: 0001157523-15-001771
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000115752315001771/a51096080.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000115752315001771/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2015-01-01 to 2015-03-31 | $501.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-01-01 to 2015-03-31 | $36.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-01-01 to 2015-03-31 | $386.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-01-01 to 2015-03-31 | 3,881,872 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2015-01-01 to 2015-03-31 | $1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2015-01-01 to 2015-03-31 | $26.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2015-01-01 to 2015-03-31 | $288.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2015-01-01 to 2015-03-31 | $616.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-03-31 | $4.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2015-03-31 | $559.4m | us-gaap:Assets |
| Total liabilities | at 2015-03-31 | $504.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-03-31 | $54.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,554 characters.

### Overview

The Company’s primary activity is its ownership of its wholly owned subsidiary, Opportunity Bank of Montana (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 in December 2012. 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 March 31, 2015.

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this regard, 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 undergoing a core conversion that is expected to be completed in the third quarter of this year. Future cost savings are anticipated due to the core conversion.

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### Financial Condition

Comparisons of financial condition in this section are between March 31, 2015 and December 31, 2014.

Total assets at March 31, 2015 were $559.37 million, a slight decrease of $842,000, or 0.2%, from $560.21 million at December 31, 2014. Loans receivable increased by $17.52 million, or 5.5%, to $333.79 million at March 31, 2015, from $316.27 million at December 31, 2014. Commercial real estate loans increased by $13.48 million, residential mortgage loans increased by $2.00 million and commercial loans increased by $1.09 million. Construction loans and home equity loans also increased, while consumer loans decreased slightly. Total loan originations were $88.30 million for the three months ended March 31, 2015, with single family mortgages accounting for $57.60 million of the total. Commercial real estate and land loan originations totaled $21.62 million.

### Balance Sheet Details

### Cash and Cash Equivalents and Investment Securities

The following table summarizes investment securities:

*(Dollars in Thousands)*

| Securities available-for-sale: | March 31, 2015 Fair Value | Percentage of Total | December 31, 2014 Fair Value | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government and agency | $32,197 | 20.63% | $33,181 | 20.11% |
| Municipal obligations | 64,379 | 41.23% | 71,885 | 43.57% |
| Corporate obligations | 5,959 | 3.82% | 6,005 | 3.64% |
| MBSs - government-backed | 21,785 | 13.96% | 21,964 | 13.31% |
| CMOs - government-backed | 27,919 | 17.89% | 28,752 | 17.42% |
| Total securities available-for-sale | 152,239 | 97.53% | 161,787 | 98.05% |
| Interest-bearing deposits | 1,244 | 0.80% | 613 | 0.37% |
| FHLB capital stock, at cost | 1,967 | 1.26% | 1,968 | 1.19% |
| FRB capital stock, at cost | 641 | 0.41% | 641 | 0.39% |
| Total | $156,091 | 100.00% | $165,009 | 100.00% |

Total cash and cash equivalents decreased by $7.75 million and securities available-for-sale decreased $9.55 million or 5.9%. All categories of available-for-sale securities decreased during the period. The largest decrease during the period was in municipal obligations which decreased $7.51 million due to sales activity.

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### Financial Condition – continued

### Lending Activities

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

*(Dollars in thousands)*

| Real estate loans: Residential mortgage | March 31, 2015 Amount | Percent of Total | December 31, 2014 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| (1-4 family) (1) | $104,546 | 31.03% | $102,543 | 32.12% |
| Commercial real estate | 131,110 | 38.91% | 117,627 | 36.85% |
| Real estate construction | 8,711 | 2.59% | 8,002 | 2.51% |
| Total real estate loans | 244,367 | 72.53% | 228,172 | 71.48% |
| Other loans: |  |  |  |  |
| Home equity | 40,312 | 11.96% | 39,671 | 12.43% |
| Consumer | 13,664 | 4.05% | 13,827 | 4.33% |
| Commercial | 38,625 | 11.46% | 37,536 | 11.76% |
| Total other loans | 92,601 | 27.47% | 91,034 | 28.52% |
| Total loans | 336,968 | 100.00% | 319,206 | 100.00% |
| Deferred loan fees | 553 |  | 486 |  |
| Allowance for loan losses | 2,625 |  | 2,450 |  |
| Total loans, net | $333,790 |  | $316,270 |  |
| (1) Excludes loans held for sale. |  |  |  |  |

Home equity and construction loan originations totaled $3.04 million and $0.19 million, respectively, for the same period. Consumer loans originated totaled $1.69 million. Commercial loans originated totaled $4.16 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased $566,000, to $17.02 million at March 31, 2015 from $17.59 million at December 31, 2014.

*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. As of March 31, 2015, the Bank had $619,000 of real estate owned.

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### Financial Condition – continued

The following table sets forth information regarding nonperforming assets:

*(Dollars in Thousands)*

| Non-accrual loans Real estate loans: | March 31, 2015 | December 31, 2014 |
| --- | ---: | ---: |
| Residential mortgage (1-4 family) | $50 | $821 |
| Other loans: |  |  |
| Home equity | 48 | 48 |
| Consumer | 22 | 16 |
| Commercial | 56 | 77 |
| Accruing loans delinquent 90 days or more | - | - |
| Restructured loans: |  |  |
| Commercial real estate | - | - |
| Home equity | 47 | 48 |
| Total nonperforming loans | 223 | 1,010 |
| Real estate owned and other repossed property, net | 642 | 637 |
| Total nonperforming assets | $865 | $1,647 |
| Total nonperforming loans to total loans | 0.07% | 0.32% |
| Total nonperforming loans to total assets | 0.04% | 0.18% |
| Total allowance for loan loss to nonperforming loans | 1,117.13% | 242.57% |
| Total nonperforming assets to total assets | 0.15% | 0.29% |

Non-accrual loans decreased in the quarter ended March 31, 2015 due to one residential loan paid off via a short sale.

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### Financial Condition – continued

### Deposits and Other Sources of Funds

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

*(Dollars in Thousands)*

|  | March 31, 2015 Amount | Percent of Total | December 31, 2014 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Noninterest checking | $65,877 | 14.55% | $60,507 | 13.72% |
| Interest bearing checking | 76,498 | 16.90% | 76,367 | 17.32% |
| Savings | 66,513 | 14.69% | 62,455 | 14.16% |
| Money market accounts | 94,445 | 20.87% | 91,431 | 20.73% |
| Total | 303,333 | 67.01% | 290,760 | 65.93% |
| Certificates of deposit accounts: |  |  |  |  |
| IRA certificates | 34,263 | 7.57% | 34,216 | 7.76% |
| Brokered certificates | 4,195 | 0.93% | 4,195 | 0.95% |
| Other certificates | 110,908 | 24.49% | 111,812 | 25.36% |
| Total certificates of deposit | 149,366 | 32.99% | 150,223 | 34.07% |
| Total deposits | $452,699 | 100.00% | $440,983 | 100.00% |

\[Missing Graphic Reference\]

*Deposits.* Deposits increased $11.72 million, or 2.7%, to $452.70 million at March 31, 2015 from $440.98 million at December 31, 2014. Growth occurred across deposit products with the exception of time certificates of deposits which decreased slightly during the period. Management attributes the continued organic increase in deposits to increased marketing of checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts.

*Borrowings.* Advances from the FHLB and other borrowings decreased $12.35 million, or 22.5%, to $42.64 million at March 31, 2015 from $54.99 million at December 31, 2014. The decrease is primarily due to decreases in other short-term borrowings. Other short-term borrowings were paid off with proceeds from securities sales and deposit inflows.

### Shareholders’ Equity

Total shareholders’ equity increased $323,000, or 0.6%, to $54.82 million at March 31, 2015 from $54.50 million at December 31, 2014. This was a result of an increase in accumulated other comprehensive income of $795,000 mainly due to an increase in net unrealized gains on securities available-for-sale and net income of $386,000, partially offset by treasury stock purchased of $616,000 and dividends paid of $288,000.

### 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.

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### Analysis of Net Interest Income – continued

The following table includes average balances for balance sheet items, as well as, interest and dividends and average yields related to the average balances. All average balances are daily average balances. Non-accrual 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.

*For the Three Months Ended March 31,*

*(Dollars in Thousands)*

| 2015 Average Interest Daily and Balance Dividends Assets: Interest-earning assets: | Yield/ Cost(3) | Average Daily Balance | 2014 Interest and Dividends | Yield/ Cost(3) |
| --- | ---: | ---: | ---: | ---: |
| FHLB and FRB stock $2,609 $- | 0.00% | $1,892 | $- | 0.00% |
| Loans receivable, net 339,007 3,962 | 4.68% | 262,579 | 3,254 | 4.96% |
| Investment securities 157,505 759 | 1.93% | 196,387 | 1,066 | 2.17% |
| Interest-bearing deposits with banks 4,774 3 | 0.23% | 3,937 | 1 | 0.09% |
| Total interest-earning assets 503,895 4,724 | 3.75% | 464,795 | 4,321 | 3.72% |
| Noninterest-earning assets 47,086 |  | 47,600 |  |  |
| Total assets $550,981 |  | $512,395 |  |  |
| Liabilities and equity: |  |  |  |  |
| Interest-bearing liabilities: |  |  |  |  |
| Deposit accounts: |  |  |  |  |
| Money market $93,277 $25 | 0.11% | $91,942 | $29 | 0.13% |
| Savings 64,228 7 | 0.04% | 60,237 | 8 | 0.05% |
| Checking 75,470 6 | 0.03% | 68,616 | 7 | 0.04% |
| Certificates of deposit 149,319 299 | 0.80% | 155,457 | 285 | 0.73% |
| Advances from FHLB and other borrowings |  |  |  |  |
| including subordinated debt 47,697 164 | 1.38% | 29,801 | 173 | 2.33% |
| Total interest-bearing liabilities 429,991 501 | 0.47% | 406,053 | 502 | 0.49% |
| Non-interest checking 63,360 |  | 56,888 |  |  |
| Other noninterest-bearing liabilities 2,782 |  | 436 |  |  |
| Total liabilities 496,133 |  | 463,377 |  |  |
| Total equity 54,847 |  | 49,018 |  |  |
| Total liabilities and equity $550,980 |  | $512,395 |  |  |
| Net interest income/interest rate spread(1) $4,223 | 3.28% |  | $3,819 | 3.22% |
| Net interest margin(2) | 3.35% |  |  | 3.29% |
| Total interest-earning assets to interest-bearing liabilities | 117.19% |  |  | 114.47% |

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

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

(3) 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.

*(In Thousands)*

| Interest earning assets: | For the Three Months Ended March 31, Volume | 2015 Due to Rate | Net | Volume | 2014 Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans receivable, net | $947 | $(239) | $708 | $423 | $(181) | $242 |
| Investment securities | (211) | (96) | (307) | (114) | 93 | (21) |
| Interest-bearing |  |  |  |  |  |  |
| deposits with banks | - | 2 | 2 | (4) | (5) | (9) |
| Other earning assets | - | - | - | - | - | - |
| Total interest earning assets | 736 | (333) | 403 | 305 | (93) | 212 |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Savings, money market and |  |  |  |  |  |  |
| checking accounts | 2 | (8) | (6) | 3 | (6) | (3) |
| Certificates of deposit | (11) | 25 | 14 | (4) | 31 | 27 |
| Advances from FHLB and other borrowings |  |  |  |  |  |  |
| including subordinated debentures | 104 | (113) | (9) | (28) | (29) | (57) |
| Total interest-bearing liabilities | 95 | (96) | (1) | (29) | (4) | (33) |
| Change in net interest income | $641 | $(237) | $404 | $334 | $(89) | $245 |

### Results of Operations for the Three Months Ended March 31, 2015 and 2014

*Net Income.* Eagle’s net income for the quarter was $386,000 compared to $108,000 of net income for the three months ended March 31, 2014. The increase of $278,000, or 257.4%, was primarily due to increases in net interest income after loan loss provision of $210,000 and increases in noninterest income of $759,000, partially offset by increases in noninterest expense of $662,000. Basic and diluted earnings per share were $0.10 for the current period and $0.03 per share for the prior year comparable period.

*Net Interest Income.* Net interest income increased to $4.22 million for the quarter ended March 31, 2015, from $3.82 million for the previous year’s quarter. This increase of $404,000 was primarily the result of an increase in interest and dividend income.

*Interest and Dividend Income.* Interest and dividend income was $4.72 million for the quarter ended March 31, 2015, compared to $4.32 million for the quarter ended March 31, 2014, an increase of $403,000, or 9.3%. Interest and fees on loans increased to $3.96 million for the three months ended March 31, 2015 from $3.25 million for the same period ended March 31, 2014. This increase of $708,000, or 21.8%, 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, 2015. Average balances for loans receivable, net, including loans held-for-sale, for the quarter ended March 31, 2015 were $339.01 million, compared to $262.58 million for the prior year period. This represents an increase of $76.43 million, or 29.1%. The average interest rate earned on loans receivable decreased by 28 basis points, from 4.96% to 4.68%. Interest and dividends on investment securities available-for-sale decreased by $307,000 or 28.8% for the quarter ended March 31, 2015. Average interest rates earned on investments decreased to 1.93% from 2.17%. Average balances for investments decreased to $157.51 million for the quarter ended March 31, 2015, from $196.39 million for the quarter ended March 31, 2014.

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### Results of Operations for the Three Months Ended March 31, 2015 and 2014 – continued

*Interest Expense.* Total interest expense for the quarter was $501,000 which is comparable to total interest expense of $502,000 for the quarter ended March 31, 2014. The slight decrease was attributable to decreases in interest on borrowings offset by 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 $164,000 for the quarter ended March 31, 2015 compared to $173,000 paid in the previous year’s quarter. The average rate paid on borrowings decreased from 2.34% last year to 1.38% for the quarter ended March 31, 2015. 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.

*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 the 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 $322,000 in provision for loan losses for the quarter ended March 31, 2015 and $128,000 in the quarter ended March 31, 2014. The provision for loan losses has been increased to keep pace with solid loan production that is fueling loan growth. Total nonperforming loans, including restructured loans, was $223,000 at March 31, 2015. The Bank currently has $642,000 in foreclosed real estate property and other repossessed property.

*Noninterest Income.* Total noninterest income increased to $2.88 million for the quarter ended March 31, 2015, from $2.12 million for the quarter ended March 31, 2014, an increase of $759,000 or 35.8%. The increase is primarily due to increases in net gain on sale of loans which increased to $1.63 million for the quarter ended March 31, 2015 from $836,000.

*Noninterest Expense.* Noninterest expense was $6.36 million for the quarter ended March 31, 2015 compared to $5.70 million for the quarter ended March 31, 2014. The increase is primarily due to increased salaries and employee benefits expenses of $170,000 and increased consulting fees, legal, accounting and examination fees and data processing fees. The increased salaries expense is due higher mortgage commissions for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. Amortization of mortgage servicing fees also increased.

*Income Tax Expense.* Our income tax expense was $36,000 for the quarter ended March 31, 2015, compared to $7,000 for the quarter ended March 31, 2014. The effective tax rate for the quarter ended March 31, 2015 was 8.53% compared to 6.09% for the quarter ended March 31, 2014. 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 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 and are estimated to be $95,000 per quarter depending on Eagle’s taxable income level.

### Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB regulations. The liquidity requirement is retained for safety and soundness purposes, and 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, 2015 and December 31, 2014.

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

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 FHLB 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, 2015 (the most recent report available), the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity (“EVE”) by 9.8%. The Bank is well within the guidelines set forth by the Board of Directors for interest rate risk sensitivity.

Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The new rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets. These changes are expected to increase the amount of capital required by community banking organizations. Basel III includes a multiyear transition period from January 1, 2015 through December 31, 2019.

Eagle’s tier I core capital ratio, as measured under State of Montana and FRB rules, decreased slightly from 9.41% as of December 31, 2014 to 9.39% as of March 31, 2015. Eagle’s strong capital position helps to mitigate its interest rate risk exposure.

As of March 31, 2015, Eagle’s regulatory capital was in excess of all applicable regulatory requirements. At March 31, 2015, Eagle’s tangible, core, and risk-based capital ratios amounted to 9.39%, 9.39% and 14.68%, respectively, compared to regulatory requirements of 1.50%, 3.00%, and 8.00%, respectively.

*(Unaudited)*

*(Dollars in Thousands)*

| Tangible capital: | At March 31, 2015 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| Capital level | $51,905 | 9.39% |
| Requirement | 8,291 | 1.50 |
| Excess | $43,614 | 7.89% |
| Core capital: |  |  |
| Capital level | $51,905 | 9.39% |
| Requirement | 16,582 | 3.00 |
| Excess | $35,323 | 6.39% |
| Risk-based capital: |  |  |
| Capital level | $54,530 | 14.68% |
| Requirement | 29,711 | 8.00 |
| Excess | $24,819 | 6.68% |

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### 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, 1,275 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, 2015, 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, 195 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 six month transition period ended December 31, 2014.

Filed May 13, 2015.
Source: SEC EDGAR, the filing index for accession 0001157523-15-001771. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.