# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Mar 31, 2016

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2016-05-11
- Accepted by EDGAR: May 11, 2016, 12:01 ET
- Period: 2016-03-31
- Accession: 0001157523-16-005568
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000115752316005568/a51332983.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000115752316005568/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $750.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $152.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $823.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 3,873,171 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | $5.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $212.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2016-01-01 to 2016-03-31 | $293.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2016-03-31 | $6.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-03-31 | $643.0m | us-gaap:Assets |
| Total liabilities | at 2016-03-31 | $586.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-03-31 | $56.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,907 characters.

### Overview

The Company’s primary business activity is the ownership of its wholly owned subsidiary, Opportunity Bank of Montana (the “Bank”). The Bank is a Montana chartered commercial bank that focuses on both consumer and commercial lending. It 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, which has enabled it to successfully market home equity loans, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years, the Bank has also 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 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.

In recent 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 has been steady, it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.

The level and movement of interest rates impacts the Bank’s earnings as well. The Federal Open Market Committee (“FOMC”) changed the federal funds target rate from 0.25% to 0.50% in December 2015. The rate which remained at 0.50% during the three months ended March 31, 2016.

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 which closed in December 2012. 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 and furthered the Bank’s strategy to increase fee income to complement its margin. Operating expenses, primarily salaries and employee benefits also increased as a result of the acquisition.

The Bank completed a core systems conversion during the year ended December 31, 2015. Future cost savings are anticipated due to the core systems conversion.

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### Financial Condition

Comparisons of financial condition in this section are between March 31, 2016 and December 31, 2015.

Total assets were $642.97 million at March 31, 2016, an increase of $12.62 million, or 2.0%, from $630.35 million at December 31, 2015. The increase was largely due to the change in loans receivable. Loans receivable increased by $15.21 million, or 3.8%, to $418.94 million at March 31, 2016, from $403.73 million at December 31, 2015. Total liabilities were $586.28 million at March 31, 2016, an increase of $11.38 million, or 2.0%, from $574.90 million at December 31, 2015. The increase was primarily due to the change in deposits. Total deposits increased by $11.01 million, or 2.3%, to $494.19 million at March 31, 2016, from $483.18 million at December 31, 2015.

### Balance Sheet Details

### Investment Securities

The following table summarizes investment securities:

*(Dollars in Thousands)*

| Securities available-for-sale: | March 31, 2016 Fair Value | Percentage of Total | December 31, 2015 Fair Value | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government and agency | $10,024 | 6.66% | $10,615 | 7.03% |
| Municipal obligations | 66,703 | 44.32% | 67,069 | 44.42% |
| Corporate obligations | 9,372 | 6.23% | 9,450 | 6.26% |
| MBSs - government-backed | 33,373 | 22.18% | 32,735 | 21.68% |
| CMOs - government-backed | 25,598 | 17.01% | 25,869 | 17.13% |
| Total securities available-for-sale | 145,070 | 96.40% | 145,738 | 96.52% |
| Interest-bearing deposits | 993 | 0.66% | 970 | 0.64% |
| FHLB capital stock, at cost | 3,564 | 2.36% | 3,397 | 2.25% |
| FRB capital stock, at cost | 871 | 0.58% | 887 | 0.59% |
| Total | $150,498 | 100.00% | $150,992 | 100.00% |

Securities available-for-sale were $145.07 million at March, 31, 2016, a decrease of $668,000, or 0.5%, from $145.74 million at December 31, 2015. All categories of securities available-for-sale securities decreased slightly during the period with the exception of MBSs. MBSs increased slightly primarily due to a security purchase during the quarter ended March 31, 2016.

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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, 2016 Amount | Percent of Total | December 31, 2015 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| (1-4 family) (1) | $113,364 | 26.75% | $118,133 | 28.95% |
| Commercial real estate | 194,479 | 45.89% | 167,930 | 41.15% |
| Real estate construction | 15,673 | 3.70% | 22,958 | 5.63% |
| Total real estate loans | 323,516 | 76.34% | 309,021 | 75.73% |
| Other loans: |  |  |  |  |
| Home equity | 45,404 | 10.72% | 45,345 | 11.11% |
| Consumer | 14,229 | 3.36% | 14,641 | 3.59% |
| Commercial | 40,614 | 9.58% | 39,072 | 9.57% |
| Total other loans | 100,247 | 23.66% | 99,058 | 24.27% |
| Total loans | 423,763 | 100.00% | 408,079 | 100.00% |
| Deferred loan fees | 882 |  | 795 |  |
| Allowance for loan losses | 3,940 |  | 3,550 |  |
| Total loans, net | $418,941 |  | $403,734 |  |

(1) Excludes loans held-for-sale.

Loans receivable increased $15.21 million to $418.94 million at March 31, 2016. The increase was largely due to an increase in commercial real estate loans of $26.55 million. The increase was partially offset by decreases in residential mortgage loans of $4.77 million and construction loans of $7.29 million. Total loan originations were $84.18 million for the three months ended March 31, 2016, with single family mortgages accounting for $55.81 million of the total. Commercial real estate and land loan originations were $21.63 million. Consumer loan originations were $1.47 million and home equity originations were $75,000. Commercial loans originations were $5.19 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased slightly by $418,000, to $18.28 million at March 31, 2016 from $18.70 million at December 31, 2015.

*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, 2016, the Bank had $595,000 of real estate owned.

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### Financial Condition – continued

### Lending Activities – continued

The following table sets forth information regarding nonperforming assets:

*(Dollars in Thousands)*

| Non-accrual loans Real estate loans: | March 31, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Residential mortgage (1-4 family) | $605 | $730 |
| Commercial real estate | 658 | 667 |
| Other loans: |  |  |
| Home equity | 220 | 161 |
| Consumer | 92 | 145 |
| Commercial | 5 | 327 |
| Accruing loans delinquent 90 days or more |  |  |
| Real estate loans: |  |  |
| Residential mortgage (1-4 family) | 221 | 221 |
| Commercial real estate | 4 | 4 |
| Real estate construction | 264 | 247 |
| Other loans: |  |  |
| Home equity | 80 | - |
| Commercial | 141 | - |
| Restructured loans: |  |  |
| Other loans: |  |  |
| Home equity | 45 | 46 |
| Total nonperforming loans | 2,335 | 2,548 |
| Real estate owned and other repossed property, net | 606 | 595 |
| Total nonperforming assets | $2,941 | $3,143 |
| Total nonperforming loans to total loans | 0.55% | 0.63% |
| Total nonperforming loans to total assets | 0.36% | 0.40% |
| Total allowance for loan loss to nonperforming loans | 168.74% | 139.32% |
| Total nonperforming assets to total assets | 0.46% | 0.50% |

Nonperforming loans decreased in the quarter ended March 31, 2016 largely due to one commercial loan being paid off.

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### Financial Condition – continued

### Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

*(Dollars in Thousands)*

|  | March 31, 2016 Amount | Percent of Total | December 31, 2015 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Noninterest checking | $90,308 | 18.27% | $77,031 | 15.94% |
| Interest bearing checking | 86,373 | 17.48% | 87,350 | 18.08% |
| Savings | 74,538 | 15.08% | 71,474 | 14.79% |
| Money market accounts | 91,560 | 18.53% | 94,880 | 19.64% |
| Total | 342,779 | 69.36% | 330,735 | 68.45% |
| Certificates of deposit accounts: |  |  |  |  |
| IRA certificates | 32,853 | 6.65% | 33,262 | 6.88% |
| Brokered certificates | 7,071 | 1.43% | 7,071 | 1.46% |
| Other certificates | 111,482 | 22.56% | 112,114 | 23.21% |
| Total certificates of deposit | 151,406 | 30.64% | 152,447 | 31.55% |
| Total deposits | $494,185 | 100.00% | $483,182 | 100.00% |

*Deposits*. Deposits increased $11.01 million, or 2.3%, to $494.19 million at March 31, 2016 from $483.18 million at December 31, 2015. The increase was largely due to an increase in noninterest checking of $13.28 million. Savings also increased by $3.06 million. Money market accounts decreased $3.32 million. Interest bearing checking and certificates of deposit decreased slightly from December 31, 2015 to March 31, 2016.

*Borrowings.* Advances from the Federal Home Loan Bank (“FHLB”) and other borrowings decreased slightly by $1.52 million, or 2.1%, to $71.20 million at March 31, 2016 from $72.72 million at December 31, 2015.

### Shareholders’ Equity

Total shareholders’ equity increased $1.25 million, or 2.3%, to $56.70 million at March 31, 2016 from $55.45 million at December 31, 2015. This was a result of an increase in accumulated other comprehensive income of $668,000 mainly due to an increase in net unrealized gains on securities available-for-sale and net income of $823,000, partially offset by dividends paid of $293,000.

### 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)*

| Average Daily Balance Assets: Interest-earning assets: | 2016 Interest and Dividends | Yield/ Cost(3) | Average Daily Balance | 2015 Interest and Dividends | Yield/ Cost(3) |
| --- | ---: | ---: | ---: | ---: | ---: |
| FHLB and FRB stock $4,579 | $31 | 2.71% | $2,609 | $- | 0.00% |
| Loans receivable, net(1) 428,408 | 5,063 | 4.73% | 339,006 | 3,962 | 4.68% |
| Investment securities 145,708 | 747 | 2.05% | 157,505 | 759 | 1.93% |
| Other earning assets 2,899 | 3 | 0.41% | 4,774 | 3 | 0.23% |
| Total interest-earning assets 581,594 | 5,844 | 4.02% | 503,894 | 4,724 | 3.75% |
| Noninterest-earning assets 50,404 |  |  | 47,086 |  |  |
| Total assets $631,998 |  |  | $550,980 |  |  |
| Liabilities and equity: |  |  |  |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |
| Money market $93,016 | $27 | 0.12% | $93,277 | $25 | 0.11% |
| Savings 70,507 | 7 | 0.04% | 64,228 | 7 | 0.04% |
| Checking 87,297 | 7 | 0.03% | 75,470 | 6 | 0.03% |
| Certificates of deposit 151,690 | 314 | 0.83% | 149,319 | 299 | 0.80% |
| Advances from FHLB and other |  |  |  |  |  |
| borrowings including subordinated debt 89,345 | 395 | 1.77% | 47,697 | 164 | 1.38% |
| Total interest-bearing liabilities 491,855 | 750 | 0.61% | 429,991 | 501 | 0.47% |
| Noninterest checking 77,746 |  |  | 63,360 |  |  |
| Other noninterest-bearing liabilities 5,630 |  |  | 2,782 |  |  |
| Total liabilities 575,231 |  |  | 496,133 |  |  |
| Total equity 56,767 |  |  | 54,847 |  |  |
| Total liabilities and equity $631,998 |  |  | $550,980 |  |  |
| Net interest income/interest rate spread(2) | $5,094 | 3.41% |  | $4,223 | 3.28% |
| Net interest margin(3) |  | 3.50% |  |  | 3.35% |
| Total interest-earning assets to interest-bearing liabilities |  | 118.25% |  |  | 117.19% |

|  |  |
| ---: | --- |
| (1) | Includes loans held-for-sale. |
| (2) | Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate |
|  | on interest-bearing liabilities. |
| (3) | Net interest margin represents income before the provision for loan losses divided by average interest-earning assets. |
| (4) | For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. |

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### Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume, which have been allocated proportionately to the change due to volume and the change due to rate.

*(In Thousands)*

| Interest earning assets: | For the Three Months Ended March 31, Volume | 2016 Due to Rate | Net | Volume | 2015 Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| FHLB and FRB stock | $1 | $30 | $31 | $- | $- | $- |
| Loans receivable, net | 1,045 | 56 | 1,101 | 947 | (239) | 708 |
| Investment securities | (57) | 45 | (12) | (211) | (96) | (307) |
| Other earning assets | (1) | 1 | - | - | 2 | 2 |
| Total interest earning assets | 988 | 132 | 1,120 | 736 | (333) | 403 |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Savings, money market and |  |  |  |  |  |  |
| checking accounts | 2 | 1 | 3 | 2 | (8) | (6) |
| Certificates of deposit | 4 | 11 | 15 | (11) | 25 | 14 |
| Advances from FHLB and other borrowings |  |  |  |  |  |  |
| including subordinated debentures | 144 | 87 | 231 | 104 | (113) | (9) |
| Total interest-bearing liabilities | 150 | 99 | 249 | 95 | (96) | (1) |
| Change in net interest income | $838 | $33 | $871 | $641 | $(237) | $404 |

### Results of Operations for the Three Months Ended March 31, 2016 and 2015

*Net Income.* Eagle’s net income for the three months ended March 31, 2016 was $823,000 compared to $386,000 for the three months ended March 31, 2015. This increase of $437,000, or 113.2%, was primarily due to an increase in net interest income after loan loss provision of $743,000, partially offset by an increase in noninterest expense of $187,000 and an increase in income tax expense of $116,000. Basic and diluted earnings per share were $0.22 and $0.21, respectively, for the current period. Basic and diluted earnings per share were $0.10 per share for the prior year comparable period.

*Net Interest Income.* Net interest income increased to $5.09 million for the three months ended March 31, 2016, from $4.22 million for the same quarter in the prior year. This increase of $871,000, or 20.6%, was primarily the result of an increase in interest and dividend income, partially offset by an increase in interest expense of $249,000.

*Interest and Dividend Income.* Interest and dividend income was $5.84 million for the quarter ended March 31, 2016, compared to $4.72 million for the quarter ended March 31, 2015, an increase of $1.12 million, or 23.7%. Interest and fees on loans increased to $5.06 million for the three months ended March 31, 2016 from $3.96 million for the same period ended March 31, 2015. This increase of $1.10 million, or 27.8%, was due to an increase in the average balance of loans, as well as a slight increase in the average yield of loans for the quarter ended March 31, 2016. Average balances for loans receivable, net, including loans held-for-sale, for the quarter ended March 31, 2016 were $428.41 million, compared to $339.01 million for the prior year period. This represents an increase of $89.40 million, or 26.4%. The average interest rate earned on loans receivable increased by 5 basis points, from 4.68% for the three months ended March 31, 2015, to 4.73% for the three months ended March 31, 2016. Interest and dividends on investment securities available-for-sale decreased slightly by $12,000 or 1.6% for the three months ended March 31, 2016. Average balances for investments decreased to $145.71 million for the three months ended March 31, 2016, from $157.51 million for the three months ended March 31, 2015. However, average interest rates earned on investments increased slightly from to 1.93% for the three months ended March 31, 2015, to 2.05% for the three months ended March 31, 2016.

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### Results of Operations for the Three Months Ended March 31, 2016 and 2015 – continued

*Interest Expense.* Total interest expense for the three months ended March 31, 2016 was $750,000 compared to $501,000 for the three months ended March 31, 2015. The increase of $249,000, or 49.7%, was largely attributable to an increase in interest expense on FHLB advances and other borrowings and subordinated debentures. In June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes due in 2025 in a private placement transaction to an institutional accredited investor. The average borrowing balance increased from $47.70 million for the three months ended March 31, 2015 to $89.35 million for the three months ended March 31, 20016. The average rate paid increased from 1.38% for the three months ended March 31, 2015, to 1.77% for the three months ended March 31, 2016. 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 prior year 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 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 management 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 $450,000 in provision for loan losses for the three months ended March 31, 2016 and $322,000 for the three months ended March 31, 2015. The provision for loan losses has been increased to keep pace with increasing loan production that is fueling loan growth. Total nonperforming loans, including restructured loans, was $2.34 million at March 31, 2016. The Bank currently has $606,000 in foreclosed real estate property and other repossessed property.

*Noninterest Income.* Total noninterest income was comparable period over period. Net gain on sale of loans increased $87,000 for the three months ended March 31, 2016 compared to the same quarter in the prior year. Interchange and ATM fees also increased $76,000 for the three months ended March 31, 2016 compared to the same quarter in the prior year. A net loss on the fair value hedge interest rate swap of $93,000 was recorded during the three months ended March 31, 2015. The interest rate swap was terminated in the quarter ended March 31, 2015. These increases were offset by a decrease in net gain on sale of available-for-sale securities of $186,000.

*Noninterest Expense.* Noninterest expense was $6.55 million for the three months ended March 31, 2016 compared to $6.36 million for the three months ended March 31, 2015. The increase of $187,000, or 2.9%, is primarily due to an increase in salaries and employee benefits expenses of $311,000, partially offset by a decrease in consulting fees. The increase in salaries expense is due to higher mortgage commissions for the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015.

*Income Tax Expense.* Our income tax expense was $152,000 for the three months ended March 31, 2016, compared to $36,000 for the three months ended March 31, 2015. The effective tax rate for the three months ended March 31, 2016 was 15.6%. Tax free municipal bond income and Bank owned life insurance income contribute to the lower effective tax rates. The effective tax rate is further reduced by a tax credit investment entered into by the Company in fiscal year 2013. The Bank 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 an estimated seven-year credit allowance period.

### Liquidity and Capital Resources

### Liquidity

The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and Federal Reserve Bank (“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 Des Moines. The Bank exceeded those minimum ratios as of both March 31, 2016 and December 31, 2015.

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### Liquidity and Capital Resources – continued

### Liquidity – 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 Des Moines 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.

### Capital Resources

As of February 29, 2016 (the most recent report available for March 31, 2016), the Bank’s internally determined measurement of sensitivity to interest rate movements as measured by a 200 basis point rise in interest rates scenario, increased the economic value of equity (“EVE”) by 2.6% compared to a decrease of 1.8% as of November 30, 2015 (the most recent report available for December 31, 2015). The Bank is within the guidelines set forth by the Board of Directors for interest rate risk sensitivity in rising interest rate scenarios.

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.

The Banks’s Tier I leverage ratio, as measured under State of Montana and FRB rules, decreased slightly from 9.36% as of December 31, 2015 to 9.29% as of March 31, 2016. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of March 31, 2016, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. As of March 31, 2016, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 13.72%, 12.85%, 12.85% and 9.29%, respectively, compared to regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively.

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### Liquidity and Capital Resources – continued

### Capital Resources – continued

*(Unaudited)*

*(Dollars in Thousands)*

| Total risk-based capital to risk weighted assets: | March 31, 2016 Dollar Amount | % of Assets |
| --- | ---: | ---: |
| **Capital level** | **$61,581** | **13.72%** |
| **Requirement** | **35,898** | **8.00** |
| **Excess** | **$25,683** | **5.72%** |
| **Tier I capital to risk weighted assets:** |  |  |
| **Capital level** | **$57,641** | **12.85%** |
| **Requirement** | **26,923** | **6.00** |
| **Excess** | **$30,718** | **6.85%** |
| **Common equity tier I capital to risk weighted assets:** |  |  |
| **Capital level** | **$57,641** | **12.85%** |
| **Requirement** | **20,192** | **4.50** |
| **Excess** | **$37,449** | **8.35%** |
| **Tier I capital to adjusted total assets:** |  |  |
| **Capital level** | **$57,641** | **9.29%** |
| **Requirement** | **24,811** | **4.00** |
| **Excess** | **$32,830** | **5.29%** |

### Interest Rate Risk

Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates. Interest rate risk results from several factors and could have a significant impact on the Company’s net interest income, which is the Company primary source of net income. Net interest income is affected by changes in interest rates, the relationship between rates on interest bearing assets and liabilities, the impact of interest fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.

Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices in place to measure, monitor and control interest rate exposures. The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing interest rates.

The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability committee, which is governed by policies established by the Company’s Board that are reviewed and approved annually. The Board delegates responsibility for carrying out the asset/liability management policies to the Bank’s asset/liability committee. In this capacity, the asset/liability committee develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk. Our asset and liability policy and strategies are expected to continue as described so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.

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### Interest Rate Risk – continued

The Bank has established acceptable levels of interest rate risk as follows: Projected net interest income over the next twelve months will not be reduced by more than 15.0% given a change in interest rates of up to 200 basis points (+ or -).

The following table includes the Banks’s net interest income sensitivity analysis.

| Changes in Market Interest Rates (Basis Points) | Rate Sensitivity As of February 29, 2016 Year 1 | Year 2 | Policy Limits |
| ---: | ---: | ---: | ---: |
| +200 | -0.47% | 1.04% | -15.00% |
| -100 | -1.49% | -6.23% | -15.00% |

### 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, 2016, 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, 172 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 year ended December 31, 2015.

Filed May 11, 2016.
Source: SEC EDGAR, the filing index for accession 0001157523-16-005568. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.