# Eagle Bancorp Montana, Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Eagle Bancorp Montana, Inc.](/companies/ebmt.md) (CIK 1478454)
- Form: 10-Q
- Filed: 2016-08-10
- Accepted by EDGAR: Aug 10, 2016, 12:04 ET
- Period: 2016-06-30
- Accession: 0001437749-16-036985
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1478454/000143774916036985/ebmt20160707_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1478454/000143774916036985/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $788.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $340.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $459.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $1.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.51 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 3,873,171 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 3,873,171 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $3.5m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $302.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2016-01-01 to 2016-06-30 | $586.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2016-01-01 to 2016-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-06-30 | $6.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-06-30 | $663.3m | us-gaap:Assets |
| Total liabilities | at 2016-06-30 | $604.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | $59.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,985 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 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 remained at 0.50% during the six months ended June 30, 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 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.

### Financial Condition

Comparisons of financial condition in this section are between June 30, 2016 and December 31, 2015.

Total assets at June 30, 2016 were $663.34 million, an increase of $32.99 million, or 5.2%, from $630.35 million at December 31, 2015. Loans receivable increased by $35.94 million, or 8.9%, to $439.67 million at June 30, 2016. Securities available-for-sale decreased by $5.29 million, or 3.6%, to $140.45 million at June 30, 2016. Total liabilities at June 30, 2016 were $604.33 million, an increase of $29.43 million, or 5.1%, from $574.90 million at December 31, 2015. Total deposits increased $25.70 million or 5.3%, to $508.88 at June 30, 2016. Federal Home Loan Bank (“FHLB”) advances and other borrowings increased $2.77 million, or 3.8%, to $75.49 million at June 30, 2016.

### Balance Sheet Details

### Investment Activities

The following table summarizes investment activities:

*(Dollars in Thousands)*

| Securities available-for-sale: | June 30, 2016 Fair Value | Percentage of Total | December 31, 2015 Fair Value | Percentage of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government and agency | $8,958 | 6.14% | $10,615 | 7.03% |
| Municipal obligations | 67,443 | 46.22% | 67,069 | 44.42% |
| Corporate obligations | 9,382 | 6.43% | 9,450 | 6.26% |
| MBSs - government-backed | 31,937 | 21.89% | 32,735 | 21.68% |
| CMOs - government-backed | 22,729 | 15.58% | 25,869 | 17.13% |
| Total securities available-for-sale | 140,449 | 96.26% | 145,738 | 96.52% |
| Interest bearing deposits | 844 | 0.58% | 970 | 0.64% |
| FHLB capital stock, at cost | 3,735 | 2.56% | 3,397 | 2.25% |
| FRB capital stock, at cost | 871 | 0.60% | 887 | 0.59% |
| Total | $145,899 | 100.00% | $150,992 | 100.00% |

Securities available-for-sale were $140.45 million at June 30, 2016, a decrease of $5.29 million, or 3.6%, from $145.74 million at December 31, 2015. The largest decrease in securities available-for-sale was in CMOs which decreased by $3.14 million largely due to a security sale. U.S. government and agency securities decreased $1.66 million largely due to a called security.

### 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: | June 30, 2016 Amount | Percent of Total | December 31, 2015 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Residential mortgage (1-4 family) (1) | $116,207 | 26.12% | $118,133 | 28.95% |
| Commercial real estate | 200,848 | 45.15% | 167,930 | 41.15% |
| Real estate construction | 16,382 | 3.68% | 22,958 | 5.63% |
| Total real estate loans | 333,437 | 74.95% | 309,021 | 75.73% |
| Other loans: |  |  |  |  |
| Home equity | 47,842 | 10.75% | 45,345 | 11.11% |
| Consumer | 14,618 | 3.29% | 14,641 | 3.59% |
| Commercial | 48,982 | 11.01% | 39,072 | 9.57% |
| Total other loans | 111,442 | 25.05% | 99,058 | 24.27% |
| Total loans | 444,879 | 100.00% | 408,079 | 100.00% |
| Deferred loan fees, net | (951) |  | (795) |  |
| Allowance for loan losses | (4,260) |  | (3,550) |  |
| Total loans, net | $439,668 |  | $403,734 |  |

(1) Excludes loans held-for-sale.

Loans receivable increased $35.94 million to $439.67 million at June 30, 2016. The increase was largely due to an increase in commercial real estate loans of $32.92 million. Commercial loans also increased by $9.91 million and home equity loans increased by $2.49 million. These increases were partially offset by decreases in construction loans of $6.58 million and decreases in residential mortgage loans of $1.92 million. Total loan originations were $184.46 million for the six months ended June 30, 2016, with residential mortgages accounting for $136.04 million of the total. Commercial real estate and land loan originations were $34.60 million. Home equity and construction loan originations were $75,000 and $303,000, respectively, for the same period. Consumer loan originations were $3.85 million. Commercial loan originations were $9.59 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale increased to $21.25 million at June 30, 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.

### Financial Condition – continued

### Lending Activities– continued

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 June 30, 2016, the Bank had $546,000 of real estate owned.

The following table sets forth information regarding nonperforming assets:

*(Dollars in Thousands)*

| Non-accrual loans Real estate loans: | June 30, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Residential mortgage (1-4 family) | $1,000 | $730 |
| Commercial real estate | 374 | 667 |
| Other loans: |  |  |
| Home equity | 288 | 161 |
| Consumer | 117 | 145 |
| Commercial | 261 | 327 |
| Accruing loans delinquent 90 days or more |  |  |
| Real estate loans: |  |  |
| Residential mortgage (1-4 family) | - | 221 |
| Commercial real estate | 4 | 4 |
| Real estate construction | - | 247 |
| Other loans: |  |  |
| Commercial | 85 | - |
| Restructured loans: |  |  |
| Other loans: |  |  |
| Home equity | 44 | 46 |
| Total nonperforming loans | 2,173 | 2,548 |
| Real estate owned and other repossed property, net | 565 | 595 |
| Total nonperforming assets | $2,738 | $3,143 |
| Total nonperforming loans to total loans | 0.49% | 0.63% |
| Total nonperforming loans to total assets | 0.33% | 0.40% |
| Total allowance for loan loss to nonperforming loans | 196.04% | 139.32% |
| Total nonperforming assets to total assets | 0.41% | 0.50% |

38

### Financial Condition – continued

### Deposits and Other Sources of Funds

The following table includes deposit accounts by category:

*(Dollars in Thousands)*

|  | June 30, 2016 Amount | Percent of Total | December 31, 2015 Amount | Percent of Total |
| --- | ---: | ---: | ---: | ---: |
| Noninterest checking | $88,327 | 17.36% | $77,031 | 15.94% |
| Interest bearing checking | 86,103 | 16.92% | 87,350 | 18.08% |
| Savings | 85,823 | 16.86% | 71,474 | 14.79% |
| Money market accounts | 90,026 | 17.69% | 94,880 | 19.64% |
| Total | 350,279 | 68.83% | 330,735 | 68.45% |
| Certificates of deposit accounts: |  |  |  |  |
| IRA certificates | 32,633 | 6.41% | 33,262 | 6.88% |
| Brokered certificates | 18,066 | 3.55% | 7,071 | 1.46% |
| Other certificates | 107,904 | 21.21% | 112,114 | 23.21% |
| Total certificates of deposit | 158,603 | 31.17% | 152,447 | 31.55% |
| Total deposits | $508,882 | 100.00% | $483,182 | 100.00% |

*Deposits*. Deposits increased $25.70 million, or 5.3%, to $508.88 million at June 30, 2016 from $483.18 million at December 31, 2015. The increase was largely due to an increase in savings of $14.35 million and an increase in noninterest checking of $11.30 million. Certificates of deposit also increased by $6.16 million. This increase was impacted by additional brokered certificates obtained in the amount of $11.00 million. Money market accounts decreased $4.85 million. Interest bearing checking decreased slightly from December 31, 2015 to June 30, 2016.

*Borrowings*. Advances from FHLB and other borrowings increased slightly by $2.77 million, or 3.8%, to $75.49 million at June 30, 2016 from $72.72 million at December 31, 2015.

### Shareholders’ Equity

Total shareholders’ equity increased $3.55 million, or 6.4%, to $59.00 million at June 30, 2016 from $55.45 million at December 31, 2015. This was a result of an increase in accumulated other comprehensive income of $2.13 million mainly due to an increase in net unrealized gains on securities available-for-sale and net income of $1.91 million, partially offset by dividends paid of $586,000.

### 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.

### Analysis of Net Interest Income – continued

The following tables include 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.

*(Dollars in Thousands)*

| Assets: Interest earning assets: | For the Three Months Ended June 30, 2016 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) | 2015 Average Daily Balance | Interest and Dividend | Yield/ Cost(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $143,265 | $740 | 2.07% | $149,902 | $737 | 1.97% |
| FHLB and FRB stock | 4,670 | 35 | 3.00% | 3,222 | 20 | 2.45% |
| Loans receivable, net(1) | 448,158 | 4,955 | 4.42% | 360,782 | 4,255 | 4.72% |
| Other earning assets | 386 | 1 | 1.04% | 4,385 | 3 | 0.29% |
| Total interest earning assets | 596,479 | 5,731 | 3.84% | 518,291 | 5,015 | 3.87% |
| Noninterest earning assets | 53,106 |  |  | 49,262 |  |  |
| Total assets | $649,585 |  |  | $567,553 |  |  |
| Liabilities and equity: |  |  |  |  |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |  |
| Money market | $91,469 | $26 | 0.11% | $92,965 | $27 | 0.12% |
| Savings | 73,738 | 8 | 0.04% | 66,791 | 7 | 0.04% |
| Checking | 88,353 | 7 | 0.03% | 80,388 | 6 | 0.03% |
| Certificates of deposit | 153,270 | 340 | 0.89% | 149,993 | 316 | 0.84% |
| Advances from FHLB and other borrowings including subordinated debt | 93,777 | 407 | 1.74% | 53,402 | 170 | 1.28% |
| Total interest bearing liabilities | 500,607 | 788 | 0.63% | 443,539 | 526 | 0.47% |
| Noninterest checking | 87,049 |  |  | 67,606 |  |  |
| Other noninterest bearing liabilities | 4,183 |  |  | 3,215 |  |  |
| Total liabilities | 591,839 |  |  | 514,360 |  |  |
| Total equity | 57,746 |  |  | 53,193 |  |  |
| Total liabilities and equity | $649,585 |  |  | $567,553 |  |  |
| Net interest income/interest rate spread(2) |  | $4,943 | 3.21% |  | $4,489 | 3.40% |
| Net interest margin(3) |  |  | 3.31% |  |  | 3.46% |
| Total interest earning assets to interest bearing liabilities |  |  | 119.15% |  |  | 116.85% |

(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.

### Analysis of Net Interest Income – continued

*(Dollars in Thousands)*

| Assets: Interest earning assets: | For the Six Months Ended June 30, 2016 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) | 2015 Average Daily Balance | Interest and Dividends | Yield/ Cost(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $144,594 | $1,487 | 2.06% | $153,679 | $1,496 | 1.95% |
| FHLB and FRB stock | 4,625 | 66 | 2.85% | 2,915 | 20 | 1.39% |
| Loans receivable, net(1) | 438,283 | 9,792 | 4.47% | 349,895 | 8,217 | 4.70% |
| Other earning assets | 1,930 | 4 | 0.41% | 4,867 | 6 | 0.24% |
| Total interest earning assets | 589,432 | 11,349 | 3.85% | 511,356 | 9,739 | 3.81% |
| Noninterest earning assets | 51,756 |  |  | 48,168 |  |  |
| Total assets | $641,188 |  |  | $559,524 |  |  |
| Liabilities and equity: |  |  |  |  |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Deposit accounts: |  |  |  |  |  |  |
| Money market | $92,613 | $53 | 0.11% | $93,354 | $51 | 0.11% |
| Savings | 72,122 | 15 | 0.04% | 65,510 | 13 | 0.04% |
| Checking | 87,825 | 13 | 0.03% | 77,929 | 13 | 0.03% |
| Certificates of deposit | 152,480 | 655 | 0.86% | 149,655 | 616 | 0.82% |
| Advances from FHLB and other borrowings including subordinated debt | 91,561 | 802 | 1.75% | 50,960 | 334 | 1.31% |
| Total interest bearing liabilities | 496,601 | 1,538 | 0.62% | 437,408 | 1,027 | 0.47% |
| Noninterest checking | 82,423 |  |  | 65,484 |  |  |
| Other noninterest bearing liabilities | 4,907 |  |  | 2,990 |  |  |
| Total liabilities | 583,931 |  |  | 505,882 |  |  |
| Total equity | 57,257 |  |  | 53,642 |  |  |
| Total liabilities and equity | $641,188 |  |  | $559,524 |  |  |
| Net interest income/interest rate spread(2) |  | $9,811 | 3.23% |  | $8,712 | 3.34% |
| Net interest margin(3) |  |  | 3.33% |  |  | 3.41% |
| Total interest earning assets to interest bearing liabilities |  |  | 118.69% |  |  | 116.91% |

(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.

### Rate/Volume Analysis

The following tables present 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 June 30, 2016 Volume | Due to Rate | Net | 2015 Volume | Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $(33) | $36 | $3 | $(255) | $(125) | $(380) |
| FHLB and FRB stock | 9 | 6 | 15 | - | 19 | 19 |
| Loans receivable, net | 1,030 | (330) | 700 | 951 | (75) | 876 |
| Other earning assets | (3) | 1 | (2) | - | 1 | 1 |
| Total interest earning assets | 1,003 | (287) | 716 | 696 | (180) | 516 |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, money market and checking accounts | 1 | (1) | - | 3 | (4) | (1) |
| Certificates of deposit | 7 | 18 | 25 | (7) | 32 | 25 |
| Advances from FHLB and other borrowingsincluding subordinated debentures | 129 | 108 | 237 | 36 | (34) | 2 |
| Total interest bearing liabilities | 137 | 125 | 262 | 32 | (6) | 26 |
| Change in net interest income | $866 | $(412) | $454 | $664 | $(174) | $490 |

42

### Rate/Volume Analysis – continued

*(In Thousands)*

| Interest earning assets: | For the Six Months Ended June 30, 2016 Volume | Due to Rate | Net | 2015 Volume | Due to Rate | Net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment securities | $(88) | $79 | $(9) | $(465) | $(222) | $(687) |
| FHLB and FRB stock | 12 | 34 | 46 | - | 20 | 20 |
| Loans receivable, net | 2,076 | (501) | 1,575 | 1,897 | (313) | 1,584 |
| Other earning assets | (4) | 2 | (2) | 1 | 1 | 2 |
| Total interest earning assets | 1,996 | (386) | 1,610 | 1,433 | (514) | 919 |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, money market and checking accounts | 3 | 1 | 4 | 5 | (13) | (8) |
| Certificates of deposit | 12 | 27 | 39 | (18) | 59 | 41 |
| Advances from FHLB and other borrowings including subordinated debentures | 267 | 201 | 468 | 129 | (137) | (8) |
| Total interest bearing liabilities | 282 | 229 | 511 | 116 | (91) | 25 |
| Change in net interest income | $1,714 | $(615) | $1,099 | $1,317 | $(423) | $894 |

### Results of Operations for the Three Months Ended June 30, 2016 and 2015

*Net Income.* Eagle’s net income for the three months ended June 30, 2016 was $1.26 million compared to $792,000 for the three months ended June 30, 2015. The increase of $472,000, or 59.6%, was due to an increase in net interest income after loan loss provision of $323,000 and an increase in noninterest income of $531,000, partially offset by an increase in noninterest expense of $214,000 and an increase in income tax expense of $168,000. Basic and diluted earnings per share were $0.34 and $0.32, respectively, for the current period. Basic and diluted earnings per share were $0.21 per share for the prior year comparable period.

*Net Interest Income.* Net interest income increased to $4.94 million for the three months ended June 30, 2016, from $4.49 million for the same quarter in the prior year. This increase of $454,000, or 10.1%, was the result of an increase in interest and dividend income of $716,000, partially offset by an increase in interest expense of $262,000.

*Interest and Dividend Income.* Interest and dividend income was $5.73 million for the three months ended June 30, 2016, compared to $5.02 million for the three months ended June 30, 2015, an increase of $716,000, or 14.3%. Interest and fees on loans increased to $4.96 million for the three months ended June 30, 2016 from $4.26 million for the three months ended June 30, 2015. This increase of $700,000, or 16.5%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended June 30, 2016. Average balances for loans receivable, net, including loans held-for-sale, for the three months ended June 30, 2016 were $448.16 million, compared to $360.78 million for the prior year period. This represents an increase of $87.38 million, or 24.2%. The average interest rate earned on loans receivable decreased by 30 basis points, from 4.72% to 4.42%. Interest and dividends on investment securities available-for-sale increased slightly period over period. Average interest rates earned on investments increased to 2.07% from 1.97%. However, average balances for investments decreased to $143.27 million for the three months ended June 30, 2016, from $149.90 million for the three months ended June 30, 2015.

### Results of Operations for the Three Months Ended June 30, 2016 and 2015 – continued

*Interest Expense.* Total interest expense was $788,000 for the three months ended June 30, 2016 compared to $526,000 for the three months ended June 30, 2015. The increase of $262,000 or 49.8% was largely attributable to an increase in interest expense on FHLB advances and other borrowings and subordinated debentures. The average borrowing balance increased from $53.40 million for the three months ended June 30, 2015 to $93.78 million for the three months ended June 30, 2016. The average rate paid increased from 1.28% for the three months ended June 30, 2015, to 1.74% for the three months ended June 30, 2016. Borrowings have been used to help fund the robust loan growth. Also, in June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes due in 2025. 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.

*Loan Loss Provision.* Loan loss provisions are charged to earnings to maintain 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 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 $459,000 in provision for loan losses for the three months ended June 30, 2016 and $328,000 for the three months ended June 30, 2015. The provision for loan losses has been increased to keep pace with increasing loan production that is fueling loan growth.

*Noninterest Income.* Total noninterest income increased to $3.81 million for the three months ended June 30, 2016, from $3.28 million for the three months ended June 30, 2015, an increase of $531,000 or 16.2%. The increase is primarily due to an increase in net gain on sale of loans which increased to $2.44 million for the three months ended June 30, 2016 from $1.86 million for the three months ended June 30, 2015. During the quarter ended June 30, 2016, $80.23 million residential mortgages were originated compared to $65.07 million for the quarter ended June 30, 2015. In addition, $68.78 million mortgage loans were sold during the current quarter compared to $64.74 million in the same quarter in the prior year.

*Noninterest Expense.* Noninterest expense was $6.69 million for the three months ended June 30, 2016 compared to $6.47 million for the three months ended June 30, 2015. The increase of $214,000 or 3.3% is largely due to increased salaries and employee benefits expense of $277,000, partially offset by a decrease in consulting fees of $177,000. This increase in salaries expense is due to higher mortgage commissions for the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015.

*Income Tax Expense.* Income tax expense was $340,000 for the three months ended June 30, 2016, compared to $172,000 for the three months ended June 30, 2015. The effective tax rate for the three months ended June 30, 2016 was 21.2%.

### Results of Operations for the Six Months Ended June 30, 2016 and 2015

*Net Income.* Eagle’s net income for the six months ended June 30, 2016 was $1.91 million compared to $1.18 million of net income for the six months ended June 30, 2015. The increase of $733,000, or 62.2%, was primarily due to an increase in net interest income after loan loss provision of $840,000 and an increase in noninterest income of $545,000, partially offset by an increase in noninterest expense of $401,000 and an increase in income tax expense of $251,000. Basic and diluted earnings per share were $0.51 and $0.49, respectively, for the current period. Basic and diluted earnings per share were $0.31 and $0.30, respectively, for the prior year comparable period.

*Net Interest Income.* Net interest income increased to $9.81 million for the six months ended June 30, 2016, from $8.71 million for the previous year’s six month period. This increase of $1.10 million was the result of an increase in interest and dividend income of $1.61 million partially offset by an increase in interest expense of $511,000.

*Interest and Dividend Income.* Interest and dividend income was $11.35 million for the six months ended June 30, 2016, compared to $9.74 million for the six months ended June 30, 2015, an increase of $1.61 million, or 16.5%. Interest and fees on loans increased to $9.79 million for the six months ended June 30, 2016 from $8.22 million for the same period ended June 30, 2015. This increase of $1.57 million, or 19.1%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the six months ended June 30, 2015. Average balances for loans receivable, net, including loans held-for-sale, for the six months ended June 30, 2016 were $438.28 million, compared to $349.90 million for the prior year period. This represents an increase of $88.39 million, or 25.3%. The average interest rate earned on loans receivable decreased by 23 basis points, from 4.70% to 4.47%. Interest and dividends on investment securities available-for-sale decreased slightly period over period. Average balances for investments decreased to $144.59 million for the six months ended June 30, 2016, from $153.68 million for the six months ended June 30, 2015. However, average interest rates earned on investments increased to 2.06% from 1.95%.

### Results of Operations for the Six Months Ended June 30, 2016 and 2015 – continued

*Interest Expense.* Total interest expense for the six months ended June 30, 2016 was $1.54 million compared to $1.03 million for the six months ended June 30, 2015. The increase of $511,000 or 49.8% was largely attributable to an increase in interest expense on FHLB advances and other borrowings and subordinated debentures. The average borrowing balance increased from $50.96 million for the six months ended June 30, 2015 to $91.56 million for the six months ended June 30, 2016. The average rate paid increased from 1.31% for the six months ended June 30, 2015, to 1.75% for the six months ended June 30, 2016. Borrowings have been used to help fund the robust loan growth. Also, in June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes due in 2025. 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.

*Loan Loss Provision.* Loan loss provisions 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 $909,000 in provision for loan losses for the six months ended June 30, 2016 and $650,000 in the six months ended June 30, 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 $2.17 million at June 30, 2016. As of June 30, 2016, the Bank had $565,000 in foreclosed real estate property and other repossessed property.

*Noninterest Income.* Total noninterest income increased to $6.70 million for the six months ended June 30, 2016, from $6.16 million for the six months ended June 30, 2015, an increase of $545,000 or 8.9%. The increase is primarily due to an increase in net gain on sale of loans which increased $669,000 or 19.2%. During the six months ended June 30, 2016, $136.04 million residential mortgages were originated compared to $122.67 million for the six months ended June 30, 2015. In addition, $121.11 million mortgage loans were sold during the six months ended June 30, 2016 compared to $119.61 million in the same period in the prior year. Interchange and ATM fees also increased $135,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. These increases were partially offset by a decrease in net gain on sale of available for sale securities of $150,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

*Noninterest Expense.* Noninterest expense was $13.23 million for the six months ended June 30, 2016 compared to $12.83 million for the six months ended June 30, 2015. The increase of $401,000 or 3.1% is largely due to increased salaries and employee benefits expense of $588,000, partially offset by a decrease in consulting fees of $334,000. The increase in salaries expense is due to higher mortgage commissions for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

*Income Tax Expense.* Income tax expense was $459,000 for the six months ended June 30, 2016, compared to $208,000 for the six months ended June 30, 2015. The effective tax rate for the six months ended June 30, 2016 was 19.4%. 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 June 30, 2016 and December 31, 2015.

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 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

At May 31, 2016 (the most recent report available for June 30, 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 2.5% compared to a decrease of 1.8% at 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 9.17% as of June 30, 2016. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

As of June 30, 2016, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. As of June 30, 2016, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 13.86%, 12.92%, 12.92% and 9.17%, respectively, compared to regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively.

### Liquidity and Capital Resources – continued

*(Dollars in Thousands)*

| Total risk-based capital to risk weighted assets: | June 30, 2016 (Unaudited) Dollar Amount | of Assets |
| --- | ---: | ---: |
| Capital level | $62,754 | 13.86% |
| Requirement | 36,224 | 8.00 |
| Excess | $26,530 | 5.86% |
| Tier I capital to risk weighted assets: |  |  |
| Capital level | $58,494 | 12.92% |
| Requirement | 27,168 | 6.00 |
| Excess | $31,326 | 6.92% |
| Common equity tier I capital to risk weighted assets: |  |  |
| Capital level | $58,494 | 12.92% |
| Requirement | 20,376 | 4.50 |
| Excess | $38,118 | 8.42% |
| Tier I capital to adjusted total assets: |  |  |
| Capital level | $58,494 | 9.17% |
| Requirement | 25,527 | 4.00 |
| Excess | $32,967 | 5.17% |

### 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.

### 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 May 31, 2016 Year 1 | Year 2 | Policy Limits |
| ---: | ---: | ---: | ---: |
| +200 | -0.81% | 0.82% | -15.00% |
| -100 | -1.39% | -4.93% | -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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Controls and procedures

As filed, 4,048 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. Our disclosure controls include some, but not all, components of our internal control over financial reporting.

Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of June 30, 2016, nor were they effective as of March 31, 2016, as a result of the significant deficiency described below. This resulted in our principal executive officer and principal financial officer revising their prior conclusions of effectiveness of our disclosure controls and procedures contained in the Company’s Form 10-Q for the quarter ended March 31, 2016, and determining that our disclosure controls and procedures were not effective as of March 31, 2016.

In connection with the preparation of our financial statements for inclusion in this quarterly report, we identified a significant deficiency in our internal control over financial reporting. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting. As a result of this significant deficiency, the Board of Directors concluded that the Company would restate the unaudited condensed consolidated financial statements for the quarter ended March 31, 2016, originally included in our Quarterly Report on Form 10-Q for the first quarter of 2016 (as described in detail in Note 2 to the unaudited consolidated financial statements included herein).

The significant deficiency consisted of two separate issues that resulted in the overstatement of interest income on mortgage loans for the quarter ended March 31, 2016. Management has determined that the misstatement occurred because of errors that occurred during loan setup for mortgage loans that were sold with servicing retained. The issue had been identified, but the severity had not been properly determined in a timely manner which allowed the misstatement to cross a quarterly reporting period.

To remediate the significant deficiency in our internal control over financial reporting noted above (and consequent deficiencies in our disclosure controls and procedures), we have continued to implement certain changes to the design of our internal controls. Specifically, we have provided additional training and strengthened the oversight and review of loan transactions, particularly relative to the sold mortgage loans. We are also in the process of formulating a management level disclosure committee to review and certify accuracy of public filings, providing additional training to executive management regarding the escalation of issues to those involved in financial reporting, and creating a written escalation process. While our remediation efforts are in process, they have not been completed.

Except as described above, 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.

## 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 Aug 10, 2016.
Source: SEC EDGAR, the filing index for accession 0001437749-16-036985. Last ingested by Listed: Nov 5, 2026, 12:14 ET. No prices; not investment advice.