10-Q 1 ebmt20170331_10q.htm FORM 10-Q ebmt20170331_10q.htm Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2017

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from _____ to _____.

 

Commission file number 1-34682

 

Eagle Bancorp Montana, Inc.


(Exact name of small business issuer as specified in its charter)

 

Delaware

27-1449820

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

1400 Prospect Avenue, Helena, MT 59601


(Address of principal executive offices)

 

(406) 442-3080


(Issuer's telephone number)

 

Website address: www.opportunitybank.com

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     [   ]

Accelerated filer         [   ]

Non-accelerated filer     [   ]

Smaller reporting company [X]

(Do not check if smaller

reporting company)

Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [   ]

 

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

 

Common stock, par value $0.01 per share

3,811,409 shares outstanding

As of May 9, 2017

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

PART I.

Financial Information

PAGE  

     

Item1.

Financial Statements (Unaudited)

 
     
  Consolidated Statements of Financial Condition as of March 31, 2017 and December 31, 2016 1
     
  Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 3
     
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 5
     
 

Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2017 and 2016

6
     
 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

7
     
  Notes to the Unaudited Consolidated Financial Statements   9
     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

  31
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

     

Item 4.

Controls and Procedures

43

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

45

     

Signatures

  46

 

Exhibit 31.1

   
     

Exhibit 31.2

   
     

Exhibit 32.1

   
     

101.INS XBRL

Instance Document

 
     

101.SCH XBRL

Taxonomy Extension Schema Document

 
     

101.CAL XBRL

Taxonomy Extension Calculation Linkbase Document

 
     

101.DEF XBRL

Taxonomy Extension Definition Linkbase Document

 
     

101.LAB XBRL

Taxonomy Extension Label Linkbase Document

 
     

101.PRE XBRL

Taxonomy Extension Presentation Linkbase Document

 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

Note Regarding Forward-Looking Statements

 

This report includes “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the asset quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of the management of Eagle Bancorp Montana, Inc. (the “Company”) and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

general economic conditions, either nationally or in our market areas;

 

competition among depository and other financial institutions;

 

changes in the prices, values and sales volume of residential and commercial real estate in Montana;

 

loss of customers checking and savings account deposits as customers pursue other higher-yielding investments, particularly in a rising rate environment;

 

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

adverse changes or volatility in the securities markets;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate acquired businesses;

 

changes in consumer spending, borrowing and savings habits;

 

the inability of our risk management controls to prevent or detect all errors or fraudulent acts;

 

our ability to continue to increase and manage our commercial and residential real estate, multi-family and commercial business loans;

 

possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

the level of future deposit insurance premium assessments;

 

continued low interest rate environment or interest rate volatility;

 

the Company’s ability to develop and maintain secure and reliable information technology systems, keep pace with technological changes, effectively defend itself against cyberattacks, or recover from breaches to its cybersecurity infrastructure;

 

the impact of the restructuring of the U.S. financial and regulatory system;

 

the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates;

 

changes in the financial performance, creditworthiness and/or condition of our borrowers and their ability to repay their loans when due; and

 

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2016, any subsequent Reports on Form 10-Q and Form 8-K, and other filings with the SEC. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

 

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 

ASSETS:

               

Cash and due from banks

  $ 5,353     $ 6,531  

Interest-bearing deposits in banks

    813       787  

Total cash and cash equivalents

    6,166       7,318  
                 

Securities available-for-sale

    127,212       128,436  

Federal Home Loan Bank stock

    3,344       4,012  

Federal Reserve Bank stock

    871       871  

Investment in Eagle Bancorp Statutory Trust I

    155       155  

Mortgage loans held-for-sale

    8,432       18,230  

Loans receivable, net of deferred loan fees of $1,036 at March 31, 2017 and $1,092 at December 31, 2016 and allowance for loan losses of $5,075 at March 31, 2017 and $4,770 at December 31, 2016

    483,783       461,391  

Accrued interest and dividends receivable

    2,101       2,123  

Mortgage servicing rights, net

    5,892       5,853  

Premises and equipment, net

    19,750       19,393  

Cash surrender value of life insurance

    14,191       14,095  

Real estate and other repossessed assets acquired in settlement of loans, net

    668       825  

Goodwill

    7,034       7,034  

Core deposit intangible, net

    356       384  

Deferred tax asset, net

    2,036       1,965  

Other assets

    1,686       1,840  
                 

Total assets

  $ 683,677     $ 673,925  

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

 

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 

LIABILITIES:

               

Deposit accounts:

               

Noninterest bearing

  $ 95,737     $ 82,877  

Interest bearing

    430,548       429,918  

Total deposits

    526,285       512,795  
                 

Accrued expenses and other liabilities

    4,309       4,291  

Federal Home Loan Bank advances and other borrowings

    68,266       82,413  

Long-term debt

               

Principal amount

    25,155       15,155  

Unamortized debt issuance costs

    (373 )     (185 )

Total long-term debt less unamortized debt issuance costs

    24,782       14,970  
                 

Total liabilities

    623,642       614,469  
                 
                 

SHAREHOLDERS' EQUITY:

               

Preferred stock (no par value; 1,000,000 shares authorized; no shares issued or outstanding)

    -       -  

Common stock (par value $0.01 per share; 8,000,000 shares authorized; 4,083,127 shares issued; 3,811,409 shares outstanding at March 31, 2017 and December 31, 2016)

    41       41  

Additional paid-in capital

    22,407       22,366  

Unallocated common stock held by Employee Stock Ownership Plan

    (767 )     (809 )

Treasury stock, at cost

    (2,971 )     (2,971 )

Retained earnings

    41,699       41,240  

Net accumulated other comprehensive loss

    (374 )     (411 )

Total shareholders' equity

    60,035       59,456  
                 

Total liabilities and shareholders' equity

  $ 683,677     $ 673,925  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
           

(As Restated)

 

INTEREST AND DIVIDEND INCOME:

               

Interest and fees on loans

  $ 5,570     $ 4,837  

Securities available-for-sale

    729       747  

Federal Home Loan Bank dividends

    40       31  

Other interest income

    1       3  

Total interest and dividend income

    6,340       5,618  
                 

INTEREST EXPENSE:

               

Deposits

    380       355  

Federal Home Loan Bank advances and other borrowings

    205       201  

Long-term debt

    272       194  

Total interest expense

    857       750  
                 

NET INTEREST INCOME

    5,483       4,868  
                 

Loan loss provision

    301       450  
                 

NET INTEREST INCOME AFTER LOAN LOSS PROVISION

    5,182       4,418  
                 

NONINTEREST INCOME:

               

Service charges on deposit accounts

    232       199  

Net gain on sale of loans (includes $558 and $635 for the three months ended March 31, 2017 and 2016, respectively, related to accumulated other comprehensive earnings reclassification)

    1,825       1,718  

Mortgage loan servicing fees

    547       363  

Wealth management income

    141       136  

Interchange and ATM fees

    206       202  

Appreciation in cash surrender value of life insurance

    124       112  

Net loss on sale of real estate owned and other repossessed property

    (1 )     -  

Other noninterest income

    134       166  

Total noninterest income

    3,208       2,896  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
           

(As Restated)

 

NONINTEREST EXPENSE:

               

Salaries and employee benefits

    4,433       3,690  

Occupancy and equipment expense

    717       789  

Data processing

    567       548  

Advertising

    189       188  

Amortization of mortgage servicing rights

    262       228  

Amortization of core deposit intangible and tax credits

    107       112  

Federal insurance premiums

    84       83  

Postage

    48       54  

Legal, accounting and examination fees

    85       98  

Consulting fees

    49       83  

Write-down on real estate owned and other repossessed property

    36       -  

Other noninterest expense

    862       675  

Total noninterest expense

    7,439       6,548  
                 

INCOME BEFORE INCOME TAXES

    951       766  
                 

Income tax expense (includes $25 and $460 for the three months ended March 31, 2017 and 2016, respectively, related to income tax expense from reclassification items)

    188       119  
                 

NET INCOME

  $ 763     $ 647  
                 
                 

BASIC EARNINGS PER SHARE

  $ 0.20     $ 0.17  
                 

DILUTED EARNINGS PER SHARE

  $ 0.20     $ 0.17  
                 

WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC EPS)

    3,811,409       3,779,464  
                 

WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED EPS)

    3,875,677       3,873,171  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
           

(As Restated)

 

NET INCOME

  $ 763     $ 647  
                 

OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS):

               

Change in fair value of investment securities available-for-sale, before income taxes

    279       1,127  

Reclassification for realized gains and losses on investment securities included in income, before income tax

    -       -  

Change in fair value of derivatives designated as cash flow hedges, before income taxes

    341       636  

Reclassification for realized gains on derivatives designated as cash flow hedges, before income taxes

    (558 )     (635 )

Total other items of comprehensive income

    62       1,128  
                 

Income tax (expense) benefit related to:

               

Investment securities

    (113 )     (460 )

Derivatives designated as cash flow hedges

    88       -  

Total income tax expense

    (25 )     (460 )
                 

COMPREHENSIVE INCOME

  $ 800     $ 1,315  

  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended March 31, 2017 and March 31, 2016 (As Restated)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

                                                   

ACCUMULATED

         
                           

UNALLOCATED

                   

OTHER

         
   

PREFERRED

   

COMMON

   

PAID-IN

   

ESOP

   

TREASURY

   

RETAINED

   

COMPREHENSIVE

         
   

STOCK

   

STOCK

   

CAPITAL

   

SHARES

   

STOCK

   

EARNINGS

   

INCOME (LOSS)

   

TOTAL

 
                                                                 

Balance at January 1, 2016

  $ -     $ 41     $ 22,152     $ (975 )   $ (3,321 )   $ 37,301     $ 252     $ 55,450  
                                                                 

Net income

                                            647               647  
                                                                 

Other comprehensive income

                                                    668       668  
                                                                 

Dividends paid ($0.0775 per share)

                                            (293 )             (293 )
                                                                 

Employee Stock Ownership Plan shares allocated or committed to be released for allocation (4,154 shares)

                    5       42                               47  
                                                                 

Balance at March 31, 2016 (as restated)

  $ -     $ 41     $ 22,157     $ (933 )   $ (3,321 )   $ 37,655     $ 920     $ 56,519  
                                                                 
                                                                 

Balance at January 1, 2017

  $ -     $ 41     $ 22,366     $ (809 )   $ (2,971 )   $ 41,240     $ (411 )   $ 59,456  
                                                                 

Net income

                                            763               763  
                                                                 

Other comprehensive income

                                                    37       37  
                                                                 

Dividends paid ($0.08 per share)

                                            (304 )             (304 )
                                                                 

Employee Stock Ownership Plan shares allocated or committed to be released for allocation (4,154 shares)

                    41       42                               83  
                                                                 

Balance at March 31, 2017

  $ -     $ 41     $ 22,407     $ (767 )   $ (2,971 )   $ 41,699     $ (374 )   $ 60,035  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
           

(As Restated)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 763     $ 647  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Loan loss provision

    301       450  

Write-down on real estate owned and other repossessed assets

    36       -  

Depreciation

    238       284  

Net amortization of investment securities premium and discounts

    412       503  

Amortization of mortgage servicing rights

    262       228  

Amortization of core deposit intangible and tax credits

    107       112  

Deferred income tax benefit

    (96 )     (168 )

Net gain on sale of loans

    (1,825 )     (1,718 )

Net loss on sale of real estate owned and other repossessed assets

    1       -  

Net gain on sale/disposal of premises and equipment

    -       (6 )

Net appreciation in cash surrender value of life insurance

    (96 )     (84 )

Net change in:

               

Accrued interest and dividends receivable

    22       65  

Loans held-for-sale

    11,406       2,137  

Other assets

    87       369  

Accrued expenses and other liabilities

    101       1,930  

Net cash provided by operating activities

    11,719       4,749  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Activity in available-for-sale securities:

               

Maturities, principal payments and calls

    2,093       2,823  

Purchases

    (1,002 )     (1,531 )

Federal Home Loan Bank stock redeemed (purchased)

    668       (167 )

Federal Reserve Bank stock redeemed

    -       16  

Loan origination and principal collection, net

    (22,994 )     (15,931 )

Proceeds from sale of real estate and other repossessed assets acquired in settlement of loans

    120       15  

Proceeds from sale of premises and equipment

    -       6  

Additions to premises and equipment

    (595 )     (212 )

Net cash used in investing activities

    (21,710 )     (14,981 )

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in Thousands, Except for Per Share Data)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
           

(As Restated)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net increase in deposits

  $ 13,490     $ 11,212  

Net short-term (payments) advances on Federal Home Loan Bank and other borrowings

    (14,993 )     642  

Long-term advances from Federal Home Loan Bank and other borrowings

    5,000       -  

Payments on long-term Federal Home Loan Bank and other borrowings

    (4,154 )     (2,154 )

Dividends paid

    (304 )     (293 )

Proceeds from issuance of long-term debt

    10,000       -  

Payments for debt issuance costs

    (200 )     -  

Net cash provided by financing activities

    8,839       9,407  
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (1,152 )     (825 )
                 

CASH AND CASH EQUIVALENTS, beginning of period

    7,318       7,438  
                 

CASH AND CASH EQUIVALENTS, end of period

  $ 6,166     $ 6,613  
                 
                 

SUPPLEMENTAL CASH FLOW INFORMATION:

               

Cash paid during the period for interest

  $ 776     $ 734  
                 

Cash paid during the period for income taxes

  $ -     $ -  
                 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

               

Increase in market value of securities available-for-sale

  $ 279     $ 1,127  
                 

Mortgage servicing rights recognized

  $ 301     $ 248  
                 

Loans transferred to real estate and other assets acquired in foreclosure

  $ -     $ 26  
                 

Employee Stock Ownership Plan shares released

  $ 83     $ 47  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income and cash flows for the unaudited interim periods.

 

The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or any other period. The unaudited consolidated financial statements and notes presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Eagle’s Form 10-K for the year ended December 31, 2016.

 

The Company evaluated subsequent events for potential recognition and/or disclosure through May 9, 2017 the date the unaudited consolidated financial statements were issued.

 

NOTE 2. INVESTMENT SECURITIES

 

Investment securities are summarized as follows:

 

   

March 31, 2017

   

December 31, 2016

 
           

Gross

                   

Gross

         
   

Amortized

   

Unrealized

   

Fair

   

Amortized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

(Losses)

   

Value

   

Cost

   

Gains

   

(Losses)

   

Value

 
   

(In Thousands)

 

Available-for-Sale:

                                                               

U.S. government and agency obligations

  $ 5,357     $ 10     $ (61 )   $ 5,306     $ 5,673     $ 7     $ (72 )   $ 5,608  

Municipal obligations

    67,611       592       (1,293 )     66,910       68,493       575       (1,404 )     67,664  

Corporate obligations

    10,415       22       (93 )     10,344       9,454       15       (162 )     9,307  

MBSs - government-backed

    28,685       312       (305 )     28,692       29,537       283       (308 )     29,512  

CMOs - government backed

    16,116       14       (170 )     15,960       16,530       15       (200 )     16,345  

Total

  $ 128,184     $ 950     $ (1,922 )   $ 127,212     $ 129,687     $ 895     $ (2,146 )   $ 128,436  

 

There were no sales of securities available-for-sale during the three months ended March 31, 2017 or 2016. 

 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2. INVESTMENT SECURITIES - continued

 

The amortized cost and fair value of securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

March 31, 2017

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 
   

(In Thousands)

 
                 

Due in one year or less

  $ 2,049     $ 2,046  

Due from one to five years

    9,064       9,078  

Due from five to ten years

    14,256       14,104  

Due after ten years

    58,014       57,332  
      83,383       82,560  

MBSs - government-backed

    28,685       28,692  

CMOs - government-backed

    16,116       15,960  

Total

  $ 128,184     $ 127,212  

 

Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.

 

The Company’s investment securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months were as follows:

 

   

March 31, 2017

 
   

Less Than 12 Months

   

12 Months or Longer

 
           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

 
   

(In Thousands)

 

U.S. government and agency

  $ 4,238     $ (61 )   $ -     $ -  

Municipal obligations

    38,485       (1,286 )     550       (7 )

Corporate obligations

    4,099       (6 )     4,451       (87 )

MBSs and CMOs - government-backed

    18,770       (383 )     7,445       (92 )

Total

  $ 65,592     $ (1,736 )   $ 12,446     $ (186 )

 

   

December 31, 2016

 
   

Less Than 12 Months

   

12 Months or Longer

 
           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

 
   

(In Thousands)

 

U.S. government and agency

  $ 4,420     $ (72 )   $ -     $ -  

Municipal obligations

    39,786       (1,392 )     634       (12 )

Corporate obligations

    3,375       (15 )     4,918       (147 )

MBSs and CMOs - government-backed

    18,113       (405 )     7,855       (103 )

Total

  $ 65,694     $ (1,884 )   $ 13,407     $ (262 )

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2. INVESTMENT SECURITIES - continued

 

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of March 31, 2017 and December 31, 2016, there were, respectively, 93 and 97 securities in unrealized loss positions that were considered to be temporarily impaired and therefore an impairment charge has not been recorded.

 

As of March 31, 2017, 66 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 3.03% from the Company’s amortized cost basis of these securities. At December 31, 2016, 70 U.S. government and agency securities and municipal obligations had unrealized losses with aggregate depreciation of approximately 3.19% from the Company’s amortized cost basis of these securities. These unrealized losses are principally due to changes in interest rates and credit spreads. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts' reports. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

 

As of March 31, 2017, 12 corporate obligations had unrealized losses of approximately 1.08% from the Company’s amortized cost basis of these securities. At December 31, 2016, 13 corporate obligations had an unrealized loss with aggregate depreciation of approximately 1.92% from the Company's amortized cost basis of these securities. These unrealized losses are principally due to changes in interest rates. No credit issues have been identified that cause management to believe the declines in market value are other than temporary. In analyzing the issuer's financial condition, management considers industry analysts' reports, financial performance and projected target prices of investment analysts within a one-year time frame. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.

 

As of March 31, 2017, 15 mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) had unrealized losses with aggregate depreciation of approximately 1.78% from the Company’s amortized cost basis of these securities. At December 31, 2016, 14 MBSs and CMOs had unrealized losses with aggregate depreciation of approximately 1.92% from the Company’s amortized cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market, changes in interest rates and credit spreads and uncertainty of future prepayment speeds. Management considers available evidence to assess whether it is more likely-than-not that all amounts due would not be collected. In such assessment, management considers the severity and duration of the impairment, the credit ratings of the security, the overall deal and payment structure, including the Company's position within the structure, underlying obligor, financial condition and near term prospects of the issuer, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates. There has been no disruption of the scheduled cash flows on any of the securities. Management’s analysis as of March 31, 2017 revealed no expected credit losses on the securities and therefore, declines are not deemed to be other than temporary.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE

 

Loans receivable consisted of the following:

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(In Thousands)

 

First mortgage loans:

               

Residential mortgage (1-4 family)

  $ 112,872     $ 113,262  

Commercial real estate

    234,467       214,927  

Real estate construction

    24,118       20,540  
                 

Other loans:

               

Home equity

    49,037       49,018  

Consumer

    14,786       14,800  

Commercial

    54,614       54,706  
                 

Total

    489,894       467,253  
                 

Deferred loan fees, net

    (1,036 )     (1,092 )

Allowance for loan losses

    (5,075 )     (4,770 )

Total loans, net

  $ 483,783     $ 461,391  

 

Within the commercial real estate loan category above, $11,450,000 and $11,586,000 was guaranteed by the United States Department of Agriculture Rural Development, at March 31, 2017 and December 31, 2016, respectively. In addition, within the commercial loan category above, $1,553,000 and $1,588,000 were in loans originated through a syndication program where the business resides outside of Montana, at March 31, 2017, and December 31, 2016, respectively.

 

The following table includes information regarding nonperforming assets.

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in Thousands)

 
                 

Non-accrual loans

  $ 651     $ 614  

Accruing loans delinquent 90 days or more

    998       495  

Restructured loans, net

    42       43  

Total nonperforming loans

    1,691       1,152  

Real estate owned and other repossessed assets, net

    668       825  

Total nonperforming assets

  $ 2,359     $ 1,977  
                 

Total nonperforming assets as a percentage of total assets

    0.35 %     0.29 %
                 

Allowance for loan losses

  $ 5,075     $ 4,770  
                 

Percent of allowance for loan losses to nonperforming loans

    300.12 %     414.06 %
                 

Percent of allowance for loan losses to nonperforming assets

    215.13 %     241.27 %

 

 
-12-

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

Allowance for loan losses activity was as follows:

 

   

Residential

                                                 
   

Mortgage

   

Commercial

   

Real Estate

   

Home

                         
   

(1-4 Family)

   

Real Estate

   

Construction

   

Equity

   

Consumer

   

Commercial

   

Total

 
   

(In Thousands)

 

Allowance for loan losses:

                                                       

Beginning balance, January 1, 2017

  $ 997     $ 2,079     $ 244     $ 460     $ 193     $ 797     $ 4,770  

Charge-offs

    -       -       -       -       (9 )     -       (9 )

Recoveries

    -       -       -       5       8       -       13  

Provision

    2       199       8       6       18       68       301  

Ending balance, March 31, 2017

  $ 999     $ 2,278     $ 252     $ 471     $ 210     $ 865     $ 5,075  
                                                         

Ending balance, March 31, 2017 allocated to loans individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 16     $ 46     $ 62  
                                                         

Ending balance, March 31, 2017 allocated to loans collectively evaluated for impairment

  $ 999     $ 2,278     $ 252     $ 471     $ 194     $ 819     $ 5,013  
                                                         

Loans receivable:

                                                       

Ending balance, March 31, 2017

  $ 112,872     $ 234,467     $ 24,118     $ 49,037     $ 14,786     $ 54,614     $ 489,894  
                                                         

Ending balance, March 31, 2017 of loans individually evaluated for impairment

  $ 221     $ -     $ -     $ 336     $ 136     $ 146     $ 839  
                                                         

Ending balance, March 31, 2017 of loans collectively evaluated for impairment

  $ 112,651     $ 234,467     $ 24,118     $ 48,701     $ 14,650     $ 54,468     $ 489,055  

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

   

Residential

                                                 
   

Mortgage

   

Commercial

   

Real Estate

   

Home

                         
   

(1-4 Family)

   

Real Estate

   

Construction

   

Equity

   

Consumer

   

Commercial

   

Total

 
   

(In Thousands)

 

Allowance for loan losses:

                                                       

Beginning balance, January 1, 2016

  $ 911     $ 1,593     $ 184     $ 342     $ 66     $ 454     $ 3,550  

Charge-offs

    -       -       -       (7 )     (24 )     (32 )     (63 )

Recoveries

    -       -       -       -       3       -       3  

Provision

    70       142       60       30       120       28       450  

Ending balance, March 31, 2016

  $ 981     $ 1,735     $ 244     $ 365     $ 165     $ 450     $ 3,940  
                                                         

Ending balance, March 31, 2016 allocated to loans individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 76     $ 5     $ 81  
                                                         

Ending balance, March 31, 2016 allocated to loans collectively evaluated for impairment

  $ 981     $ 1,735     $ 244     $ 365     $ 89     $ 445     $ 3,859  
                                                         

Loans receivable:

                                                       

Ending balance, March 31, 2016

  $ 113,364     $ 194,479     $ 15,673     $ 45,404     $ 14,229     $ 40,614     $ 423,763  
                                                         

Ending balance, March 31, 2016 of loans individually evaluated for impairment

  $ 605     $ 658     $ -     $ 265     $ 92     $ 5     $ 1,625  
                                                         

Ending balance, March 31, 2016 of loans collectively evaluated for impairment

  $ 112,759     $ 193,821     $ 15,673     $ 45,139     $ 14,137     $ 40,609     $ 422,138  

 

The Company utilizes an 8 point internal loan rating system, largely based on regulatory classifications, as follows:

 

Loans Rated Pass – these are loans in categories 1 – 5 that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

 

Loans Rated Special Mention – these loans in category 6 have potential weaknesses and are watched closely by management. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

 

Loans Rated Substandard – these loans in category 7 are inadequately protected by the current net worth and paying capacity of the obligor of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Loans Rated Doubtful – these loans in category 8 have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Loans Rated Loss – these loans are considered uncollectible and are not part of the 8 point rating system. They are of such small value that their continuance as assets without establishment of a specific reserve is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be affected in the future.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial real estate, construction, and commercial business loans that have a principal balance of $750,000 or more. Quarterly, the Company reviews the rating of any consumer loan, broadly defined, that is delinquent 90 days or more. Likewise, quarterly, the Company reviews the rating of any commercial loan, broadly defined, that is delinquent 60 days or more. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

 

Internal classification of the loan portfolio was as follows:

 

   

March 31, 2017

 
   

Residential

                                                 
   

Mortgage

   

Commercial

   

Real Estate

   

Home

                         
   

(1-4 Family)

   

Real Estate

   

Construction

   

Equity

   

Consumer

   

Commercial

   

Total

 
   

(In Thousands)

 

Grade:

                                                       

Pass

  $ 112,020     $ 234,012     $ 23,662     $ 48,666     $ 14,644     $ 53,894     $ 486,898  

Special mention

    -       -       456       -       32       191       679  

Substandard

    852       455       -       371       94       483       2,255  

Doubtful

    -       -       -       -       -       46       46  

Loss

    -       -       -       -       16       -       16  

Total

  $ 112,872     $ 234,467     $ 24,118     $ 49,037     $ 14,786     $ 54,614     $ 489,894  
                                                         

Credit risk profile based on payment activity

                                                       

Performing

  $ 112,369     $ 234,012     $ 24,118     $ 48,666     $ 14,650     $ 54,388     $ 488,203  

Restructured loans

    -       -       -       42       -       -       42  

Nonperforming

    503       455       -       329       136       226       1,649  

Total

  $ 112,872     $ 234,467     $ 24,118     $ 49,037     $ 14,786     $ 54,614     $ 489,894  

 

 

   

December 31, 2016

 
   

Residential

                                                 
   

Mortgage

   

Commercial

           

Home

                         
   

(1-4 Family)

   

Real Estate

   

Construction

   

Equity

   

Consumer

   

Commercial

   

Total

 
   

(In Thousands)

 

Grade:

                                                       

Pass

  $ 112,524     $ 214,476     $ 20,084     $ 48,643     $ 14,697     $ 54,470     $ 464,894  

Special mention

    -       -       456       -       -       -       456  

Substandard

    738       451       -       375       95       236       1,895  

Doubtful

    -       -       -       -       -       -       -  

Loss

    -       -       -       -       8       -       8  

Total

  $ 113,262     $ 214,927     $ 20,540     $ 49,018     $ 14,800     $ 54,706     $ 467,253  
                                                         

Credit risk profile based on payment activity

                                                       

Performing

  $ 112,585     $ 214,923     $ 20,540     $ 48,643     $ 14,704     $ 54,706     $ 466,101  

Restructured loans

    -       -       -       43       -       -       43  

Nonperforming

    677       4       -       332       96       -       1,109  

Total

  $ 113,262     $ 214,927     $ 20,540     $ 49,018     $ 14,800     $ 54,706     $ 467,253  

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

The following tables include information regarding delinquencies within the loan portfolio.

 

   

March 31, 2017

 
   

Loans Past Due and Still Accruing

                         
           

90 Days

                                 
   

30-89 Days

   

and

           

Non-Accrual

   

Current

   

Total

 
   

Past Due

   

Greater

   

Total

   

Loans

   

Loans

   

Loans

 
   

(In Thousands)

 

Residential mortgage (1-4 family)

  $ 1,987     $ 282     $ 2,269     $ 221     $ 110,382     $ 112,872  

Commercial real estate

    1,133       455       1,588       -       232,879       234,467  

Real estate construction

    474       -       474       -       23,644       24,118  

Home equity

    248       35       283       294       48,460       49,037  

Consumer

    219       -       219       136       14,431       14,786  

Commercial

    610       226       836       -       53,778       54,614  

Total

  $ 4,671     $ 998     $ 5,669     $ 651     $ 483,574     $ 489,894  

 

 

   

December 31, 2016

 
   

Loans Past Due and Still Accruing

                         
           

90 Days

                                 
   

30-89 Days

   

and

           

Non-Accrual

   

Current

   

Total

 
   

Past Due

   

Greater

   

Total

   

Loans

   

Loans

   

Loans

 
   

(In Thousands)

 

Residential mortgage (1-4 family)

  $ 975     $ 456     $ 1,431     $ 221     $ 111,610     $ 113,262  

Commercial real estate

    513       4       517       -       214,410       214,927  

Real estate construction

    -       -       -       -       20,540       20,540  

Home equity

    365       35       400       297       48,321       49,018  

Consumer

    169       -       169       96       14,535       14,800  

Commercial

    249       -       249       -       54,457       54,706  

Total

  $ 2,271     $ 495     $ 2,766     $ 614     $ 463,873     $ 467,253  


 
-16-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

The following tables include information regarding impaired loans.

 

   

March 31, 2017

 
           

Unpaid

         
   

Recorded

   

Principal

   

Related

 
   

Investment

   

Balance

   

Allowance

 
   

(In Thousands)

 

With no related allowance:

                       

Residential mortgage (1-4 family)

  $ 221     $ 221     $ -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    336       388       -  

Consumer

    120       169       -  

Commercial

    100       100       -  
                         

With a related allowance:

                       

Residential mortgage (1-4 family)

    -       -       -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    -       -       -  

Consumer

    16       16       16  

Commercial

    46       46       46  
                         

Total:

                       

Residential mortgage (1-4 family)

    221       221       -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    336       388       -  

Consumer

    136       185       16  

Commercial

    146       146       46  

Total

  $ 839     $ 940     $ 62  

 

 
-17-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. LOANS RECEIVABLE - continued

 

   

December 31, 2016

 
           

Unpaid

         
   

Recorded

   

Principal

   

Related

 
   

Investment

   

Balance

   

Allowance

 
   

(In Thousands)

 

With no related allowance:

                       

Residential mortgage (1-4 family)

  $ 221     $ 221     $ -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    340       390       -  

Consumer

    88       135       -  

Commercial

    -       -       -  
                         

With a related allowance:

                       

Residential mortgage (1-4 family)

    -       -       -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    -       -       -  

Consumer

    8       8       8  

Commercial

    -       -       -  
                         

Total:

                       

Residential mortgage (1-4 family)

    221       221       -  

Commercial real estate

    -       -       -  

Construction

    -       -       -  

Home equity

    340       390       -  

Consumer

    96       143       8  

Commercial

    -       -       -  

Total

  $ 657     $ 754     $ 8  

 

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
   

Average Recorded Investment

 
    (In Thousands)  
                 

Residential mortgage (1-4 family)

  $ 221     $ 668  

Commercial real estate

    -       662  

Construction

    -       -  

Home equity

    338       236  

Consumer

    116       119  

Commercial

    73       166  

Total

  $ 748     $ 1,851  

 

Interest income recognized on impaired loans for the three months ended March 31, 2017 and 2016 are considered insignificant.

 

 
-18-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4. TROUBLED DEBT RESTRUCTURINGS

 

The Company adopted the amendments in Accounting Standards Update No. 2011-02 (ASC Topic 310) during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the previous fiscal year (July 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC Subtopic 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC Subtopic 310-10-35. The amendments in the guidance require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired.

 

As of March 31, 2017, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under ASC Subtopic 310-10-35 was $42,000 (ASC Subtopic 310-40-65-1(b)), and there was no allowance for credit losses associated with these receivables, on the basis of a current evaluation of loss (ASC Subtopic 310-40-65-1(b)). There was $34,000 charged-off at the time of restructure related to these receivables.

 

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

 

Rate Modification – A modification in which the interest rate is changed.

 

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

 

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

 

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

 

Combination Modification – Any other type of modification, including the use of multiple categories above.

 

 

The following tables present troubled debt restructurings.

 

   

March 31, 2017

 
   

Accrual

   

Non-Accrual

   

Total

 
   

Status

   

Status

   

Modification

 
   

(In Thousands)

 

Residential mortgage (1-4 family)

  $ -     $ -     $ -  

Commercial real estate

    -       -       -  

Real estate construction

    -       -       -  

Home equity

    42       -       42  

Consumer

    -       -       -  

Commercial

    -       -       -  

Total

  $ 42     $ -     $ 42  

 

 

 
-19-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4. TROUBLED DEBT RESTRUCTURINGS - continued

 

The following tables present troubled debt restructurings.

 

   

December 31, 2016

 
   

Accrual

   

Non-Accrual

   

Total

 
   

Status

   

Status

   

Modification

 
   

(In Thousands)

 

Residential mortgage (1-4 family)

  $ -     $ -     $ -  

Commercial real estate

    -       -       -  

Real estate construction

    -       -       -  

Home equity

    43       -       43  

Consumer

    -       -       -  

Commercial

    -       -       -  

Total

  $ 43     $ -     $ 43  

 

The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

 

During the three months ended March 31, 2017 and 2016, there were no new restructured loans.

 

There were no loans modified as a troubled debt restructured loan within the previous three months for which there was a payment default during the three months ended March 31, 2017.

 

A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. As of March 31, 2017 and December 31, 2016, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures.

 

NOTE 5. DEPOSITS

 

Deposits are summarized as follows:

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(In Thousands)

 
                 

Noninterest checking

  $ 95,737     $ 82,877  

Interest bearing checking

    93,519       93,163  

Savings

    85,054       82,266  

Money market

    93,634       89,211  

Time certificates of deposit

    158,341       165,278  

Total

  $ 526,285     $ 512,795  

 

 
-20-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6. LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

   

March 31, 2017

   

December 31, 2016

 
           

Unamortized

           

Unamortized

 
           

Debt

           

Debt

 
   

Principal

   

Issuance

   

Principal

   

Issuance

 
   

Amount

   

Costs

   

Amount

   

Costs

 
   

(In Thousands)

 
                                 

Senior notes fixed at 5.75%, due 2022

  $ 10,000     $ (193 )   $ -     $ -  

Subordinated debentures fixed at 6.75%, due 2025

    10,000       (180 )     10,000       (185 )

Subordinated debentures variable at 3-Month Libor plus 1.42%, due 2035

    5,155       -       5,155       -  

Total long-term debt

  $ 25,155     $ (373 )   $ 15,155     $ (185 )

 

 

In February 2017, the Company completed the issuance, through a private placement, of $10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The interest will be paid semi-annually through maturity date. The notes are not subject to redemption at the option of the Company.

 

In June 2015, the Company completed the issuance of $10,000,000 in aggregate principal amount of subordinated notes due in 2025 in a private placement transaction to an institutional accredited investor. The notes will bear interest at an annual fixed rate of 6.75% and interest will be paid quarterly through maturity date or earlier redemption.

 

In September 2005, the Company completed the private placement of $5,155,000 in subordinated debentures to Eagle Bancorp Statutory Trust I (“the Trust”). The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities to First Tennessee Bank, N.A. with a liquidation value of $5,155,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders in December 2005. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities was fixed at 6.02% until December 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 2.916% and 2.418% as of March 31, 2017 and December 31, 2016, respectively. Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date.

 

For the three months ended March 31, 2017 and 2016, interest expense on long-term debt was $272,000 and $194,000, respectively.

 

NOTE 7. EARNINGS PER SHARE

 

Basic earnings per share for the three months ended March 31, 2017 was computed using 3,811,409 weighted average shares outstanding. Basic earnings per share for the three months ended March 31, 2016 was computed using 3,779,464 weighted average shares outstanding. Diluted earnings per share was computed using the treasury stock method by adjusting the number of shares outstanding by the shares purchased. The weighted average shares outstanding for the diluted earnings per share calculations was 3,875,677 for the three months ended March 31, 2017 and 3,873,171 for the three months ended March 31, 2016.

 

 
-21-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8. DIVIDENDS AND STOCK REPURCHASE PROGRAM

 

For the year ended December 31, 2016, Eagle paid dividends of $0.0775 per share for the quarters ended March 31 and June 30, 2016. Eagle paid dividends of $0.08 per share for the quarters ended September 30 and December 31, 2016. A dividend of $0.08 per share was declared on January 26, 2017, and paid March 3, 2017 to shareholders of record on February 10, 2017. A dividend of $0.08 per share was declared on April 20, 2017, payable on June 2, 2017 to shareholders of record on May 12, 2017.

 

On July 21, 2016, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2016 or the three months ended March 31, 2017. The plan expires on July 21, 2017.

 

On July 23, 2015, the Board of Directors authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. During the three months ended December 31, 2015, 15,000 shares were purchased at an average price of $11.75 per share. During the three months ended September 30, 2015, 46,065 shares were purchased at an average price of $11.47 per share. The plan expired on July 23, 2016.

 

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table includes information regarding the activity in accumulated other comprehensive income (loss).

 

   

Unrealized

   

Unrealized

         
   

Gains (Losses)

   

(Losses) Gains

         
   

on Derivatives

   

on Investment

         
   

Designated as

   

Securities

         
   

Cash Flow Hedges

   

Available-for-Sale

   

Total

 
                         

Balance, January 1, 2017

  $ 330     $ (741 )   $ (411 )

Other comprehensive income, before reclassifications and income taxes

    341       279       620  

Amounts reclassified from accumulated other comprehensive income (loss), before income taxes

    (558 )     -       (558 )

Income tax benefit (expense)

    88       (113 )     (25 )

Total other comprehensive (loss) income

    (129 )     166       37  

Balance, March 31, 2017

  $ 201     $ (575 )   $ (374 )
                         

Balance, January 1, 2016

  $ 376     $ (124 )   $ 252  

Other comprehensive income, before reclassifications and income taxes

    636       1,127       1,763  

Amounts reclassified from accumulated other comprehensive income (loss), before income taxes

    (635 )     -       (635 )

Income tax expense

    -       (460 )     (460 )

Total other comprehensive income

    1       667       668  

Balance, March 31, 2016

  $ 377     $ 543     $ 920  

 

 
-22-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES

 

Mortgage Loan Commitments

 

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held-for-sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

 

Interest Rate Lock Commitments

 

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of interest rate lock commitments was $33,961,000 and $19,738,000 at March 31, 2017 and December 31, 2016, respectively. The fair value of such commitments was insignificant.

 

The Company has no other off-balance-sheet arrangements or transactions with unconsolidated, special purpose entities that would expose the Company to liability that is not reflected on the face of the financial statements.

 

NOTE 11. FAIR VALUE DISCLOSURES

 

FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and, (iv) willing to transact.

 

FASB ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied.

 

Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

 

The fair value hierarchy is as follows:

 

Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, or convert to cash in the short term.

 

Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 
-23-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES continued

 

Level 3 Inputs Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

 

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

Available-for-Sale Securities – Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

 

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

 

Loans Held-for-Sale – These loans are reported at the lower of cost or fair value. Fair value is determined based on expected proceeds based on sales contracts and commitments and are considered Level 2 inputs.

 

Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primary third party appraisals, less costs to sell. The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value. Repossessed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on same or similar factors above.

 

 
-24-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES continued

 

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

  

   

March 31, 2017

 
   

Level 1

   

Level 2

   

Level 3

   

Total Fair

 
   

Inputs

   

Inputs

   

Inputs

   

Value

 
   

(In Thousands)

 

Financial assets:

                               

Available-for-sale securities

                               

U.S. government and agency

  $ -     $ 5,306     $ -     $ 5,306  

Municipal obligations

    -       66,910       -       66,910  

Corporate obligations

    -       10,344       -       10,344  

MBSs - government-backed

    -       28,692       -       28,692  

CMOs - government-backed

    -       15,960       -       15,960  

Loans held-for-sale

    -       8,432       -       8,432  

 

   

December 31, 2016

 
   

Level 1

   

Level 2

   

Level 3

   

Total Fair

 
   

Inputs

   

Inputs

   

Inputs

   

Value

 
   

(In Thousands)

 

Financial assets:

                               

Available-for-sale securities

                               

U.S. government and agency

  $ -     $ 5,608     $ -     $ 5,608  

Municipal obligations

    -       67,664       -       67,664  

Corporate obligations

    -       9,307       -       9,307  

MBSs - government-backed

    -       29,512       -       29,512  

CMOs - government-backed

    -       16,345       -       16,345  

Loans held-for-sale

    -       18,230       -       18,230  

 

 
-25-

Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES - continued

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

 

   

March 31, 2017

 
   

Level 1

   

Level 2

   

Level 3

   

Total Fair

 
   

Inputs

   

Inputs

   

Inputs

   

Value

 
   

(In Thousands)

 

Impaired loans

  $ -     $ -     $ 777     $ 777  

Repossessed assets

    -       -       668       668  

 

   

December 31, 2016

 
   

Level 1

   

Level 2

   

Level 3

   

Total Fair

 
   

Inputs

   

Inputs

   

Inputs

   

Value

 
   

(In Thousands)

 

Impaired loans

  $ -     $ -     $ 649     $ 649  

Repossessed assets

    -       -       825       825  

 

As of March 31, 2017, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $839,000 were reduced by specific valuation allowance allocations totaling $62,000 to a total reported fair value of $777,000 based on collateral valuations utilizing Level 3 valuation inputs.

 

As of December 31, 2016, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $657,000 were reduced by specific valuation allowance allocations totaling $8,000 to a total reported fair value of $649,000 based on collateral valuations utilizing Level 3 valuation inputs.

 

The following table represents the Banks’s Level 3 financial assets and liabilities, the valuation techniques used to measure the fair value of those financial assets and liabilities, and the significant unobservable inputs and the ranges of values for those inputs. 

 

   

Fair Value at

 

Principal

 

Significant

 

Range of

 
   

March 31,

   

December 31,

 

Valuation

 

Unobservable

 

Signficant Input

 

Instrument

 

2017

   

2016

 

Technique

 

Inputs

 

Values

 

(Dollars In Thousands)

 
                                   

Impaired loans

  $ 777     $ 649  

Appraisal of collateral (1)

 

Appraisal adjustments

    10 - 30%  
                                   

Repossessed assets

  $ 668     $ 825  

Appraisal of collateral (1)(3)

 

Liquidation expenses (2)

    10 - 30%  

 

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less associated allowance.

 

(2)

Appraisals may be adjusted for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES - continued

 

FASB ASC Topic 825 requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. Below is a table that summarizes the fair market values of all financial instruments of the Company at March 31, 2017 and December 31, 2016, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments.

 

The fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

   

March 31, 2017

 
                           

Total

         
   

Level 1

   

Level 2

   

Level 3

   

Estimated

   

Carrying

 
   

Inputs

   

Inputs

   

Inputs

   

Fair Value

   

Amount

 
   

(In Thousands)

 
Financial assets:                                        

Cash and cash equivalents

  $ 6,166     $ -     $ -     $ 6,166     $ 6,166  

Federal Home Loan Bank stock

    3,344       -       -       3,344       3,344  

Federal Reserve Bank stock

    871       -       -       871       871  

Loans receivable, net

    -       -       485,566       485,566       483,006  

Accrued interest and dividends receivable

    2,101       -       -       2,101       2,101  

Mortgage servicing rights

    -       -       6,534       6,534       5,892  

Cash surrender value of life insurance

    14,191       -       -       14,191       14,191  
Financial liabilities:                                        

Non-maturing interest bearing deposits

    -       272,207       -       272,207       272,207  

Noninterest bearing deposits

    95,737       -       -       95,737       95,737  

Time certificates of deposit

    -       -       158,103       158,103       158,341  

Accrued expenses and other liabilities

    4,309       -       -       4,309       4,309  

Federal Home Loan Bank advances and other borrowings

    -       -       68,307       68,307       68,266  

Long-term debt

    -       -       24,258       24,258       25,155  
Off-balance-sheet instruments     -                                  

Forward delivery commitments

    -       -       -       -       -  

Commitments to extend credit

    -       -       -       -       -  

Rate lock commitments

    -       -       -       -       -  

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES continued

 

   

December 31, 2016

 
                           

Total

         
   

Level 1

   

Level 2

   

Level 3

   

Estimated

   

Carrying

 
   

Inputs

   

Inputs

   

Inputs

   

Fair Value

   

Amount

 
   

(In Thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 7,318     $ -     $ -     $ 7,318     $ 7,318  

Federal Home Loan Bank stock

    4,012       -       -       4,012       4,012  

Federal Reserve Bank stock

    871       -       -       871       871  

Loans receivable, net

    -       -       464,797       464,797       460,742  

Accrued interest and dividends receivable

    2,123       -       -       2,123       2,123  

Mortgage servicing rights

    -       -       6,741       6,741       5,853  

Cash surrender value of life insurance

    14,095       -       -       14,095       14,095  

Financial liabilities:

                                       

Non-maturing interest bearing deposits

    -       264,640       -       264,640       264,640  

Noninterest bearing deposits

    82,877       -       -       82,877       82,877  

Time certificates of deposit

    -       -       165,129       165,129       165,278  

Accrued expenses and other liabilities

    4,291       -       -       4,291       4,291  

Federal Home Loan Bank advances and other borrowings

    -       -       82,462       82,462       82,413  

Long-term debt

    -       -       14,291       14,291       15,155  

Off-balance-sheet instruments

                                       

Forward delivery commitments

    -       -       -       -       -  

Commitments to extend credit

    -       -       -       -       -  

Rate lock commitments

    -       -       -       -       -  

 

The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. However, the Form 10-K for the year ended December 31, 2016 provides additional description of valuation methodologies used in estimating fair value of these financial instruments.

 

Cash, Interest Bearing Accounts, Accrued Interest and Dividend Receivable and Accrued Expenses and Other Liabilities – The carrying amounts approximate fair value due to the relatively short period of time between the origination of these instruments and their expected realization.

 

Stock in the Federal Home Loan Bank of Des Moines (“FHLB”) and Federal Reserve Bank (“FRB”) – The fair value of stock approximates redemption value.

 

Loans Receivable – Fair values are estimated by stratifying the loan portfolio into groups of loans with similar financial characteristics. Loans are segregated by type such as real estate, commercial, and consumer, with each category further segmented into fixed and adjustable rate interest terms. For mortgage loans, the Company uses the secondary market rates in effect for loans that have similar characteristics. The fair value of other fixed rate loans is calculated by discounting scheduled cash flows through the anticipated maturities adjusted for prepayment estimates. Adjustable interest rate loans are assumed to approximate fair value because they generally reprice within the short term.

 

Fair values are adjusted for credit risk based on assessment of risk identified with specific loans, and risk adjustments on the remaining portfolio based on credit loss experience.

 

Assumptions regarding credit risk are judgmentally determined using specific borrower information, internal credit quality analysis, and historical information on segmented loan categories for non-specific borrowers.

 

Mortgage Servicing Rights – the fair value of servicing rights was determined using discount rates ranging from approximately 13.00% to 15.00%, prepayment speeds ranging from approximately 104.00% to 277.00% PSA, depending on stratification of the specific right. The fair value was also adjusted for the effect of potential past dues and foreclosures.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11. FAIR VALUE DISCLOSURES - continued

 

Cash Surrender Value of Life Insurance – The carrying amount for cash surrender value of life insurance approximates fair value as policies are recorded at redemption value.

 

Deposits and Time Certificates of Deposit – The fair value of deposits with no stated maturity, such as checking, passbook, and money market, is equal to the amount payable on demand. The fair value of time certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities.

 

Advances from the FHLB and Subordinated Debentures – The fair value of the Company’s advances and debentures are estimated using discounted cash flow analysis based on the interest rate that would be effective March 31, 2017 and December 31, 2016, respectively if the borrowings repriced according to their stated terms.

 

Off-Balance-Sheet Instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these financial instruments are considered insignificant. Additionally, those financial instruments have no carrying value.

 

NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance is a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB agreed to delay the effective date of the standard by one year. Therefore, the new standard will be effective in the first quarter of 2018 and is not expected to have a significant impact to the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for annual and interim reporting periods beginning after December 15, 2017 and is not expected to have a significant impact to the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) intended to improve financial reporting regarding leasing transactions. The new standard affects all companies and organizations that lease assets. The standard will require organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases if the lease terms are more than 12 months. The guidance also will require qualitative and quantitative disclosures providing additional information about the amounts recorded in the financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the potential impact of the amendment on the Company’s consolidated financial statements.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS - continued

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is working to evaluate the significance of that impact.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20) to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The Company is evaluating the potential impact of the amendment on the Company’s consolidated financial statements.

 

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 changed the federal funds target rate from 0.5% to 0.75% in December 2016. The rate increased from 0.75% to 1.0% during the three months ended March 31, 2017.

 

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Condition

 

Comparisons of financial condition in this section are between March 31, 2017 and December 31, 2016.

 

Total assets were $683.68 million at March 31, 2017, an increase of $9.75 million, or 1.4%, from $673.93 million at December 31, 2016. The increase was largely due to the change in loans receivable. Loans receivable increased by $22.39 million, or 4.9%, to $483.78 million at March 31, 2017, from $461.39 million at December 31, 2016. Total liabilities were $623.64 million at March 31, 2017, an increase of $9.17 million, or 1.5%, from $614.47 million at December 31, 2016. The increase was due to an increase in deposits and an increase in long-term debt partially offset by a decrease in Federal Home Loan Bank (“FHLB”) advances. Total deposits increased by $13.49 million, or 2.6%, to $526.29 million at March 31, 2017, from $512.80 million at December 31, 2016. Long-term debt increased by $9.81 million to $24.78 million at March 31, 2017 from $14.97 million at December 31, 2016. FHLB advances and other borrowings decreased $14.14 million to $68.27 million at March 31, 2017 from $82.41 million at December 31, 2016.

 

Balance Sheet Details

 

Investment Activities

 

The following table summarizes investment activities:

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

Fair Value

   

Percentage of Total

   

Fair Value

   

Percentage of Total

 
   

(Dollars in Thousands)

 

Securities available-for-sale:

                               

U.S. government and agency

  $ 5,306       4.01 %   $ 5,608       4.18 %

Municipal obligations

    66,910       50.60 %     67,664       50.45 %

Corporate obligations

    10,344       7.82 %     9,307       6.94 %

MBSs - government-backed

    28,692       21.70 %     29,512       22.01 %

CMOs - government-backed

    15,960       12.07 %     16,345       12.19 %
                                 

Total securities available-for-sale

    127,212       96.20 %     128,436       95.77 %
                                 
                                 

Interest bearing deposits

    813       0.61 %     787       0.59 %
                                 

FHLB capital stock, at cost

    3,344       2.53 %     4,012       2.99 %
                                 

FRB capital stock, at cost

    871       0.66 %     871       0.65 %
                                 

Total

  $ 132,240       100.00 %   $ 134,106       100.00 %

 

Securities available-for-sale were $127.21 million at March, 31, 2017, a decrease of $1.23 million, or 1.0%, from $128.44 million at December 31, 2016. All categories of securities available-for-sale securities decreased slightly during the period with the exception of corporate obligations. Corporate securities increased slightly primarily due to a security purchase during the quarter ended March 31, 2017.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Condition – continued

 

Lending Activities

 

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

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

 
   

(Dollars in thousands)

 

Real estate loans:

                               

Residential mortgage (1-4 family) (1)

  $ 112,872       23.04 %   $ 113,262       24.24 %

Commercial real estate

    234,467       47.86 %     214,927       46.00 %

Real estate construction

    24,118       4.92 %     20,540       4.40 %

Total real estate loans

    371,457       75.82 %     348,729       74.64 %
                                 

Other loans:

                               

Home equity

    49,037       10.01 %     49,018       10.49 %

Consumer

    14,786       3.02 %     14,800       3.16 %

Commercial

    54,614       11.15 %     54,706       11.71 %

Total other loans

    118,437       24.18 %     118,524       25.36 %
                                 

Total loans

    489,894       100.00 %     467,253       100.00 %
                                 

Deferred loan fees

    (1,036 )             (1,092 )        

Allowance for loan losses

    (5,075 )             (4,770 )        
                                 

Total loans, net

  $ 483,783             $ 461,391          

 (1) Excludes loans held-for-sale.

 

Loans receivable increased $22.39 million to $483.78 million at March 31, 2017. The increase was largely due to an increase in commercial real estate loans of $19.54 million. Real estate construction loans also increased $3.58 million. Total loan originations were $88.86 million for the three months ended March 31, 2017, with residential mortgage accounting for $51.73 million of the total. Commercial real estate and land loan originations were $24.62 million. Consumer loan originations were $2.04 million and home equity originations were $4.51 million. Real estate construction loan originations were $1.65 million. Commercial loans originations were $4.32 million, with none originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased by $9.80 million, to $8.43 million at March 31, 2017 from $18.23 million at December 31, 2016.

 

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. Subsequent write-downs are recorded as a charge to operations. As of March 31, 2017, the Bank had $648,000 of real estate owned.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Condition – continued

 

Lending Activities – continued

 

The following table sets forth information regarding nonperforming assets:

 

 

March 31,

 

December 31,

 
 

2017

 

2016

 
 

(Dollars in Thousands)

 

Non-accrual loans

           

Real estate loans:

           

Residential mortgage (1-4 family)

$ 221   $ 221  

Other loans:

           

Home equity

  294     297  

Consumer

  136     96  

Accruing loans delinquent 90 days or more

           

Real estate loans:

           

Residential mortgage (1-4 family)

  282     456  

Commercial real estate

  455     4  

Other loans:

           

Home equity

  35     35  

Commercial

  226     -  

Restructured loans:

           

Other loans:

           

Home equity

  42     43  

Total nonperforming loans

  1,691     1,152  

Real estate owned and other repossed property, net

  668     825  

Total nonperforming assets

$ 2,359   $ 1,977  
             

Total nonperforming loans to total loans

  0.35 %   0.25 %

Total nonperforming loans to total assets

  0.25 %   0.17 %

Total allowance for loan loss to nonperforming loans

  300.12 %   414.06 %

Total nonperforming assets to total assets

  0.35 %   0.29 %

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Condition – continued

 

Deposits and Other Sources of Funds

 

The following table includes deposit accounts by category:

  

   

March 31,

   

December 31,

 
   

2017

   

2016

 
                                 
           

Percent

           

Percent

 
   

Amount

   

of Total

   

Amount

   

of Total

 
   

(Dollars in Thousands)

 

Noninterest checking

  $ 95,737       18.19 %   $ 82,877       16.16 %

Interest bearing checking

    93,519       17.77 %     93,163       18.17 %

Savings

    85,054       16.16 %     82,266       16.04 %

Money market accounts

    93,634       17.79 %     89,211       17.40 %

Total

    367,944       69.91 %     347,517       67.77 %

Certificates of deposit accounts:

                               

IRA certificates

    30,784       5.85 %     31,277       6.10 %

Brokered certificates

    12,596       2.39 %     15,596       3.04 %

Other certificates

    114,961       21.85 %     118,405       23.09 %

Total certificates of deposit

    158,341       30.09 %     165,278       32.23 %

Total deposits

  $ 526,285       100.00 %   $ 512,795       100.00 %

 

Deposits increased $13.49 million, or 2.6%, to $526.29 million at March 31, 2017 from $512.80 million at December 31, 2016. The increase was largely due to an increase in noninterest checking of $12.86 million. Money market accounts and savings also increased by $4.42 million and $2.79 million, respectively. Interest bearing checking increased slightly by $356,000. However, certificates of deposit decreased $6.94 million.

 

The following table summarizes borrowing activity:

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
                                 
   

Net

   

Percent

   

Net

   

Percent

 
   

Amount

   

of Total

   

Amount

   

of Total

 
   

(Dollars in Thousands)

 

FHLB advances and other borrowings

  $ 68,266       73.37 %   $ 82,413       84.63 %

Other long-term debt:

                               

Senior notes fixed at 5.75%, due 2022

    9,807       10.54 %     -       0.00 %

Subordinated debentures fixed at 6.75%, due 2025

    9,820       10.55 %     9,815       10.08 %

Subordinated debentures variable, due 2035

    5,155       5.54 %     5,155       5.29 %

Total other long-term debt

    24,782       26.63 %     14,970       15.37 %

Total borrowings

    93,048       100.00 %     97,383       100.00 %

 

FHLB advances and other borrowings decreased by $14.14 million, or 17.2%, to $68.27 million at March 31, 2017 from $82.41 million at December 31, 2016.

 

Long-term debt increased by $9.81 million to $24.78 million at March 31, 2017 from $14.97 million at December 31, 2016 primarily due to the issuance of $10.00 million aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022.

 

Shareholders’ Equity

 

Total shareholders’ equity increased $579,000, or 1.0%, to $60.04 million at March 31, 2017 from $59.46 million at December 31, 2016. This was primarily the result of a net income of $763,000, partially offset by dividends paid of $304,000.

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

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,

 
    2017   2016 (As Restated)  
   

Average

   

Interest

           

Average

   

Interest

         
   

Daily

   

and

   

Yield/

   

Daily

   

and

   

Yield/

 
   

Balance

   

Dividends

   

Cost(4)

   

Balance

   

Dividends

   

Cost(4)

 
   

(Dollars in Thousands)

 

Assets:

                                               

Interest earning assets:

                                               

Investment securities

  $ 128,074     $ 729       2.28 %   $ 145,708     $ 747       2.05 %

FHLB and FRB stock

    4,067       40       3.93 %     4,579       31       2.71 %

Loans receivable, net(1)

    474,439       5,570       4.70 %     428,408       4,837       4.52 %

Other earning assets

    468       1       0.85 %     2,899       3       0.41 %

Total interest earning assets

    607,048       6,340       4.18 %     581,594       5,618       3.86 %

Noninterest earning assets

    55,493                       50,404                  

Total assets

  $ 662,541                     $ 631,998                  
                                                 

Liabilities and equity:

                                               

Interest bearing liabilities:

                                               

Deposit accounts:

                                               

Checking

  $ 94,266     $ 7       0.03 %   $ 87,297     $ 7       0.03 %

Savings

    81,502       9       0.04 %     70,507       7       0.04 %

Money market

    91,536       25       0.11 %     93,016       27       0.12 %

Certificates of deposit

    164,059       339       0.83 %     151,690       314       0.83 %

Advances from FHLB and other borrowings including long-term debt

    83,667       477       2.28 %     89,345       395       1.77 %

Total interest bearing liabilities

    515,030       857       0.67 %     491,855       750       0.61 %

Noninterest checking

    84,488                       77,746                  

Other noninterest bearing liabilities

    4,271                       5,630                  

Total liabilities

    603,789                       575,231                  
                                                 

Total equity

    58,752                       56,767                  
                                                 

Total liabilities and equity

  $ 662,541                     $ 631,998                  

Net interest income/interest rate spread(2)

          $ 5,483       3.51 %           $ 4,868       3.25 %
                                                 

Net interest margin(3)

                    3.61 %                     3.35 %

Total interest earning assets to interest bearing liabilities

                    117.87 %                     118.25 %

 

(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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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

   

For the Three Months Ended March 31,

 
   

2017

   

2016 (As Restated)

 
           

Due to

                   

Due to

         
   

Volume

   

Rate

   

Net

   

Volume

   

Rate

   

Net

 
   

(In Thousands)

 

Interest earning assets:

                                               

Investment securities

  $ (90 )   $ 72     $ (18 )   $ (57 )   $ 45     $ (12 )

FHLB and FRB stock

    (3 )     12       9       1       30       31  

Loans receivable, net

    520       213       733       1,045       (170 )     875  

Other earning assets

    (3 )     1       (2 )     (1 )     1       -  

Total interest earning assets

    424       298       722       988       (94 )     894  
                                                 

Interest bearing liabilities:

                                               

Checking, savings and money market accounts

    2       (2 )     -       2       1       3  

Certificates of deposit

    26       (1 )     25       4       11       15  

Advances from FHLB and other borrowings including long-term debt

    (25 )     107       82       144       87       231  

Total interest bearing liabilities

    3       104       107       150       99       249  
                                                 

Change in net interest income

  $ 421     $ 194     $ 615     $ 838     $ (193 )   $ 645  

 

Results of Operations for the Three Months Ended March 31, 2017 and March 31, 2016 (As Restated)

 

Net Income. Eagle’s net income for the three months ended March 31, 2017 was $763,000 compared to $647,000 for the three months ended March 31, 2016. This increase of $116,000, or 17.9%, was primarily due to an increase in net interest income after loan loss provision of $764,000 and an increase in noninterest income of $312,000, partially offset by an increase in noninterest expense of $891,000 and an increase in income tax expense of $69,000. Basic and diluted earnings per share were both $0.20 for the current period. Basic and diluted earnings per share were both $0.17 per share for the prior year comparable period.

 

Net Interest Income. Net interest income increased to $5.48 million for the three months ended March 31, 2017, from $4.87 million for the same quarter in the prior year. This increase of $615,000, or 12.6%, was primarily the result of an increase in interest and dividend income of $722,000, partially offset by an increase in interest expense of $107,000.

 

Interest and Dividend Income. Interest and dividend income was $6.34 million for the three months ended March 31, 2017, compared to $5.62 million for the three months ended March 31, 2016, an increase of $722,000, or 12.9%. Interest and fees on loans increased to $5.57 million for the three months ended March 31, 2017 from $4.84 million for the three months ended March 31, 2016. This increase of $733,000, or 15.2%, was due to an increase in the average balance of loans, as well as an increase in the average yield of loans for the three months ended March 31, 2017. Average balances for loans receivable, net, including loans held-for-sale, for the three months ended March 31, 2017 were $474.44 million, compared to $428.41 million for the prior year period. This represents an increase of $46.03 million, or 10.7%. The average interest rate earned on loans receivable increased by 18 basis points, from 4.52% for the three months ended March 31, 2016, to 4.70% for the three months ended March 31, 2017. Interest and dividends on investment securities available-for-sale decreased slightly by $18,000 or 2.4% for the three months ended March 31, 2017. Average balances for investments decreased to $128.07 million for the three months ended March 31, 2017, from $145.71 million for the three months ended March 31, 2016. However, average interest rates earned on investments increased from 2.05% for the three months ended March 31, 2016, to 2.28% for the three months ended March 31, 2017.

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended March 31, 2017 and March 31, 2016 (As Restated) – continued

 

Interest Expense. Total interest expense for the three months ended March 31, 2017 was $857,000 compared to $750,000 for the three months ended March 31, 2016. The increase of $107,000, or 14.3%, was largely attributable to an increase in interest expense on advances from FHLB and other borrowings including long-term debt. The average borrowing balance for advances from FHLB and other borrowings including long-term debt decreased from $89.35 million for the three months ended March 31, 2016 to $83.67 million for the three months ended March 31, 2017. However, the average rate paid increased from 1.77% for the three months ended March 31, 2016, to 2.28% for the three months ended March 31, 2017. In February 2017, the Company completed the issuance of $10.00 million in aggregate principal amount of 5.75% fixed senior unsecured notes due in 2022. The slight increase in interest on deposits of $25,000 or 7.0% is primarily due to higher overall average balances for certificates of 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 $301,000 in provision for loan losses for the three months ended March 31, 2017 and $450,000 for the three months ended March 31, 2016. Total nonperforming loans, including restructured loans, was $1.69 million at March 31, 2017. The Bank currently has $668,000 in foreclosed real estate property and other repossessed property.

 

Noninterest Income. Total noninterest income was $3.21 million for the three months ended March 31, 2017 compared to $2.90 million for the three months ended March 31, 2016. The increase of $312,000 or 10.8% is largely due to an increase in net gain on sale of loans of $107,000 and an increase of $184,000 in mortgage loan servicing fees. During the three months ended March 31, 2017, $56.57 million mortgage loans were sold compared to $52.33 million for the three months ended March 31, 2016.

 

Noninterest Expense. Noninterest expense was $7.44 million for the three months ended March 31, 2017 compared to $6.55 million for the three months ended March 31, 2016. The increase of $891,000, or 13.6%, is largely due to an increase in salaries and employee benefits expenses of $743,000. The increase in salaries expense is due in part to higher commission-based compensation related to the continued loan growth and additional staff related to compliance with mortgage rules.

 

Income Tax Expense. Our income tax expense was $188,000 for the three months ended March 31, 2017, compared to $119,000 for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 was 19.8%. Income tax expense has increased with our increased income levels. However, tax free municipal bond income and Bank owned life insurance income help to lower the overall effective tax rates. The effective tax rate is further reduced by a tax credit investment entered into by the Company in 2012. 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, 2017 and December 31, 2016.

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 28, 2017 (the most recent report available for March 31, 2017), 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 0.4% compared to an increase of 2.1% as of November 30, 2016 (the most recent report available for December 31, 2016). 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, increased from 9.23% as of December 31, 2016 to 10.85% as of March 31, 2017. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.

 

As of March 31, 2017, the Bank’s regulatory capital was in excess of all applicable regulatory requirements. As of March 31, 2017, the Bank’s total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 15.38%, 14.35%, 14.35% and 10.85%, respectively, compared to regulatory requirements of 9.25%, 7.25%, 5.75% and 5.25%, respectively. These regulatory requirement ratios include the capital conservation buffer of 1.25% phased-in beginning January 1, 2017.

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Liquidity and Capital Resources – continued

 

Capital Resources – continued

  

   

March 31, 2017

 
   

(Unaudited)

 
   

Dollar

   

% of

 
   

Amount

   

Assets

 
   

(Dollars in Thousands)

 

Total risk-based capital to risk weighted assets:

               

Capital level

  $ 75,634       15.38

%

Requirement

    45,497       9.25  

Excess

  $ 30,137       6.13

%

                 

Tier I capital to risk weighted assets:

               

Capital level

  $ 70,559       14.35

%

Requirement

    35,660       7.25  

Excess

  $ 34,899       7.10

%

                 

Common equity tier I capital to risk weighted assets:

               

Capital level

  $ 70,559       14.35

%

Requirement

    28,282       5.75  

Excess

  $ 42,277       8.60

%

                 

Tier I capital to adjusted total average assets:

               

Capital level

  $ 70,559       10.85

%

Requirement

    34,137       5.25  

Excess

  $ 36,422       5.60

%

 

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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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

   

Rate Sensitivity

         

Interest Rates

   

As of February 28, 2017

   

Policy

 

(Basis Points)

   

Year 1

   

Year 2

   

Limits

 
                           

+200

      -0.06%       0.09%       -15.00%  
-100       -1.54%       -5.33%       -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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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

This item has been omitted based on Eagle’s status as a smaller reporting company.

 

 
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Table of Contents
 

 

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

CONTROLS AND PROCEDURES

 

Item 4. Controls and Procedures

 

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, 2017, 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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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

Part II - OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

Neither the Company nor the Bank is involved in any pending legal proceeding other than non-material legal proceedings occurring in the ordinary course of business.

 

Item 1A.

Risk Factors.

 

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, 2016.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

On July 21, 2016, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. The extent to which the company repurchases its shares and the timing of such repurchase will depend upon market conditions and other corporate considerations. No shares were purchased under this plan during the year ended December 31, 2016 or the three months ended March 31, 2017. The plan expires on July 21, 2017.

 

On July 23, 2015, the Board of Directors authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares may be purchased by the Company on the open market or in privately negotiated transactions. During the three months ended December 31, 2015, 15,000 shares were purchased at an average price of $11.75 per share. During the three months ended September 30, 2015, 46,065 shares were purchased at an average price of $11.47 per share. The plan expired on July 23, 2016.

 

 

 
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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

Part II - OTHER INFORMATION (CONTINUED)

 

 

Item 3.

Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.

Mine Safety Disclosures


Not applicable

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

Exhibit

Number

Description

10.1

Amendment No. 2 to the 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 21, 2017.

   

31.1

Certification by Peter J. Johnson, Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

   

31.2

Certification by Laura F. Clark, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

   

32.1

Certification by Peter J. Johnson, Chief Executive Officer, and Laura F. Clark, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.INS

XBRL Instance Document

   

101.SCH

XBRL Taxonomy Extension Schema Document

   

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

   

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

   

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

   

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 
-45-

Table of Contents
 

  

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

EAGLE BANCORP MONTANA, INC.

 

  

 

  

 

  

Date: May 9, 2017

By:  

/s/ Peter J. Johnson

 

Peter J. Johnson

 

President/CEO

 

 

 

 

 

 

  

 

  

 

  

Date: May 9, 2017

By:  

/s/ Laura F. Clark

 

Laura F. Clark

 

Senior Vice President/CFO

 

 

 

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