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EBMT > SEC Filings for EBMT > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for EAGLE BANCORP MONTANA, INC.

Form 10-Q for EAGLE BANCORP MONTANA, INC.


13-Nov-2012

Quarterly Report


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

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 our management 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 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, that are worse than expected;

competition among depository and other financial institutions;

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

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

changes in the securities markets;

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

our ability to successfully integrate acquired entities, if any;

changes in consumer spending, borrowing and savings habits;

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;

the level of future deposit premium assessments;

the impact of the current economic conditions on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;

the impact of recently enacted legislation to restructure the U.S. financial and regulatory system, including proposals to reform the housing markets and government-sponsored enterprises serving such markets;

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

changes in the financial performance 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 fiscal year ended June 30, 2012, 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 SUBSIDIARY

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

Overview

The Company's primary activity is its ownership of its wholly owned subsidiary, American Federal Savings Bank (the "Bank"). The Bank is a federally chartered savings bank, engaging in typical banking activities: acquiring deposits from local markets and originating loans and investing in securities. Recent federal legislation mandated that the consolidated regulatory functions of The Office of Thrift Supervision ("OTS") over the Bank and the Company be transferred to two federal agencies and that the OTS be merged into the Office of the Comptroller of the Currency (the "OCC"). Thus, as a result of the enactment in July of 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Federal Reserve Board (the "FRB") became, as of July 21, 2011, the principal federal bank regulatory agency for the Company and the OCC the principal federal regulator for the Bank. The Bank's charter was not affected and the Bank continues to operate as a federal stock savings bank. Its deposits remain insured by the Federal Deposit Insurance Corporation. Because the Dodd-Frank Act did not eliminate the thrift charter under which the Bank has historically operated, the Bank's traditional lending and investment activities should not be affected. Further, to ensure regulatory continuity, the Dodd-Frank Act requires that the OCC designate a new Deputy Comptroller who will be responsible for the supervision and examination of federal savings associations.

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 moves in interest rates. Noninterest income in the form of fee income and gain on sale of loans adds to the Bank's income.

The Bank has a strong mortgage lending focus, with the majority of its loans represented by single-family residential mortgages. The Bank has also successfully marketed home equity loans to its customers, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years the Bank has focused on adding commercial loans to its portfolio, both real estate and non-real estate. 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 the need for sources of fee income to complement its margin, and the Bank now maintains a significant loan servicing portfolio which generates income. The gain on sale of loans also provides significant fee income in periods of high mortgage loan origination volumes. 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 do not automatically reprice as interest rates rise, as do certificates of deposit.

For the past several years, management's focus has been on improving the Bank's core earnings. Core earnings can be described as income before taxes, with the exclusion of gain on sale of loans and adjustments to the market value of the Bank's loan servicing portfolio. Management believes that the Bank will need to continue to focus on increasing net interest margin, other areas of fee income, and control of operating expenses to achieve earnings growth going forward. Management's strategy of growing the bank's loan portfolio and deposit base is expected to help achieve these goals as follows: loans typically earn higher rates of return than investments; a larger deposit base should yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to the strategy is funding the growth of the Bank's balance sheet in an efficient manner. Deposit growth will be difficult to maintain due to significant competition for deposits and it is likely that wholesale funding (which is usually more expensive than retail deposits) will be needed to supplement it.

The level and movement of interest rates impacts the Bank's earnings as well. The Federal Reserve's Federal Open Market Committee ("FOMC") did not change the federal funds target rate which remained at 0.25% during the three months ended September 30, 2012.

From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of organic growth. In this connection, on June 29, 2012, the Bank entered into a definitive agreement to acquire all of the Montana retail banking operations of Sterling Savings Bank of Spokane Washington. As a result of this acquisition, American Federal will acquire approximately $188.4 million in additional assets, principally in the form of cash and loans and assume $188.4 million in new deposits. The transaction which will increase the Bank's retail branch structure from 6 to 13 locations and is expected to close on November 30, 2012.


EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Financial Condition

Comparisons of financial condition in this section are between September 30, 2012 and June 30, 2012.

Total assets at September 30, 2012 were $320.04 million, a decrease of $7.26 million, or 2.22%, from $327.30 million at June 30, 2012. This decrease in assets was primarily attributable to decreases in loans and cash and cash equivalents offset by increases in securities available-for-sale.

Loans receivable decreased by $6.65 million, or 3.83%, to $167.19 million at September 30, 2012, from $173.84 million at June 30, 2012. The decline occurred across most loan types, though commercial real estate loans increased by $438,000. Home equity, consumer loans, and construction loans decreased moderately. Residential mortgages decreased by the largest amount, $5.07 million. Total loan originations were $49.20 million for the three months ended September 30, 2012, with single family mortgages accounting for $40.52 million of the total. Home equity and construction loan originations totaled $2.18 million and $1.76 million, respectively, for the same period. Commercial real estate and land loan originations totaled $1.61 million. Consumer and commercial loans originated totaled $2.20 million and $930,000, respectively. Loans held-for-sale decreased to $9.16 million at September 30, 2012 from $10.61 million at June 30, 2012.

Total cash and cash equivalents decreased by $8.07 million, and securities available-for-sale increased $8.98 million.

Deposits increased $912,000, or .41%, to $220.9 million at September 30, 2012 from $219.99 million at June 30, 2012. Growth occurred in noninterest checking and savings, while interest-bearing checking, money markets and certificates of deposits decreased. Management attributes the overall increase in deposits to increased marketing of checking accounts as well as customers' preference for placing funds in secure, federally insured accounts.

The ability of the Bank to continue to grow its retail deposit base during the period along with a reduction in cash and cash equivalents enabled wholesale funding to decrease during the quarter. Advances from the Federal Home Loan Bank and other borrowings decreased $9.05 million, or 21.20%, to $33.65 million from $42.70 million.

Total shareholders' equity increased $329,000 or 0.61%, to $53.98 million at September 30, 2012 from $53.65 million at June 30, 2012. This was a result of net income for the period of $422,000 in addition to an increase in accumulated other comprehensive income of $141,000 (mainly due to an increase in net unrealized gains on securities available-for-sale). The increase was also partially offset by dividends paid for the period.

Results of Operations for the Three Months Ended September 30, 2012 and 2011

Net Income. The quarter's results were characterized by a significant increase in gain on sale of loans driven by renewed and robust refinancing activity largely offset by acquisition costs associated with the pending purchase of the seven Sterling Savings Bank branches located in Montana. Eagle's net income for the quarter decreased to $422,000 versus $428,000 for the three months ended September 30, 2011. The net income decrease of $6,000, or 1.40%, was due principally to an increase in noninterest expense of $980,000 offset by an increase in noninterest income of $1.01 million caused by an increase in home mortgage refinancing activity, resulting in increased gain on sale of loans. The provision for loan losses decreased $23,000 from the prior period. Eagle's tax provision was $45,000 lower in the current quarter. Basic earnings per share were $0.11 for the current period, the same as the prior comparable period.

Net Interest Income. Net interest income decreased to $2.66 million for the quarter ended September 30, 2012, from $2.76 million for the previous year's quarter. This decrease of $100,000 was the result of a decrease in interest and dividend income of $428,000 partially offset by a decrease in interest expense of $328,000.

Interest and Dividend Income. Total interest and dividend income was $3.23 million for the quarter ended September 30, 2012, compared to $3.65 million for the quarter ended September 30, 2011, a decrease of $428,000, or 11.72%. Interest and fees on loans decreased to $2.55 million for the three months ended September 30, 2012 from $2.78 million for the same period ended September 30, 2011. This decrease of $224,000, or 8.07%, was due to both the decrease in the average yield on loans and average balances of loans for the quarter ended September 30, 2012. The average interest rate earned on loans receivable decreased by 28 basis points, from 5.92% to 5.64%. Average balances for loans receivable, net, including loans held for sale, for the quarter ended September 30, 2012 were $180.78 million, compared to $187.64 million for the prior year period. This represents a decrease of $6.86 million, or 3.66%. Interest and dividends on investment securities available-for-sale (AFS) decreased by $203,000 for the quarter ended September 30, 2012 from $872,000 for the same quarter last year. Average balances on investments decreased to $91.56 million for


EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Results of Operations for the Three Months Ended September 30, 2012 and 2011 - continued

the quarter ended September 30, 2012, from $102.89 million for the quarter ended September 30, 2011. The average interest rate earned on investments decreased to 2.92% from 3.39%. Interest on deposits with banks decreased to $5,000 from $6,000, due to a decrease in the average rates. Average balances on deposits with banks increased to $11.93 million for the quarter ended September 30, 2012, compared to $8.96 million for the quarter ended September 30, 2011and the average rates on such deposits with banks decreased from 0.27% at September 30, 2011 to 0.17% at September 30, 2012.

Interest Expense. Total interest expense declined significantly in the quarter to $566,000 from $894,000 for the quarter ended September 30, 2011, a decrease of $328,000, or 36.69%. The decrease was attributable to decreases in interest on deposits and borrowings offset by growth in average deposit balances as the Bank's customers appeared to continue to opt for the safety of federally insured deposits, notwithstanding historically low rates on such deposits, over the risks and uncertainty of the capital markets. Decreases in rates on deposits caused a decline in deposit interest expense of $41,000, or 14.19% over the quarter ended September 30, 2011. The decrease was attributable to a decrease in average rates paid on most deposit products. Money market accounts, however, increased 2 basis points. Interest bearing checking account rates declined from 0.06% to 0.05%, savings account rates remained at 0.10%, and certificates of deposit rates decreased from 1.27% to 1.10%. The declines, however, were offset by increases in average balances during the period to $219.52 million for the quarter ended September 30, 2012, compared to $212.14 million for the same quarter in the previous year. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased significantly to $40.92 million for the quarter ended September 30, 2012, compared to $65.53 million for the same quarter in the previous year. The average rate paid, along with the decrease in average borrowing balances resulted in a decrease in interest paid on borrowings to $294,000 for the quarter ended September 30, 2012 versus $583,000 paid in the previous year's quarter. The average rate paid on borrowings decreased from 3.69% last year to 3.11% for the quarter ended September 30, 2012. The average rate paid on all interest-bearing liabilities decreased 43 basis points from the quarter ended September 30, 2011 to the quarter ended September 30, 2012.

Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management of the Bank, to provide for probable loan losses based on prior loss experience, volume and type of lending conducted by the Bank, national and local economic conditions, and past due loans in portfolio. The Bank's policies require a review of assets on a quarterly basis. The Bank classifies loans as well as other assets if warranted. While the Bank believes it uses the best information available to make a determination with respect to the allowance for loan losses, it recognizes that future adjustments may be necessary. The Bank recorded $235,000 in provision for loan losses for the quarter ended September 30, 2012 and $258,000 in the quarter ended September 30, 2011. This decrease from 2011 was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total nonperforming loans, including restructured loans, net decreased from $5.21 million at September 30, 2011 to $2.29 million at September 30, 2012. The Bank currently has $2.30 million in foreclosed real estate property and other repossessed property with a net book value of $1.93 million.

Noninterest Income. Due to declines in long term interest rates, the Bank again experienced significant refinancing activity in residential real estate. As long-term rates continued to push to historically low levels, refinance activity in the current quarter grew and exceeded the level reached in the prior year's period. This increased activity had a significant effect on the amount of non-interest income with total noninterest income increasing to $1.58 million for the quarter ended September 30, 2012, from $569,000 for the quarter ended September 30, 2011, an increase of $1.01 million or 176.80%. Of this amount, net gain on sale of loans increased to $812,000 for the quarter ended September 30, 2012 from $236,000 for the quarter ended September 30, 2011. During this period, $40.52 million 1-4 family mortgage loans were originated compared to $17.05 million in the quarter ended September 30, 2011. In addition, $42.67 million of mortgage loans were sold during the period compared to $12.64 million sold in the quarter ended September 30, 2011, an increase of $30.03 million. The gain on fair value hedge-FASB ASC 815 also contributed to the increase in noninterest income. Gain on fair value hedge-FASB ASC 815 increased to $37,000 from the prior period's loss amount of $330,000.

Noninterest Expense. Noninterest expense was $3.44 million for the quarter ended September 30, 2012, and $2.46 million for the quarter ended September 30, 2011. Though most items were fairly similar, provision for valuation loss on OREO increased to $68,000 from zero for the comparable period last year. This increase was due to decline in values in some of the Company's foreclosed properties. Amortization of mortgage servicing rights increased from $93,000 to $187,000, an increase of $94,000. The largest change occurred due to the new item of acquisition costs. These costs of $477,000, as noted earlier, are related to the pending purchase of the seven branches from Sterling Savings Bank. Other expense categories showed relatively minor changes.

Income Tax Expense. Our income tax expense was $142,000 for the quarter ended September 30, 2012, compared to $187,000 for the quarter ended September 30, 2011. The effective tax rate for the quarter ended September 30, 2012 was 25.17% and was 30.41% for the quarter ended September 30, 2011.


EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Results of Operations for the Three Months Ended September 30, 2012 and 2011 - continued

Liquidity, Interest Rate Sensitivity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency ("OCC") regulations. The OCC has eliminated the statutory requirement based upon a percentage of deposits and short-term borrowings. The OCC states that the liquidity requirement is retained for safety and soundness purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for "basic surplus" and "basic surplus with FHLB" as internally defined. In general, the "basic surplus" is a calculation of the ratio of unencumbered short-term assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days divided by total assets. "Basic surplus with FHLB" adds to "basic surplus" the additional borrowing capacity the Bank has with the FHLB of Seattle. The Bank exceeded those minimum ratios as of both September 30, 2012 and September 30, 2011.

The Bank's primary sources of funds are deposits, repayment of loans and mortgage-backed and collateralized mortgage obligation securities, maturities of investments, funds provided from operations, and advances from the Federal Home Loan Bank of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed and collateralized mortgage obligation securities and maturities of investment securities are generally predictable. However, other sources of funds, such as deposit flows and loan prepayments, can be greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses liquidity resources principally to fund existing and future loan commitments. It also uses them to fund maturing certificates of deposit, demand deposit withdrawals and to invest in other loans and investments, maintain liquidity, and meet operating expenses.

Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on commitments to make loans and management's assessment of the Bank's ability to generate funds.

At August 31, 2012 (the most recent report available), the Bank's measure, as internally determined, of sensitivity to interest rate movements, as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity ("EVE") by 2.1%. The Bank is well within the guidelines set forth by the Board of Directors for interest rate risk sensitivity. The Bank's tier I core capital ratio, as measured under OCC rules, increased from 13.08% as of September 30, 2011 to 13.86% as of September 30, 2012. The Bank's strong capital position helps to mitigate its interest rate risk exposure.


EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Liquidity, Interest Rate Sensitivity and Capital Resources - continued

As of September 30, 2012, the Bank's regulatory capital was in excess of all applicable regulatory requirements. At September 30, 2012, the Bank's tangible, core, and risk-based capital ratios amounted to 13.86%, 13.86%, and 22.59%, respectively, compared to regulatory requirements of 1.50%, 3.0%, and 8.0%, respectively. See the following table (amounts in thousands):

                        At September 30, 2012
                             (Unaudited)
                         Dollar           % of
                         Amount          Assets
Tangible capital:
Capital level         $     41,977         13.86
Requirement                  4,543          1.50
Excess                      37,434         12.36

Core capital:
Capital level               41,977         13.86
Requirement                  9,086          3.00
Excess                      32,891         10.86

Risk-based capital:
Capital level               43,777         22.59
Requirement                 15,504          8.00
Excess                      28,273         14.59

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.


EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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