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EBMT > SEC Filings for EBMT > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for EAGLE BANCORP MONTANA, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EAGLE BANCORP MONTANA, INC.


14-May-2013

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

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 are 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 have not been 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 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 the majority of its loan originations represented by single-family residential mortgages. The Bank has also successfully marketed home equity loans to its customers, as well as a wide range of shorter term consumer loans for various personal needs (automobiles, recreational vehicles, etc.). In recent years the Bank has focused on adding commercial loans to its portfolio, both real estate and non-real estate. 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, its mortgage banking business and its wealth management business. 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 nine months ended March 31, 2013.

Acquisition of Sterling Savings Bank Branches

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 with Sterling Savings Bank, a Washington state-chartered bank, to acquire Sterling's banking operations in the state of Montana, including seven branch locations, certain deposit liabilities, loans and other assets and liabilities associated with such branch locations. As a result of this acquisition, which closed on November 30, 2012, the Bank acquired approximately $182.5 million in additional assets, including approximately $41.3 million of pass-rated performing loans and assumed $181.6 million in new deposits. The Bank expects that the increase in its branch network as a result of the Sterling branch acquisition will substantially increase its loan origination volume and, due to the substantial increase in deposits, fee income. In addition, the acquisition of the branches is expected to increase certain of the Bank's expenses, including salaries and employee benefits and occupancy and equipment expense. The Bank received approximately $130.1 million in cash in the transaction, which may not be able to be immediately used to fund loans. While a substantial amount of the cash has been invested in securities, it may require additional time to deploy all of the proceeds to fund loans. The Company anticipates that the Sterling acquisition will be accretive to earnings per share in the first year after the acquisition. However, the size of the acquisition may cause integration challenges that could delay or reduce the expected benefits of the acquisition.

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EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Overview - continued

Acquisition of Sterling Savings Bank Branches - continued

The branch acquisition complements the Bank's existing growth strategy by expanding into the southern Montana market and more than doubling the Bank's retail branch network from six to 13 locations. Of the seven acquired branches six are in new markets for the Bank, including two in Missoula, one in Billings, and one each in Hamilton, Livingston and Big Timber. The seventh is in Bozeman where the Bank already has a presence. After the acquisition, the Bank became the sixth largest Montana-based banking institution.

In addition, the transaction also strengthens the Bank's mortgage origination franchise and adds a wealth management business headquartered in Bozeman, Montana. The addition of Sterling's Montana mortgage banking unit will double the Bank's mortgage banking business. This increase in the mortgage banking business and the addition of a wealth management business is expected to increase the Bank's noninterest income and further the Bank's strategy to increase fee income to complement its margin.

Financial Condition

Comparisons of financial condition in this section are between March 31, 2013 and June 30, 2012.

Total assets at March 31, 2013 were $512.83 million, an increase of $185.53 million, or 56.7%, from $327.30 million at June 30, 2012. This increase in assets was primarily attributable to the acquisition of the Sterling branches, which translated primarily into an increase in securities available for sale and loans receivable.

Loans receivable increased by $36.98 million, or 21.3%, to $210.82 million at March 31, 2013, from $173.84 million at June 30, 2012. Of the increase, $41.20 million was the result of the Sterling branch acquisition which increased the balances across all the different loan types. Excluding the Sterling branch acquisition, loans receivable decreased by approximately $4.22 million. Commercial real estate loans increased by $15.56 million, or 24.1%. This was the largest increase among the various loan types. Residential mortgages, home equity, consumer loans, and construction loans increased more moderately. All were affected by the Sterling branch acquisition. Total loan originations were $198.89 million for the nine months ended March 31, 2013, with single family mortgages accounting for $162.11 million of the total. Home equity and construction loan originations totaled $6.86 million and $5.99 million, respectively, for the same period. Commercial real estate and land loan originations totaled $12.65 million. Consumer and commercial loans originated totaled $5.65 million and $5.62 million, respectively. Loans held-for-sale increased to $12.63 million at March 31, 2013 from $10.61 million at June 30, 2012.

Total cash and cash equivalents decreased by $2.78 million, and securities available-for-sale increased $136.72 million.

Deposits increased $201.60 million, or 91.6%, to $421.59 million at March 31, 2013 from $219.99 million at June 30, 2012. Growth occurred across all deposit products. Of the increase $181.6 million was attributable to the Sterling branch acquisition. Excluding the Sterling branch acquisition, deposits increased by $20.0 million, or 9.1%. Management attributes the organic 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 enabled the Bank to decrease wholesale funding during the period. Advances from the Federal Home Loan Bank and other borrowings decreased $13.29 million, or 31.1%, to $29.41 million at March 31, 2013 from $42.70 million at June 30, 2012.

Total stockholders' equity decreased $690,000 or 1.3%, to $52.96 million at March 31, 2013 from $53.65 million at June 30, 2012. This was a result of a decrease in accumulated other comprehensive income of $1.48 million (mainly due to a decrease in net unrealized gains on securities available-for-sale) and dividends paid of $832,000, partially offset by net income of $1.3 million.

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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 March 31, 2013 and 2012

Net Income. The quarter's results were characterized by a significant increase in gain on sale of loans driven by robust refinancing activity largely offset by acquisition costs associated with the purchase of the seven Sterling Savings Bank branches located in Montana. Eagle's net income for the quarter was $907,000 versus $658,000 of net income for the three months ended March 31, 2012. The increase of $249,000, or 37.8%, was due principally to an increase in noninterest income of $1.97 million and a reduction in income tax expense partially offset by an increase in noninterest expense of $3.55 million. The increase in noninterest income resulted from an increase in home mortgage refinancing activity, resulting in increased gain on sale of loans. The provision for loan losses decreased $142,000 from the prior period. Eagle incurred a tax benefit of $629,000 in the current quarter while it incurred a tax provision of $242,000 in the prior period. This reduction in tax expense, in addition to the lower pretax earnings, is primarily attributable to a new market tax credit project that was initiated during the previous quarter. This project resulted in the Company receiving $2.9 million in federal new markets tax credits that can be used over the next seven years. Basic earnings per share were $0.24 for the current period, and $0.18 per share for the prior comparable period.

Net Interest Income. Net interest income increased to $3.57 million for the quarter ended March 31, 2013, from $2.76 million for the previous year's quarter. This increase of $814,000 was the result of an increase in interest and dividend income of $583,000 and by a decrease in interest expense of $231,000.

Interest and Dividend Income. Total interest and dividend income was $4.11 million for the quarter ended March 31, 2013, compared to $3.53 million for the quarter ended March 31, 2012, an increase of $583,000, or 16.53%. Interest and fees on loans increased to $3.01 million for the three months ended March 31, 2013 from $2.74 million for the same period ended March 31, 2012. This increase of $268,000, or 9.77%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended March 31, 2013. The average interest rate earned on loans receivable decreased by 53 basis points, from 5.76% to 5.23%. Average balances for loans receivable, net, including loans held for sale, for the quarter ended March 31, 2013 were $230.24 million, compared to $190.56 million for the prior year period. This represents an increase of $39.68 million, or 20.8%. Interest and dividends on investment securities available-for-sale (AFS) increased by $309,000 for the quarter ended March 31, 2013 from $778,000 for the same quarter last year. Average balances on investments increased to $219.38 million for the quarter ended March 31, 2013, from $96.27 million for the quarter ended March 31, 2012. The average interest rate earned on investments decreased to 1.98% from 3.23%. Interest on deposits with banks increased to $10,000 from $4,000, due to an increase in average balances and by an increase in the average rates. Average balances on deposits with banks increased to $7.09 million for the quarter ended March 31, 2013, compared to $6.81 million for the quarter ended March 31, 2012 and the average rates on such deposits with banks increased from 0.23% at March 31, 2012 to 0.29% at March 31, 2013.

Interest Expense. Total interest expense declined significantly in the quarter to $535,000 from $766,000 for the quarter ended March 31, 2012, a decrease of $231,000, or 30.2%. The decrease was attributable to decreases in interest on borrowings while interest on deposits increased. The average rates on deposits, which includes non-interest bearing deposits, decreased from 49 basis points to 29 basis points, but this was offset by the growth in average deposit balances. This increase in average balances is the result of both the Sterling branch acquisition and organic growth. The organic growth was likely the result of the Bank's customers continuing 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. The average balances increased from $214.27 million to $415.79 million, an increase of $201.52 million. Most account types did experience some decrease in average rates, with the exception of money market and interest earning checking, which stayed the same as the prior period. Money market accounts remained at 13 basis points. Interest bearing checking account rates remained at 5 basis points. Savings account rates declined to 0.07% from 0.10%, and certificates of deposit rates decreased from 1.15% to 0.65%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased significantly to $33.95 million for the quarter ended March 31, 2013, compared to $57.25 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 $230,000 for the quarter ended March 31, 2013 versus $506,000 paid in the previous year's quarter. The average rate paid on borrowings decreased from 3.54% last year to 2.72% for the quarter ended March 31, 2013. The average rate paid on all interest-bearing liabilities decreased 69 basis points from the quarter ended March 31, 2012 to the quarter ended March 31, 2013.

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 $116,000 in provision for loan losses for the quarter ended March 31, 2013 and $258,000 in the quarter ended March 31, 2012. This decrease from 2012 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 $3.50 million at March 31, 2012 to $973,000 at March 31, 2013. The Bank currently has $1.50 million in foreclosed real estate property and other repossessed property with a net book value of $1.09 million.

-38-

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 March 31, 2013 and 2012 - continued

Noninterest Income. Due to declines in long term interest rates, the Bank again experienced significant refinancing activity in residential real estate as well as it being the first full quarter operating the home loan activities resulting from the Sterling acquisition which augmented our existing mortgage lending. As long-term rates bounce around historic 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 noninterest income with total noninterest income increasing to $3.27 million for the quarter ended March 31, 2013, from $1.30 million for the quarter ended March 31, 2012, an increase of $1.97 million or 151.0%. Of this amount, net gain on sale of loans increased to $1.72 million for the quarter ended March 31, 2013 from $522,000 for the quarter ended March 31, 2012. During this period, $72.63 million 1-4 family mortgage loans were originated compared to $33.92 million in the quarter ended March 31, 2012. In addition, $69.68 million of mortgage loans were sold during the period compared to $29.87 million sold in the quarter ended March 31, 2012, an increase of $39.81 million. The gain on sale of securities also contributed to the increase in noninterest income. Gain on sale of securities increased to $465,000 from the prior period's amount of $115,000.

Noninterest Expense. Noninterest expense was $6.45 million for the quarter ended March 31, 2013, and $2.91 million for the quarter ended March 31, 2012. The primary cause of this increase is the $712,000 in acquisition costs that incurred this period, while the prior period had none. We anticipate most, if not all of the acquisition costs related to the Sterling branch acquisition have been completed in this third quarter of fiscal year 2013. The provision for valuation loss on OREO decreased to $93,000 from $165,000 for the comparable period last year. This decrease was due to a decline in values in some of the Company's foreclosed properties. Amortization of mortgage servicing rights decreased from $201,000 to $158,000, a decrease of $43,000. Salaries and employee benefits increased $1.83 million which is due to increased staff in both preparation for the acquisition of the Sterling branches and those Sterling employees joining the Company on December 1, 2012. Also, this quarter's expense included $110,000 in nonrecurring compensation costs associated with the acquisition. Consulting fees decreased from $55,000 down to $14,000 as the prior year's period included consulting services related to a possible acquisition which did not come to fruition. Amortization of core deposit intangible and tax credits expense increased to $145,000 from none in the prior year's period. This amortization expense relates to the equity investment in the new markets tax credit project, which will be amortized over the life of these federal tax credits, and the amortization of the core deposit intangible. Occupancy and equipment expense, data processing, and advertising all increased as the result of the acquisition and now operating a larger entity.

Income Tax Expense. Our income tax benefit was $629,000 for the quarter ended March 31, 2013, compared to $242,000 of an income tax expense for the quarter ended March 31, 2012. The effective tax rate for the quarter ended March 31, 2013 was negative 226.62% and was 26.89% for the quarter ended March 31, 2012. As pretax income was lowered by acquisition costs and higher employee costs, the percent of tax free municipal bond income and Bank owned life insurance income to total income became significant. Likewise, the deductibility of goodwill for tax purposes caused the company to experience a negative effective tax rate which was furthered by its new markets tax credits first taken during the second quarter of fiscal year 2013. The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits ("NMTC"). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The federal tax credit benefits were $127,000 for the quarter ended March 31, 2013.

Results of Operations for the Nine Months Ended March 31, 2013 and 2012

Net Income. Eagle's net income was $1.29 million and $1.57 million for the nine months ended March 31, 2013 and 2012, respectively. The decrease of $284,000, or 18.1%, was due to an increase in noninterest expense of $6.43 million partially offset by increases in net interest income of $795,000 and noninterest income of $3.82 million, and a decrease in the provision for loan losses of $303,000. The tax provision was $1.23 million lower in the current period. Basic earnings per share declined to $0.34 for the current period, compared to $0.42 for the previous year's period.

Net Interest Income. Net interest income increased to $9.15 million for the nine months ended March 31, 2013, from $8.35 million for the previous year's period. This increase was the result of a decrease in interest expense of $801,000 partially offset by a decrease in interest and dividend income of $6,000.

-39-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Results of Operations for the Nine Months Ended March 31, 2013 and 2012 - continued

Interest and Dividend Income. Total interest and dividend income was $10.83 million for the nine months ended March 31, 2013, compared to $10.84 million for the nine months ended March 31, 2012, representing a decrease of $6,000, or 0.06%. Interest and fees on loans decreased to $8.32 million for the nine months ended March 31, 2013 from $8.35 million for the same period ended March 31, 2012. Average balances for loans receivable, net, for the nine months ended March 31, 2013 were $200.91 million, compared to $189.98 million for the previous year, an increase of $10.93 million, or 5.75%. The average interest rate earned on loans receivable decreased by 34 basis points, from 5.86% to 5.52%. Interest and dividends on investment securities available-for-sale (AFS) increased slightly to $2.49 million for the nine months ended March 31, 2013 from $2.48 million for the same period last year. Average balances on investments increased to $145.77 million for the nine months ended March 31, 2013, compared to $99.91 million for the nine months ended March 31, 2012. The average interest rate earned on investments decreased to 2.28% from 3.31%. Interest on deposits with banks increased to $26,000 for the nine months ended March 31, 2013, compared to $13,000 for the nine months ended March 31, 2012. The average balance on deposits with banks increased from $6.44 million up to $14.80 million while the average rate earned dropped from 0.27% to 0.23%.

Interest Expense. Total interest expense decreased to $1.69 million for the nine months ended March 31, 2013, from $2.49 million for the nine months ended March 31, 2012, a decrease of $801,000, or 32.2%, primarily due to decreases in interest paid on FHLB Advances and other borrowings. Interest on deposits increased to $886,000 for the nine months ended March 31, 2013, from $822,000 for the nine months ended March 31, 2012. This increase of $64,000, or 7.8%, was the result of increases in average balances partially offset by a 12 basis point decrease in average rates paid on deposit accounts. Interest bearing checking accounts also decreased to an average rate paid of 0.05% from 0.06%, while money market accounts increased to 0.14% from 0.13%. Certificates of deposits and savings accounts average rates both decreased for the nine month period ended March 31, 2013: 1 basis point for savings accounts and 31 basis points for certificates of deposits. Average balances in interest-bearing deposit accounts increased to $268.82 million for the nine months ended March 31, 2013, compared to $191.53 million for the same period in the previous year. A decrease in the average balance of borrowings, in addition to a decrease in the average rate paid, resulted in a decrease in interest paid on borrowings to $801,000 versus $1.67 million paid in the nine months ended March 31, 2012. The average rate paid on borrowings decreased from 3.60% last year to 2.87% this year. The average rate paid on interest bearing liabilities decreased 57 basis points from the nine months ended March 31, 2012 to the nine months ended March 31, 2013.

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 its 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 took $538,000 in provision for loan losses for the nine months ended March 31, 2013 versus $841,000 in the nine months ended March 31, 2012. This decrease from 2012 was based on an analysis of a variety of factors including delinquencies within the loan portfolio. Total real estate and other assets acquired in settlement of loans, net of allowance for losses decreased from $2.36 million at . . .

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