Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
EBMT > SEC Filings for EBMT > Form 10-Q on 12-Feb-2014All Recent SEC Filings

Show all filings for EAGLE BANCORP MONTANA, INC.

Form 10-Q for EAGLE BANCORP MONTANA, INC.


12-Feb-2014

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.

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 six months ended December 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 $130.0 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.

-36-

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 December 31, 2013 and June 30, 2013.

Total assets at December 31, 2013 were $516.39 million, an increase of $5.86 million, or 1.1%, from $510.53 million at June 30, 2013. Loans receivable increased by $32.70 million, or 15.2%, to $247.38 million at December 31, 2013, from $214.68 million at June 30, 2013. Residential mortgage loans increased by $13.00 million, commercial real estate loans increased by $6.92 million and commercial loans increased by $9.57 million. These were the largest increases among the various loan types. Home equity, consumer loans, and construction loans increased more moderately. Total loan originations were $159.87 million for the six months ended December 31, 2013, with single family mortgages accounting for $118.24 million of the total. Home equity and construction loan originations totaled $4.99 million and $7.85 million, respectively, for the same period. Commercial real estate and land loan originations totaled $17.72 million. Consumer loans originated totaled $4.00 million. Commercial loans originated totaled $7.07 million, with $3.27 million originating from loan syndication programs with borrowers residing outside of Montana. Loans held-for-sale decreased $6.15 million, to $14.66 million at December 31, 2013 from $20.81 million at June 30, 2013.

Total cash and cash equivalents increased by $900,000, and securities available-for-sale decreased $23.95 million. Almost all security categories decreased during the period with the largest decrease in the collateralized mortgage obligation category of $11.40 million, or 23.9%.

Deposits increased $14.49 million, or 3.4%, to $432.24 million at December 31, 2013 from $417.75 million at June 30, 2013. Growth occurred across most deposit products with the exception of time certificates of deposits which decreased slightly during the period. 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 $6.79 million, or 19.5%, to $28.07 million at December 31, 2013 from $34.86 million at June 30, 2013.

Total stockholders' equity decreased $1.47 million or 3.0%, to $47.76 million at December 31, 2013 from $49.23 million at June 30, 2013. This was a result of an increase in accumulated other comprehensive loss of $2.34 million (mainly due to an increase in net unrealized losses on securities available-for-sale) and dividends paid of $568,000, partially offset by net income of $1.14 million.

-37-

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 December 31, 2013 and 2012

Net Income. Eagle's net income for the quarter was $474,000 versus a net loss of $40,000 for the three months ended December 31, 2012. The increase of $514,000 was due to increases in net interest income of $888,000 and noninterest income of $552,000, and reductions in provision for loan losses of $34,000. These were partially offset by an increase in noninterest expense of $827,000 and income tax expense of $133,000. These increases were principally the result of the significant growth in assets and employees as a result of the Sterling acquisition. The increase in noninterest income was partially attributable to an increase in the gain on sale of available-for-sale securities. The provision for loan losses decreased from the prior period due to improved credit indicators such as delinquencies. Basic earnings per share were $0.12 for the current period, and $(0.01) per share for the prior comparable period.

Net Interest Income. Net interest income increased to $3.80 million for the quarter ended December 31, 2013, from $2.91 million for the previous year's quarter. This increase of $888,000 was the result of an increase in interest and dividend income of $818,000 and by a decrease in interest expense of $70,000.

Interest and Dividend Income. Total interest and dividend income was $4.32 million for the quarter ended December 31, 2013, compared to $3.50 million for the quarter ended December 31, 2012, an increase of $818,000, or 23.4%. Interest and fees on loans increased to $3.23 million for the three months ended December 31, 2013 from $2.75 million for the same period ended December 31, 2012. This increase of $478,000, or 17.5%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the quarter ended December 31, 2013. The average interest rate earned on loans receivable decreased by 66 basis points, from 5.74% to 5.08%. Average balances for loans receivable, net, including loans held for sale, for the quarter ended December 31, 2013 were $254.60 million, compared to $191.70 million for the prior year period. This represents an increase of $62.90 million, or 32.8%. Interest and dividends on investment securities available-for-sale (AFS) increased by $348,000 for the quarter ended December 31, 2013 from $735,000 for the same quarter last year. Average balances on investments increased to $199.60 million for the quarter ended December 31, 2013, from $126.85 million for the quarter ended December 31, 2012. The average interest rate earned on investments decreased to 2.17% from 2.32%. Interest on deposits with banks decreased to $3,000 from $11,000, due to a decrease in average balances partially offset by an increase in the average rates. Average balances on deposits with banks decreased to $2.37 million for the quarter ended December 31, 2013, compared to $25.9 million for the quarter ended December 31, 2012 and the average rates on such deposits with banks increased from 0.17% at December 31, 2012 to 0.51% at December 31, 2013.

Interest Expense. Total interest expense declined in the quarter to $516,000 from $586,000 for the quarter ended December 31, 2012, a decrease of $70,000, or 11.9%. The decrease was attributable to decreases in interest on borrowings and deposits. The average rates on deposits, which include non-interest bearing deposits, decreased from 46 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 $287.33 million to $426.75 million, an increase of $139.42 million. All account types experienced some decrease in average rates. Money market accounts declined one basis point to 13 basis points down from 14 basis points. Interest bearing checking account rates declined two basis points to 4 basis points down from 6 basis points. Savings account rates declined to 0.05% from 0.09%, and certificates of deposit rates decreased from 1.13% to 0.70%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased to $33.34 million for the quarter ended December 31, 2013, compared to $36.86 million for the same quarter in the previous year. A decline in the average rate paid to 2.44% from 2.75%, along with the decrease in average borrowing balances, resulted in a decrease in interest expense for borrowings to $183,000 for the quarter ended December 31, 2013 versus $230,000 in the previous year. The average rate paid on all interest-bearing liabilities decreased 31 basis points from the quarter ended December 31, 2012 to the quarter ended December 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 $153,000 in provision for loan losses for the quarter ended December 31, 2013 and $187,000 in the quarter ended December 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 $1.50 million at December 31, 2012 to $992,000 at December 31, 2013. The Bank currently has $419,000 in foreclosed real estate property and other repossessed property.

-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 December 31, 2013 and 2012 - continued

Noninterest Income. Total noninterest income increased to $2.47 million for the quarter ended December 31, 2013, from $1.92 million for the quarter ended December 31, 2012, an increase of $552,000 or 28.6%. Mortgage loan servicing fees accounted for $92,000 of the increase, while another $80,000 was attributable to increased deposit account service charges. These increases can be attributed to the additional account volume after the Sterling acquisition. The gain on sale of securities contributed to the increase in noninterest income. Gain on sale of securities increased to $405,000 from the prior period's amount of $245,000.

Noninterest Expense. Noninterest expense was $5.61 million for the quarter ended December 31, 2013, and $4.79 million for the quarter ended December 31, 2012. The primary cause of this increase was the increase in salaries and employee benefits of $957,000 resulting from the increase in staff from the Sterling acquisition. Occupancy and equipment expense and data processing also increased as the result of the Sterling acquisition. There were no acquisition costs for the quarter ended December 31, 2013 compared to acquisition costs of $731,000 for the same quarter last year. There was no valuation loss on OREO recorded for the quarter ended December 31, 2013 compared to $30,000 in the same period last year. This decrease was due to stabilizing values in the Company's foreclosed properties.

Income Tax Expense. Our income tax expense was $30,000 for the quarter ended December 31, 2013, compared to income tax benefit of $103,000 for the quarter ended December 31, 2012. The effective tax rate for the quarter ended December 31, 2013 was 5.95% and was -72.03% for the quarter ended December 31, 2012.

Results of Operations for the Six Months Ended December 31, 2013 and 2012

Net Income. Eagle's net income for the six months ended December 31, 2013 was $1.14 million compared to $382,000 for the six months ended December 31, 2012. The increase of $759,000 was due to increases in net interest income of $1.85 million and noninterest income of $2.08 million, and reductions in provision for loan losses of $110,000. These were partially offset by an increase in noninterest expense of $3.25 million and income tax expense of $27,000. The increase in noninterest income resulted from an increase in home mortgage refinancing activity, resulting in increased gain on sale of loans. The noninterest income increase was also attributable to an increase in the gain on sale of available-for-sale securities. The provision for loan losses decreased from the prior period due to improved credit indicators such as delinquencies. Eagle's tax provision was $27,000 lower in the current period. The Company's tax rate is low primarily due to the new market tax credit project initiated in the previous year. Basic earnings per share were $0.29 for the current period and $0.10 per share for the prior comparable period.

Net Interest Income. Net interest income increased to $7.42 million for the six months ended December 31, 2013, from $5.57 million for the previous year. This increase of $1.85 million was the result of an increase in interest and dividend income of $1.73 million and by a decrease in interest expense of $112,000.

Interest and Dividend Income. Total interest and dividend income was $8.46 million for the six months ended December 31, 2013, compared to $6.72 million for the six months ended December 31, 2012, an increase of $1.74 million, or 25.9%. Interest and fees on loans increased to $6.35 million for the six months ended December 31, 2013 from $5.30 million for the same period ended December 31, 2012. This increase of $1.05 million, or 19.8%, was due to an increase in the average balance of loans partially offset by a decrease in the average yield of loans for the six months ended December 31, 2013. The average interest rate earned on loans receivable decreased by 61 basis points, from 5.70% to 5.09%. Average balances for loans receivable, net, including loans held for sale, for the six months ended December 31, 2013 were $249.58 million, compared to $186.24 million for the prior year period. This represents an increase of $63.34 million, or 34.0%. Interest and dividends on investment securities AFS increased by $698,000 for the six months ended December 31, 2013 from $1.40 million for the same period last year. Average balances on investments increased to $205.19 million for the six months ended December 31, 2013, from $108.74 million for the six months ended December 31, 2012. The average interest rate earned on investments decreased to 2.05% from 2.58%. Interest on deposits with banks decreased to $4,000 from $16,000, due to a decrease in average balances partially offset by an increase in the average rates. Average balances on deposits with banks decreased to $1.93 million for the six months ended December 31, 2013, compared to $18.94 million for the six months ended December 31, 2012 and the average rates on such deposits with banks increased from 0.17% at December 31, 2012 to 0.41% at December 31, 2013.

-39-

EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY

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

Results of Operations for the Six Months Ended December 31, 2013 and 2012 - continued

Interest Expense. Total interest expense declined for the six months ended December 31, 2013 to $1.04 million from $1.15 million for the six months ended December 31, 2012, a decrease of $112,000, or 9.6%. The decrease was attributable to decreases in interest on borrowings partially offset by an increase in expense on deposits. The average rates on deposits, which include non-interest bearing deposits, decreased from 46 basis points to 30 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 $253.34 million to $424.52 million, an increase of $171.18 million. All account types experienced some decrease in average rates. Money market accounts declined two basis points to 12 basis points down from 14 basis points. Interest bearing checking account rates declined one basis point to 4 basis points down from 5 basis points. Savings account rates declined to 0.05% from 0.09%, and certificates of deposit rates decreased from 1.12% to 0.71%. Because of the increase in retail funding due to deposit growth average balances in borrowings decreased to $36.89 million for the six months ended December 31, 2013, compared to $38.89 million for the same period in the previous year. The average rate paid, along with the decrease in average borrowing balances, resulted in a decrease in interest expense for borrowings to $365,000 for the six months ended December 31, 2013 versus $524,000 in the previous period. The average rate paid on borrowings decreased from 2.94% last year to 2.21% for the six months ended December 31, 2013. The average rate paid on all interest-bearing liabilities decreased 36 basis points from the six months ended December 31, 2012 to the six months ended December 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 $312,000 in provision for loan losses for the six months ended December 31, 2013 and $422,000 for the six months ended December 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, decreased from $1.50 million at December 31, 2012 to $992,000 at December 31, 2013. The Bank currently has $419,000 in foreclosed real estate property and other repossessed property.

Noninterest Income. Due to the continued historic low long term interest rates, the Bank continued to experience significant refinancing activity in residential real estate as well as benefiting from operating the mortgage banking activities resulting from the Sterling acquisition which augmented our existing mortgage lending. This increased activity had a significant effect on the amount of noninterest income with total noninterest income increasing to $5.57 million for the six months ended December 31, 2013, from $3.49 million for the six months ended December 31, 2012, an increase of $2.08 million or 59.6%. Of this amount, net gain on sale of loans increased to $2.55 million for the six months ended December 31, 2013 from $1.77 million for the six months ended December 31, 2012. During this period, $118.23 million of 1-4 family mortgage loans were originated compared to $89.48 million in the six months ended December 31, 2012. In addition, $105.63 million of mortgage loans were sold during the period compared to $84.61 million sold for the six months ended December 31, 2012, an increase of $21.02 million. Service charge income on deposit accounts increased $193,000 to $543,000 for the six months ended December 31, 2013 due to the increased number of deposit accounts as a result of the Sterling branch acquisition. Mortgage loan servicing fees increased $172,000 to $653,000 for the six months ended December 31, 2013 primarily due to the higher balances of residential mortgage loans serviced by the Company. The gain on sale of securities also contributed to the increase in noninterest income. Gain on sale of securities increased to $836,000 from the prior period amount of $312,000.

Noninterest Expense. Noninterest expense was $11.47 million for the six months ended December 31, 2013, and $8.22 million for the six months ended December 31, 2012. The primary cause of this increase was the increase in salaries and employee benefits of $2.86 million resulting from the increase in staff from the Sterling acquisition. Occupancy and equipment expense and data processing also increased as the result of the Sterling acquisition and now operating a larger entity. There were no acquisition costs for the six months ended December 31, 2013 compared to $1.21 million for the same period last year as the acquisition was fully completed by the third quarter of fiscal year 2013. There was no valuation losses on OREO recorded for the six months ended December 31, 2013 . . .

  Add EBMT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for EBMT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.