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Hope BancorpE a g l E B a n c o r p M o n t a n a , I n c . 2 0 1 2 a n n u a l r e p o r t 1400 proSpect avenue Helena, Mt 59601 2012 annual report EaglE Bancorp Montana, Inc. is the stock holding company of american Federal Savings Bank. american Federal was founded in 1922 in Helena, Montana as a Montana chartered building and loan association. In 1975, the Bank adopted a federal thrift charter. the Bank still maintains its headquarters and two other branches in Helena, with additional branches in Bozeman, Butte and townsend, Montana. the Bank’s market area is concentrated in south central Montana, to which it offers commercial, residential and consumer loans. the Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. FInancIal HIgHlIgHtS For the Years Ended June 30 (Dollars in thousands) 2012 2011 2010 2009 2008 SElEctED FInancIal conDItIon Data total assets net loans total Securities total Deposits total Shareholders’ Equity $327,299 173,839 89,277 219,989 53,650 $331,093 185,471 102,700 209,186 52,485 $325,739 169,502 114,653 197,939 52,432 $289,709 167,197 82,663 187,199 27,792 $279,907 168,149 80,435 178,851 25,634 SElEctED opEratIng Data net Interest Income provision for loan losses non-interest Income non-interest Expense $10,931 1,101 4,174 11,034 $10,873 948 4,623 11,082 $9,802 715 3,593 9,231 $9,233 257 2,999 8,563 $7,436 (175) 2,224 7,063 nEt IncoME $2,178 $2,410 $2,414 $ 2,388 $2,110 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% NON-PERFORMING ASSETS TO TOTAL ASSETS Peer Median Eagle Bancorp Montana, Inc. 6.03% 5.77% 5.22% 6.41% 5.99% 7.33% 6.91% 6.78% 7.01% 6.81% 1.04% 1.02% 1.16% 1.09% 0.39% 1.94% 1.24% 1.69% 1.62% 1.70% 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 Source: SNL Financial SHareHolDer InForMatIon InDepenDent regIStereD puBlIc accountIng FIrM Davis, kinard & co., p.c. 400 pine Street, Suite 600 abilene, tX 79601 325.672.4000 www.dkcpa.com corporate HeaDQuarterS 1400 prospect avenue Helena, Mt 59601 406.442.3080 SHareHolDer contact charles Berger, corporate Secretary american Federal Savings Bank p.o. Box 4999 Helena, Mt 59604-4999 406.442.3080 fax: 406.457.4013 cberger@amfedsb.com corporate counSel nixon peabody, llp 401 9th Street, n.w. Suite 900 washington, Dc 20004 202.585.8000 www.nixonpeabody.com Stock lIStIng Symbol: eBMt naSDaQ global SHareHolDer ServIceS agent registrar and transfer company 10 commerce Drive cranford, nJ 07106-3572 800.368.5948 www.rtco.com InveStor InForMatIon copies of reports filed with the Securities and exchange commission are available without charge through the Internet at www.sec.gov or the Investor relations section of our website at www.americanfederalsavingsbank.com photo: BrIDger range, ©John lambing, 2012 cover photo: gallatIn rIver anD BrIDgerS, ©John lambing, 2012 0%1%2%3%4%5%6%7%8%9%2010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q2NON-PERFORMING ASSETS TO TOTAL ASSETSPeer MedianEagle Bancorp Montana, Inc.5.77%6.03%5.22%6.41%7.33%5.99%0.39%1.04%1.02%1.16%1.09%1.24%6.91%1.94%7.01%6.78%1.69%1.62%6.81%1.70%Source: SNL Financialbasic in dollarsadjusted for exchange ratio00.450.50.550.60809101112EPSin dollarsadjusted for exchange ratio46810120809101112STOCK PRICEdollars in millionsTOTAL ASSETS1502002503003500809101112For the Years ended June 30 (Dollars in thousands) 2012 2011 2010 2009 2008SelecteD FInancIal conDItIon Data total assets $327,299 $331,093 $325,739 $289,709 $279,907net loans 173,839 185,471 169,502 167,197 168,149 total Securities 89,277 102,700 114,653 82,663 80,435 total Deposits 219,989 209,186 197,939 187,199 178,851 total Shareholders’ equity 53,650 52,485 52,432 27,792 25,634SelecteD operatIng Data net Interest Income $10,931 10,873 $9,802 $9,233 $7,436 provision for loan losses 1,101 948 715 257 (175) non-interest Income 4,174 4,623 3,593 2,999 2,224non-interest expense 11,034 11,082 9,231 8,563 7,063 net IncoMe $2,178 2,410 $2,414 $ 2,388 $2,110 eagle Bancorp Mt, Inc 2HelenaMaIn oFFIce1400 prospect avenueHelena, Mt 59601HelenaDowntown28 neill avenueHelena, Mt 59601HelenaSkYwaY SHoppIng center2090 cromwell Dixon ln.Helena, Mt 59602Bozeman1455 west oak StreetBozeman, Mt 59715Butte3401 Harrison avenueButte, Mt 59701townsend416 Broadwaytownsend, Mt 59644123456dollars per share00.050.10.150.20.250.30809101112adjusted for exchange ratioDIVIDENDS0%1%2%3%4%5%6%7%8%9%2010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q2NON-PERFORMING ASSETS TO TOTAL ASSETSPeer MedianEagle Bancorp Montana, Inc.5.77%6.03%5.22%6.41%7.33%5.99%0.39%1.04%1.02%1.16%1.09%1.24%6.91%1.94%7.01%6.78%1.69%1.62%6.81%1.70%Source: SNL Financialbasic in dollarsadjusted for exchange ratio00.450.50.550.60809101112EPSin dollarsadjusted for exchange ratio46810120809101112STOCK PRICEdollars in millionsTOTAL ASSETS1502002503003500809101112For the Years ended June 30 (Dollars in thousands) 2012 2011 2010 2009 2008SelecteD FInancIal conDItIon Data total assets $327,299 $331,093 $325,739 $289,709 $279,907net loans 173,839 185,471 169,502 167,197 168,149 total Securities 89,277 102,700 114,653 82,663 80,435 total Deposits 219,989 209,186 197,939 187,199 178,851 total Shareholders’ equity 53,650 52,485 52,432 27,792 25,634SelecteD operatIng Data net Interest Income $10,931 10,873 $9,802 $9,233 $7,436 provision for loan losses 1,101 948 715 257 (175) non-interest Income 4,174 4,623 3,593 2,999 2,224non-interest expense 11,034 11,082 9,231 8,563 7,063 net IncoMe $2,178 2,410 $2,414 $ 2,388 $2,110 eagle Bancorp Mt, Inc 2HelenaMaIn oFFIce1400 prospect avenueHelena, Mt 59601HelenaDowntown28 neill avenueHelena, Mt 59601HelenaSkYwaY SHoppIng center2090 cromwell Dixon ln.Helena, Mt 59602Bozeman1455 west oak StreetBozeman, Mt 59715Butte3401 Harrison avenueButte, Mt 59701townsend416 Broadwaytownsend, Mt 59644123456dollars per share00.050.10.150.20.250.30809101112adjusted for exchange ratioDIVIDENDS september 19, 2012 to our StockHolDerS, cuStoMerS, anD FrIenDS: september 19, 2012 to our StockHolDerS, cuStoMerS, anD FrIenDS: the coming year will see exciting changes for the company. our company’s dedicated staff is spending significant time and effort ensuring a successful integration of the new Sterling locations into american Federal’s branch network. We pledge the same level of commitment to those communities as we have always done in our current markets. —peter J. Johnson, president and chief executive officer the Board of Directors, management, and staff of eagle Bancorp Montana, Inc. and its wholly owned subsidiary, american Federal Savings Bank, are pleased to present our annual report for our fiscal year ended June 30, 2012. tHe BIggeSt newS for the company in the past year was our announcement on July 2nd of our agreeMent to purcHaSe Seven Montana BrancHeS FroM SterlIng FInancIal corporatIon. this transaction will double our branch network and increase our footprint across southern Montana, while entering the two largest markets in the state, Billings and Missoula. we also will be acquiring Sterling’s Montana mortgage banking and wealth management business lines. efforts to integrate these operations are currently underway, and we expect to close the transaction, pending regulatory approval, before the end of 2012. this transaction is, we believe, a positive one for our company and its shareholders because it provides us with entry into new markets and permits the kind of growth, through a single transaction, that otherwise would take several years if we pursued a series of smaller transactions. we will become, upon approval from our regulators, the sixth largest bank (in terms of deposits) headquartered in Montana. we are excited about the new customer base we will be working with, and of course, about the melding of Sterling’s Montana staff with our own great employees. while the environment for community banks continues to be a challenge, the company marked another successful year, with increases in book value and an increased cash dividend. net income of $2.2 million declined due to increased expenses related to merger and acquisition activity. Still our core components of earnings were stable and basic earnings per share decreased only slightly to $0.59 from $0.62. Book value per share increased, to $13.83 at year end compared to $13.39 for the previous year. the company was able to increase its net interest margin this year, to 3.68% from 3.62%. this was accomplished on a slightly smaller balance sheet primarily by paying off high rate borrowings that matured during the year, thus reducing our cost of funds. lower mortgage loan originations led to a decrease of $500,000 in net gain on sale of loans. we did see a corresponding decrease of $529,000 in the amortization of mortgage servicing rights. the coming year will see exciting changes for the company. our company’s dedicated staff is spending significant time and effort ensuring a successful integration of the new Sterling locations into american Federal’s branch network. We pledge the same level of commitment to those communities as we have always done in our current markets. —peter J. Johnson, president and chief executive officer our asset quality remains strong as non-performing loans remained relatively low. non-performing assets did increase slightly, to 1.70% of assets, compared to 1.24% at the end of the Board of Directors, management, and staff of eagle last year, but remain well below peer averages, as reported Bancorp Montana, Inc. and its wholly owned subsidiary, by Snl Financial. throughout the year we have continued to american Federal Savings Bank, are pleased to present add to our allowance for loan losses, with our provisions for our annual report for our fiscal year ended June 30, 2012. loan losses increasing $153,000 in fiscal year 2012. thankfully, Montana’s economy is again projected by the Bureau of tHe BIggeSt newS for the company in the past year Business and economic research at the university of Montana was our announcement on July 2nd of our agreeMent to have higher growth over the next few years and as a result to purcHaSe Seven Montana BrancHeS FroM our local markets should see increased income growth during SterlIng FInancIal corporatIon. this transaction will the coming year. 2012 mid-year statistics from the Montana double our branch network and increase our footprint across association of realtors covering the eight largest markets in the state showed an increase in homes sold of 7.2% over the same period in 2011. southern Montana, while entering the two largest markets in the state, Billings and Missoula. we also will be acquiring Sterling’s Montana mortgage banking and wealth management business lines. efforts to integrate these operations are currently underway, and total assets decreased by 1.1% while our loan portfolio shrank 6.3%, primarily in residential mortgage and home equity loans. we expect to close the transaction, pending the commercial real estate loan portfolio held constant while regulatory approval, before the end commercial loans increased by $4.8 million. capital is a major of 2012. this transaction is, we believe, a positive one for our company and its shareholders because it provides us with entry into new markets and permits the kind of growth, through a single transaction, that otherwise would take several years if we pursued a series of smaller transactions. we will become, upon approval from our regulators, the sixth largest bank (in terms of deposits) headquartered in Montana. we are excited about the new customer base we will be working with, and of course, about the melding of Sterling’s Montana staff with our own great employees. while the environment for community banks continues to be a challenge, the company marked another successful year, with increases in book value and an increased cash dividend. net income of $2.2 million declined due to increased expenses related to merger and acquisition activity. Still our core components of earnings were stable and basic earnings per share decreased only slightly to $0.59 from $0.62. Book value per share increased, to $13.83 at year end compared to $13.39 for the previous year. the company was able to increase its net interest margin this year, to 3.68% from 3.62%. this was accomplished on a slightly smaller balance sheet primarily by paying off high rate borrowings that matured during the year, thus reducing our cost of funds. lower mortgage loan originations led to a decrease of $500,000 in net gain on sale of loans. we did see a corresponding decrease of $529,000 in the amortization of mortgage servicing rights. our asset quality remains strong as non-performing loans remained relatively low. non-performing assets did increase slightly, to 1.70% of assets, compared to 1.24% at the end of last year, but remain well below peer averages, as reported by Snl Financial. throughout the year we have continued to add to our allowance for loan losses, with our provisions for loan losses increasing $153,000 in fiscal year 2012. thankfully, Montana’s economy is again projected by the Bureau of Business and economic research at the university of Montana to have higher growth over the next few years and as a result our local markets should see increased income growth during the coming year. 2012 mid-year statistics from the Montana association of realtors covering the eight largest markets in the state showed an increase in homes sold of 7.2% over the same period in 2011. total assets decreased by 1.1% while our loan portfolio shrank 6.3%, primarily in residential mortgage and home equity loans. the commercial real estate loan portfolio held constant while commercial loans increased by $4.8 million. capital is a major eagle Bancorp Montana, Inc. and its subsidiary, american Federal Savings Bank, look forward to the acquisition of SterlIng FInancIal corporatIon’S Montana BrancHeS. this transaction will double american Federal’s branch network and increase our footprint across southern Montana. we will be making our entrance into five new markets: Missoula, Hamilton, livingston, Big timber and Billings, Montana. Billings and Missoula hold the top two rankings for largest cities in Montana. eagle Bancorp Montana, Inc. and its subsidiary, american Federal Savings Bank, look forward to the acquisition of SterlIng FInancIal corporatIon’S Montana BrancHeS. this transaction will double american Federal’s branch network and increase our footprint across southern Montana. we will be making our entrance into five new markets: Missoula, Hamilton, livingston, Big timber and Billings, Montana. Billings and Missoula hold the top two rankings for largest cities in Montana. Billings is located in the south-central portion of the state and continues to experience rapid growth and a strong economy. Billings has avoided the economic downturn, as well as avoided the housing bust. with the Bakken oil play in eastern Montana and western north Dakota, the largest oil discovery in u.S. history, as well as the Heath shale oil play just north of Billings, the city's already rapid growth rate is escalating. Billings is located in the south-central portion of the state and continues to experience rapid growth and a strong economy. Billings has avoided the economic downturn, as well as avoided the housing bust. with the Bakken oil play in eastern Montana and western north Dakota, the largest oil discovery in u.S. history, as well as the Heath shale oil play just north of Billings, the city's already rapid growth rate is escalating. Missoula is the county seat of Missoula county. It is located along the clark Fork and Bitterroot rivers in western Montana and at the convergence of five mountain ranges. today, the city’s largest employers are the university of Montana and Missoula’s two hospitals. the city is also home to the Montana grizzlies, one of the strongest college football programs in the Division I Football championship Subdivision of the national collegiate athletic association (ncaa). Missoula is the county seat of Missoula county. It is located along the clark Fork and Bitterroot rivers in western Montana and at the convergence of five mountain ranges. today, the city’s largest employers are the university of Montana and Missoula’s two hospitals. the city is also home to the Montana grizzlies, one of the strongest college football programs in the Division I Football championship Subdivision of the national collegiate athletic association (ncaa). Source: www.wikipedia.org Source: www.wikipedia.org 3 eagle Bancorp Mt, Inc photo: YellowStone rIver, ©John lambing, 2012 3 eagle Bancorp Mt, Inc photo: YellowStone rIver, ©John lambing, 2012 september 19, 2012 to our StockHolDerS, cuStoMerS, anD FrIenDS: september 19, 2012 to our StockHolDerS, cuStoMerS, anD FrIenDS: the coming year will see exciting changes for the company. our company’s dedicated staff is spending significant time and effort ensuring a successful integration of the new Sterling locations into american Federal’s branch network. We pledge the same level of commitment to those communities as we have always done in our current markets. —peter J. Johnson, president and chief executive officer our company and its shareholders because it provides us with entry into new markets and permits the kind of growth, through a single transaction, that otherwise would take several years if we pursued a series of smaller transactions. we will become, upon approval from our regulators, the sixth largest bank (in terms of deposits) headquartered in Montana. we are excited about the new customer base we will be working with, and of course, about the melding of Sterling’s Montana staff with our own great employees. while the environment for community banks continues to be a challenge, the company marked another successful year, with increases in book value and an increased cash dividend. net income of $2.2 million declined due to increased expenses related to merger and acquisition activity. Still our core components of earnings were stable and basic earnings per share decreased only slightly to $0.59 from $0.62. Book value per share increased, to $13.83 at year end compared to $13.39 for the previous year. the company was able to increase its net interest margin this year, to 3.68% from 3.62%. this was accomplished on a slightly smaller balance sheet primarily by paying off high rate borrowings that matured during the year, thus reducing our cost of funds. lower mortgage loan originations led to a decrease of $500,000 in net gain on sale of loans. we did see a corresponding decrease of $529,000 in the amortization of mortgage servicing rights. component of the strength of a financial institution like ours the coming year will see exciting changes for the company. and I am pleased to note that our tier one capital ratio remains our company’s dedicated staff is spending significant time very strong at 17.43%. as noted earlier we now have a great opportunity as a result of the Sterling branch transaction to and effort ensuring a successful integration of the new deploy some of this excess capital in a transaction that we Sterling locations into american Federal’s branch network. believe will produce good returns for our shareholders over the next several years and which we will be able to realize We pledge the same level of commitment to those in a single, efficient transaction as opposed to multiple communities as we have always done in our current markets. transactions over several years. —peter J. Johnson, president and chief executive officer the coming year will see exciting changes for the company. our company’s dedicated staff is spending significant time and our company and its shareholders because it provides us effort ensuring a successful integration of the new Sterling with entry into new markets and permits the kind of growth, locations into american Federal’s branch network. we pledge through a single transaction, that otherwise would take several the same level of commitment to those communities as we years if we pursued a series of smaller transactions. we will have always done in our current markets. become, upon approval from our regulators, the sixth largest we SIncerelY apprecIate tHe contInuIng bank (in terms of deposits) headquartered in Montana. we are truSt anD loYaltY oF our conStItuencIeS— excited about the new customer base we will be working with, StockHolDerS, cuStoMerS, eMploYeeS anD and of course, about the melding of Sterling’s Montana staff coMMunItIeS. we will work to earn your continued with our own great employees. confidence and we thank you for the privilege of serving you! while the environment for community banks continues to be a challenge, the company marked another successful year, very Sincerely, with increases in book value and an increased cash dividend. net income of $2.2 million declined due to increased expenses related to merger and acquisition activity. Still our core components of earnings were stable and basic earnings per share decreased only slightly to $0.59 from $0.62. Book value peter J. Johnson, president/ceo per share increased, to $13.83 at year end compared to $13.39 for the previous year. our asset quality remains strong as non-performing loans remained relatively low. non-performing assets did increase slightly, to 1.70% of assets, compared to 1.24% at the end of last year, but remain well below peer averages, as reported by Snl Financial. throughout the year we have continued to add to our allowance for loan losses, with our provisions for loan losses increasing $153,000 in fiscal year 2012. thankfully, Montana’s economy is again projected by the Bureau of Business and economic research at the university of Montana to have higher growth over the next few years and as a result our local markets should see increased income growth during the coming year. 2012 mid-year statistics from the Montana association of realtors covering the eight largest markets in the state showed an increase in homes sold of 7.2% over the same period in 2011. total assets decreased by 1.1% while our loan portfolio shrank 6.3%, primarily in residential mortgage and home equity loans. the commercial real estate loan portfolio held constant while commercial loans increased by $4.8 million. capital is a major the company was able to increase its net interest margin this year, to 3.68% from 3.62%. this was accomplished on a slightly smaller balance sheet primarily by paying off high rate borrowings that matured during the year, thus reducing our cost of funds. lower mortgage loan originations led to a decrease of $500,000 in net gain on sale of loans. we did see a corresponding decrease of $529,000 in the amortization of mortgage servicing rights. our asset quality remains strong as non-performing loans remained relatively low. non-performing assets did increase slightly, to 1.70% of assets, compared to 1.24% at the end of last year, but remain well below peer averages, as reported by Snl Financial. throughout the year we have continued to add to our allowance for loan losses, with our provisions for loan losses increasing $153,000 in fiscal year 2012. thankfully, Montana’s economy is again projected by the Bureau of Business and economic research at the university of Montana to have higher growth over the next few years and as a result our local markets should see increased income growth during the coming year. 2012 mid-year statistics from the Montana association of realtors covering the eight largest markets in the state showed an increase in homes sold of 7.2% over the same period in 2011. total assets decreased by 1.1% while our loan portfolio shrank 6.3%, primarily in residential mortgage and home equity loans. the commercial real estate loan portfolio held constant while commercial loans increased by $4.8 million. capital is a major component of the strength of a financial institution like ours and I am pleased to note that our tier one capital ratio remains very strong at 17.43%. as noted earlier we now have a great opportunity as a result of the Sterling branch transaction to deploy some of this excess capital in a transaction that we believe will produce good returns for our shareholders over the next several years and which we will be able to realize in a single, efficient transaction as opposed to multiple transactions over several years. the coming year will see exciting changes for the company. our company’s dedicated staff is spending significant time and effort ensuring a successful integration of the new Sterling locations into american Federal’s branch network. we pledge the same level of commitment to those communities as we have always done in our current markets. we SIncerelY apprecIate tHe contInuIng truSt anD loYaltY oF our conStItuencIeS— StockHolDerS, cuStoMerS, eMploYeeS anD coMMunItIeS. we will work to earn your continued confidence and we thank you for the privilege of serving you! very Sincerely, peter J. Johnson, president/ceo eagle Bancorp Montana, Inc. and its subsidiary, american Federal Savings Bank, look forward to the acquisition of SterlIng FInancIal corporatIon’S Montana BrancHeS. this transaction will double american Federal’s branch network and increase our footprint across southern Montana. we will be making our entrance into five new markets: Missoula, Hamilton, livingston, Big timber and Billings, Montana. Billings and Missoula hold the top two rankings for largest cities in Montana. eagle Bancorp Montana, Inc. and its subsidiary, american Federal Savings Bank, look forward to the acquisition of SterlIng FInancIal corporatIon’S Montana BrancHeS. this transaction will double american Federal’s branch network and increase our footprint across southern Montana. we will be making our entrance into five new markets: Missoula, Hamilton, livingston, Big timber and Billings, Montana. Billings and Missoula hold the top two rankings for largest cities in Montana. Billings is located in the south-central portion of the state and continues to experience rapid growth and a strong economy. Billings has avoided the economic downturn, as well as avoided the housing bust. with the Bakken oil play in eastern Montana and western north Dakota, the largest oil discovery in u.S. history, as well as the Heath shale oil play just north of Billings, the city's already rapid growth rate is escalating. Billings is located in the south-central portion of the state and continues to experience rapid growth and a strong economy. Billings has avoided the economic downturn, as well as avoided the housing bust. with the Bakken oil play in eastern Montana and western north Dakota, the largest oil discovery in u.S. history, as well as the Heath shale oil play just north of Billings, the city's already rapid growth rate is escalating. Missoula is the county seat of Missoula county. It is located along the clark Fork and Bitterroot rivers in western Montana and at the convergence of five mountain ranges. today, the city’s largest employers are the university of Montana and Missoula’s two hospitals. the city is also home to the Montana grizzlies, one of the strongest college football programs in the Division I Football championship Subdivision of the national collegiate athletic association (ncaa). Missoula is the county seat of Missoula county. It is located along the clark Fork and Bitterroot rivers in western Montana and at the convergence of five mountain ranges. today, the city’s largest employers are the university of Montana and Missoula’s two hospitals. the city is also home to the Montana grizzlies, one of the strongest college football programs in the Division I Football championship Subdivision of the national collegiate athletic association (ncaa). Source: www.wikipedia.org Source: www.wikipedia.org photo: YellowStone rIver, ©John lambing, 2012 eagle Bancorp Mt, Inc 4 photo: YellowStone rIver, ©John lambing, 2012 eagle Bancorp Mt, Inc 4 DIrectorS eXecutIve oFFIcerS DIrectorS eXecutIve oFFIcerS lYnn e. DIckeY retired larrY a. DreYer chairman of the Board rIck F. HaYS retired peter J. JoHnSon president /chief executive officer eagle Bancorp Montana, Inc. JaMeS a. MaIerle chairman of the Board of Morrison-Maierle, Inc. peter J. JoHnSon president /chief executive officer eagle Bancorp Montana, Inc. roBert M. evanS Senior vice president /chief Information officer / Bank Security officer clInt J. MorrISon Senior vice president /chief Financial officer MIcHael c. MunDt Senior vice president /chief lending officer racHel r. aMDaHl Senior vice president /operations tHoMaS J. Mccarvel vice president of carroll college corporate SecretarY Maureen J. ruDe operations Director of the Montana Homeownership network / neighbor works Montana 5 eagle Bancorp Mt, Inc cHarleS H. Berger Stock lIStIng Symbol: eBMt naSDaQ global lYnn e. DIckeY retired peter J. JoHnSon president /chief executive officer eagle Bancorp Montana, Inc. larrY a. DreYer chairman of the Board SHareHolDer InForMatIon roBert M. evanS Senior vice president /chief Information officer / Bank Security officer rIck F. HaYS retired SHareHolDer ServIceS agent registrar and transfer company 10 commerce Drive cranford, nJ 07106-3572 800.368.5948 www.rtco.com peter J. JoHnSon president /chief executive officer eagle Bancorp Montana, Inc. JaMeS a. MaIerle chairman of the Board of Morrison-Maierle, Inc. tHoMaS J. Mccarvel vice president of carroll college InveStor InForMatIon copies of reports filed with the Securities and exchange commission are available without charge through the Internet at www.sec.gov or the Investor relations section of our website at www.americanfederalsavingsbank.com 5 eagle Bancorp Mt, Inc Maureen J. ruDe operations Director of the Montana Homeownership network / neighbor works Montana clInt J. MorrISon Senior vice president /chief Financial officer MIcHael c. MunDt Senior vice president /chief lending officer racHel r. aMDaHl Senior vice president /operations corporate SecretarY cHarleS H. Berger SHareHolDer InForMatIon Stock lIStIng Symbol: eBMt naSDaQ global SHareHolDer ServIceS agent registrar and transfer company 10 commerce Drive cranford, nJ 07106-3572 800.368.5948 www.rtco.com InveStor InForMatIon copies of reports filed with the Securities and exchange commission are available without charge through the Internet at www.sec.gov or the Investor relations section of our website at www.americanfederalsavingsbank.com Form 10–K Form 10–K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2012 or For the fiscal year ended June 30, 2012 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF For the transition period from to For the transition period from to Commission file number 1-34682 Commission file number 1-34682 Eagle Bancorp Montana, Inc. (Exact name of registrant as specified in its charter) Eagle Bancorp Montana, Inc. (Exact name of registrant as specified in its charter) [ This Page Intentionally Left Blank ] Delaware State or other jurisdiction of incorporation or organization [ This Page Intentionally Left Blank ] 27-1449820 (I.R.S. Employer Identification No.) Delaware State or other jurisdiction of incorporation or organization 27-1449820 (I.R.S. Employer Identification No.) 1400 Prospect Avenue, Helena, MT (Address of principal executive offices) 59601 (Zip Code) 1400 Prospect Avenue, Helena, MT (Address of principal executive offices) 59601 (Zip Code) Registrant’s telephone number, including area code 406-442-3080 Registrant’s telephone number, including area code 406-442-3080 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Title of each class Name of each exchange on which registered Common stock, par value $0.01 The NASDAQ Stock Market LLC Common stock, par value $0.01 The NASDAQ Stock Market LLC Securities registered pursuant to section 12(g) of the Act: Securities registered pursuant to section 12(g) of the Act: (Title of Class) (Title of Class) (Title of Class) (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Yes No Yes No UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2012 or For the fiscal year ended June 30, 2012 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to For the transition period from to Commission file number 1-34682 Commission file number 1-34682 Eagle Bancorp Montana, Inc. (Exact name of registrant as specified in its charter) Eagle Bancorp Montana, Inc. (Exact name of registrant as specified in its charter) Delaware State or other jurisdiction of incorporation or organization 1400 Prospect Avenue, Helena, MT (Address of principal executive offices) 27-1449820 (I.R.S. Employer Identification No.) Delaware State or other jurisdiction of incorporation or organization 27-1449820 (I.R.S. Employer Identification No.) 59601 (Zip Code) 1400 Prospect Avenue, Helena, MT (Address of principal executive offices) 59601 (Zip Code) Registrant’s telephone number, including area code 406-442-3080 Registrant’s telephone number, including area code 406-442-3080 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Title of each class Name of each exchange on which registered Common stock, par value $0.01 The NASDAQ Stock Market LLC Common stock, par value $0.01 The NASDAQ Stock Market LLC Securities registered pursuant to section 12(g) of the Act: Securities registered pursuant to section 12(g) of the Act: (Title of Class) (Title of Class) (Title of Class) (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the common stock held by non-affiliates of Eagle, computed by reference to the closing price at which the stock was sold as of December 31, 2011 was $31,126,000. The outstanding number of shares of common stock of Eagle as of August 1, 2012, was 3,878,971. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end is incorporated by reference into Part III of this Form 10-K. 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. TABLE OF CONTENTS Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ITEM 1. ITEM 1A. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not ITEM 1B. contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements ITEM 2. incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ITEM 3. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller ITEM 4. reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. PART I DESCRIPTION OF BUSINESS. ...................................................................................................... 2 RISK FACTORS. ........................................................................................................................... 28 UNRESOLVED STAFF COMMENTS. ......................................................................................... 31 PROPERTIES. ................................................................................................................................ 31 LEGAL PROCEEDINGS. .............................................................................................................. 32 (REMOVED AND RESERVED). .................................................................................................. 32 PART II Yes No Page Accelerated filer Large accelerated filer ITEM 5. Smaller reporting company MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ....................................... 33 SELECTED FINANCIAL DATA. ................................................................................................. 34 Non-accelerated filer (Do not check if a smaller reporting company) ITEM 6. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ...................................................................................................... 34 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .............. 42 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................... 42 The aggregate market value of the common stock held by non-affiliates of Eagle, computed by reference to the closing price ITEM 7A. at which the stock was sold as of December 31, 2011 was $31,126,000. The outstanding number of shares of common stock of Eagle as of August 1, 2012, was 3,878,971. ITEM 8. ITEM 9. Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 ITEM 9A(T). days after the Company’s fiscal year end is incorporated by reference into Part III of this Form 10-K. ITEM 9B. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DOCUMENTS INCORPORATED BY REFERENCE AND FINANCIAL DISCLOSURE. ............................................................................................... 42 CONTROLS AND PROCEDURES. .............................................................................................. 42 OTHER INFORMATION. ............................................................................................................. 43 PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ....................... 44 EXECUTIVE COMPENSATION. ................................................................................................. 44 Yes No SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ......................................................................................................................... 45 PRINCIPAL ACCOUNTING FEES AND SERVICES. ................................................................ 45 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ............................................................. 45 ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. ITEM 15. TABLE OF CONTENTS Page DESCRIPTION OF BUSINESS. ...................................................................................................... 2 RISK FACTORS. ........................................................................................................................... 28 UNRESOLVED STAFF COMMENTS. ......................................................................................... 31 PROPERTIES. ................................................................................................................................ 31 LEGAL PROCEEDINGS. .............................................................................................................. 32 (REMOVED AND RESERVED). .................................................................................................. 32 PART I PART II MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ....................................... 33 SELECTED FINANCIAL DATA. ................................................................................................. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ...................................................................................................... 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .............. 42 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................... 42 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ............................................................................................... 42 ITEM 9A(T). CONTROLS AND PROCEDURES. .............................................................................................. 42 ITEM 9B. OTHER INFORMATION. ............................................................................................................. 43 PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ....................... 44 EXECUTIVE COMPENSATION. ................................................................................................. 44 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ......................................................................................................................... 45 PRINCIPAL ACCOUNTING FEES AND SERVICES. ................................................................ 45 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ............................................................. 45 ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. ITEM 5. ITEM 6. ITEM 7. ITEM 8. ITEM 9. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. ITEM 15. 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 No Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the common stock held by non-affiliates of Eagle, computed by reference to the closing price at which the stock was sold as of December 31, 2011 was $31,126,000. The outstanding number of shares of common stock of Eagle as of August 1, 2012, was 3,878,971. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end is incorporated by reference into Part III of this Form 10-K. 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. TABLE OF CONTENTS Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ITEM 1. ITEM 1A. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not ITEM 1B. contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements ITEM 2. incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ITEM 3. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller ITEM 4. reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. PART I DESCRIPTION OF BUSINESS. ...................................................................................................... 2 RISK FACTORS. ........................................................................................................................... 28 UNRESOLVED STAFF COMMENTS. ......................................................................................... 31 PROPERTIES. ................................................................................................................................ 31 LEGAL PROCEEDINGS. .............................................................................................................. 32 (REMOVED AND RESERVED). .................................................................................................. 32 PART II Yes No Page Accelerated filer Large accelerated filer ITEM 5. Smaller reporting company MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ....................................... 33 SELECTED FINANCIAL DATA. ................................................................................................. 34 Non-accelerated filer (Do not check if a smaller reporting company) ITEM 6. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ...................................................................................................... 34 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .............. 42 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................... 42 The aggregate market value of the common stock held by non-affiliates of Eagle, computed by reference to the closing price ITEM 7A. at which the stock was sold as of December 31, 2011 was $31,126,000. The outstanding number of shares of common stock of Eagle as of August 1, 2012, was 3,878,971. ITEM 8. ITEM 9. Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 ITEM 9A(T). days after the Company’s fiscal year end is incorporated by reference into Part III of this Form 10-K. ITEM 9B. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DOCUMENTS INCORPORATED BY REFERENCE AND FINANCIAL DISCLOSURE. ............................................................................................... 42 CONTROLS AND PROCEDURES. .............................................................................................. 42 OTHER INFORMATION. ............................................................................................................. 43 PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ....................... 44 EXECUTIVE COMPENSATION. ................................................................................................. 44 Yes No SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ......................................................................................................................... 45 PRINCIPAL ACCOUNTING FEES AND SERVICES. ................................................................ 45 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ............................................................. 45 ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. ITEM 15. TABLE OF CONTENTS Page PART I DESCRIPTION OF BUSINESS. ...................................................................................................... 2 RISK FACTORS. ........................................................................................................................... 28 UNRESOLVED STAFF COMMENTS. ......................................................................................... 31 PROPERTIES. ................................................................................................................................ 31 LEGAL PROCEEDINGS. .............................................................................................................. 32 (REMOVED AND RESERVED). .................................................................................................. 32 PART II MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ....................................... 33 SELECTED FINANCIAL DATA. ................................................................................................. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ...................................................................................................... 34 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .............. 42 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................... 42 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ............................................................................................... 42 CONTROLS AND PROCEDURES. .............................................................................................. 42 OTHER INFORMATION. ............................................................................................................. 43 PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ....................... 44 EXECUTIVE COMPENSATION. ................................................................................................. 44 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ......................................................................................................................... 45 PRINCIPAL ACCOUNTING FEES AND SERVICES. ................................................................ 45 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ............................................................. 45 ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A(T). ITEM 9B. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. ITEM 15. CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS PART I PART I This Annual Report on Form 10-K 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: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) 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; 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; changes in our organization, compensation and benefit plans; 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 a recurring recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities; the impact of the current 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; General ITEM 1. DESCRIPTION OF BUSINESS. This Annual Report on Form 10-K 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: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. Eagle Bancorp Montana, Inc. (“Eagle” or “the Company”), is a Delaware corporation that holds 100% of the capital stock of American Federal Savings Bank (“American Federal” or “the Bank”), a federally chartered stock savings bank headquartered in Helena, Montana. Eagle’s principal business is to hold the capital stock of American Federal. On April 5, 2010, Eagle completed a second-step conversion from a partially-public mutual holding company structure to a fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, the Company became the stock holding company for American Federal Savings Bank, and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, each share of Eagle Bancorp common stock owned by the public was exchanged for 3.800 shares of the Company’s common stock owned immediately prior to completion of the transaction. 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; American Federal was founded in 1922 as a Montana chartered building and loan association and has conducted operations in Helena since that time. In 1975, the Bank adopted a federal thrift charter. The Bank currently has six full service offices. We also have seven automated teller machines located in our market area and we participate in the CashCard® and Money Pass® ATM networks. The Bank’s website can be found at www.americanfederalsavingsbank.com. The contents on or accessible through, our website are not incorporated into this filing. general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; Business Strategy changes in the prices, values and sales volume of residential and commercial real estate in Montana; Business Strategy inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; Our strategy is to continue profitable operations through building a diversified loan portfolio and positioning the Bank as a full-service community bank that offers both retail and commercial loan and deposit products in all of its markets. We believe that this focus will enable us to continue to grow our franchise, while maintaining our commitment to customer service, high asset quality, and sustained net earnings. The following are the key elements of our business strategy: our ability to enter new markets successfully and capitalize on growth opportunities; adverse changes or volatility in the securities markets; our ability to successfully integrate acquired businesses; Continue to diversify our portfolio through growth in commercial real estate and commercial business loans as a complement to our traditional single family residential real estate lending. Such loans now constitute about 45.6% of total loans; changes in consumer spending, borrowing and savings habits; changes in our organization, compensation and benefit plans; Continue to emphasize the attraction and retention of lower cost long-term core deposits; our ability to continue to increase and manage our commercial and residential real estate, multi-family, and commercial business loans; Seek opportunities where presented to acquire other institutions or expand our branch structure; possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises; Maintain our high asset quality levels; and the level of future deposit premium assessments; Operate as a community-oriented independent financial institution that offers a broad array of financial services with high levels of customer service. the impact of a recurring recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities; Our results of operations may be significantly affected by our ability to effectively implement our business strategy including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage acquired or merged businesses or attract significant new business through our branching efforts, our financial performance may be negatively affected. the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates; the impact of the current restructuring of the U.S. financial and regulatory system; changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and Montana in the Economic Downturn 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 other reports that we file with the SEC. Market Area 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. From our headquarters in Helena, Montana, we operate six full service retail banking offices, including our main office. Our other full service branches are located in Helena – Neill (opened 1987), Helena – Skyway (opened 2009), Bozeman (opened 1980, relocated 2009), Butte (opened 1979) and Townsend (opened 1979), Montana. The original Bozeman branch opened in 1980 was closed August 1, 2010 due to reduced use by customers as a result of the new location opened in October 2009 approximately one mile away. 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 other reports that we file with the SEC. 1 2 1 2 ITEM 1. DESCRIPTION OF BUSINESS. General Eagle Bancorp Montana, Inc. (“Eagle” or “the Company”), is a Delaware corporation that holds 100% of the capital stock of American Federal Savings Bank (“American Federal” or “the Bank”), a federally chartered stock savings bank headquartered in Helena, Montana. Eagle’s principal business is to hold the capital stock of American Federal. On April 5, 2010, Eagle completed a second-step conversion from a partially-public mutual holding company structure to a fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, the Company became the stock holding company for American Federal Savings Bank, and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, each share of Eagle Bancorp common stock owned by the public was exchanged for 3.800 shares of the Company’s common stock owned immediately prior to completion of the transaction. American Federal was founded in 1922 as a Montana chartered building and loan association and has conducted operations in Helena since that time. In 1975, the Bank adopted a federal thrift charter. The Bank currently has six full service offices. We also have seven automated teller machines located in our market area and we participate in the CashCard® and Money Pass® ATM networks. The Bank’s website can be found at www.americanfederalsavingsbank.com. The contents on or accessible through, our website are not incorporated into this filing. Our strategy is to continue profitable operations through building a diversified loan portfolio and positioning the Bank as a full-service community bank that offers both retail and commercial loan and deposit products in all of its markets. We believe that this focus will enable us to continue to grow our franchise, while maintaining our commitment to customer service, high asset quality, and sustained net earnings. The following are the key elements of our business strategy: Continue to diversify our portfolio through growth in commercial real estate and commercial business loans as a complement to our traditional single family residential real estate lending. Such loans now constitute about 45.6% of total loans; Continue to emphasize the attraction and retention of lower cost long-term core deposits; Seek opportunities where presented to acquire other institutions or expand our branch structure; Maintain our high asset quality levels; and Operate as a community-oriented independent financial institution that offers a broad array of financial services with high levels of customer service. Our results of operations may be significantly affected by our ability to effectively implement our business strategy including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage acquired or merged businesses or attract significant new business through our branching efforts, our financial performance may be negatively affected. Montana in the Economic Downturn Market Area From our headquarters in Helena, Montana, we operate six full service retail banking offices, including our main office. Our other full service branches are located in Helena – Neill (opened 1987), Helena – Skyway (opened 2009), Bozeman (opened 1980, relocated 2009), Butte (opened 1979) and Townsend (opened 1979), Montana. The original Bozeman branch opened in 1980 was closed August 1, 2010 due to reduced use by customers as a result of the new location opened in October 2009 approximately one mile away. CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS PART I PART I General ITEM 1. DESCRIPTION OF BUSINESS. This Annual Report on Form 10-K 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: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. Eagle Bancorp Montana, Inc. (“Eagle” or “the Company”), is a Delaware corporation that holds 100% of the capital stock of American Federal Savings Bank (“American Federal” or “the Bank”), a federally chartered stock savings bank headquartered in Helena, Montana. Eagle’s principal business is to hold the capital stock of American Federal. On April 5, 2010, Eagle completed a second-step conversion from a partially-public mutual holding company structure to a fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, the Company became the stock holding company for American Federal Savings Bank, and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, each share of Eagle Bancorp common stock owned by the public was exchanged for 3.800 shares of the Company’s common stock owned immediately prior to completion of the transaction. 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; American Federal was founded in 1922 as a Montana chartered building and loan association and has conducted operations in Helena since that time. In 1975, the Bank adopted a federal thrift charter. The Bank currently has six full service offices. We also have seven automated teller machines located in our market area and we participate in the CashCard® and Money Pass® ATM networks. The Bank’s website can be found at www.americanfederalsavingsbank.com. The contents on or accessible through, our website are not incorporated into this filing. general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; ITEM 1. DESCRIPTION OF BUSINESS. General Eagle Bancorp Montana, Inc. (“Eagle” or “the Company”), is a Delaware corporation that holds 100% of the capital stock of American Federal Savings Bank (“American Federal” or “the Bank”), a federally chartered stock savings bank headquartered in Helena, Montana. Eagle’s principal business is to hold the capital stock of American Federal. On April 5, 2010, Eagle completed a second-step conversion from a partially-public mutual holding company structure to a fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, the Company became the stock holding company for American Federal Savings Bank, and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, each share of Eagle Bancorp common stock owned by the public was exchanged for 3.800 shares of the Company’s common stock owned immediately prior to completion of the transaction. American Federal was founded in 1922 as a Montana chartered building and loan association and has conducted operations in Helena since that time. In 1975, the Bank adopted a federal thrift charter. The Bank currently has six full service offices. We also have seven automated teller machines located in our market area and we participate in the CashCard® and Money Pass® ATM networks. The Bank’s website can be found at www.americanfederalsavingsbank.com. The contents on or accessible through, our website are not incorporated into this filing. Business Strategy changes in the prices, values and sales volume of residential and commercial real estate in Montana; Business Strategy inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; Our strategy is to continue profitable operations through building a diversified loan portfolio and positioning the Bank as a full-service community bank that offers both retail and commercial loan and deposit products in all of its markets. We believe that this focus will enable us to continue to grow our franchise, while maintaining our commitment to customer service, high asset quality, and sustained net earnings. The following are the key elements of our business strategy: our ability to enter new markets successfully and capitalize on growth opportunities; adverse changes or volatility in the securities markets; our ability to successfully integrate acquired businesses; Continue to diversify our portfolio through growth in commercial real estate and commercial business loans as a complement to our traditional single family residential real estate lending. Such loans now constitute about 45.6% of total loans; changes in consumer spending, borrowing and savings habits; changes in our organization, compensation and benefit plans; Continue to emphasize the attraction and retention of lower cost long-term core deposits; our ability to continue to increase and manage our commercial and residential real estate, multi-family, and commercial business loans; Seek opportunities where presented to acquire other institutions or expand our branch structure; possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises; Maintain our high asset quality levels; and the level of future deposit premium assessments; Operate as a community-oriented independent financial institution that offers a broad array of financial services with high levels of customer service. the impact of a recurring recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities; Our results of operations may be significantly affected by our ability to effectively implement our business strategy including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage acquired or merged businesses or attract significant new business through our branching efforts, our financial performance may be negatively affected. the failure of assumptions underlying the establishment of allowance for possible loan losses and other estimates; the impact of the current restructuring of the U.S. financial and regulatory system; changes in the financial performance and/or condition of our borrowers and their ability to repay their Montana in the Economic Downturn changes in the financial performance and/or condition of our borrowers and their ability to repay their loans when due; and Market Area 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. From our headquarters in Helena, Montana, we operate six full service retail banking offices, including our main office. Our other full service branches are located in Helena – Neill (opened 1987), Helena – Skyway (opened 2009), Bozeman (opened 1980, relocated 2009), Butte (opened 1979) and Townsend (opened 1979), Montana. The original Bozeman branch opened in 1980 was closed August 1, 2010 due to reduced use by customers as a result of the new location opened in October 2009 approximately one mile away. 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 other reports that we file with the SEC. Our strategy is to continue profitable operations through building a diversified loan portfolio and positioning the Bank as a full-service community bank that offers both retail and commercial loan and deposit products in all of its markets. We believe that this focus will enable us to continue to grow our franchise, while maintaining our commitment to customer service, high asset quality, and sustained net earnings. The following are the key elements of our business strategy: Continue to diversify our portfolio through growth in commercial real estate and commercial business loans as a complement to our traditional single family residential real estate lending. Such loans now constitute about 45.6% of total loans; Continue to emphasize the attraction and retention of lower cost long-term core deposits; Seek opportunities where presented to acquire other institutions or expand our branch structure; Maintain our high asset quality levels; and Operate as a community-oriented independent financial institution that offers a broad array of financial services with high levels of customer service. Our results of operations may be significantly affected by our ability to effectively implement our business strategy including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage acquired or merged businesses or attract significant new business through our branching efforts, our financial performance may be negatively affected. Montana in the Economic Downturn Market Area From our headquarters in Helena, Montana, we operate six full service retail banking offices, including our main office. Our other full service branches are located in Helena – Neill (opened 1987), Helena – Skyway (opened 2009), Bozeman (opened 1980, relocated 2009), Butte (opened 1979) and Townsend (opened 1979), Montana. The original Bozeman branch opened in 1980 was closed August 1, 2010 due to reduced use by customers as a result of the new location opened in October 2009 approximately one mile away. 1 2 1 2 This Annual Report on Form 10-K 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: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) 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; 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; changes in our organization, compensation and benefit plans; 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 a recurring recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities; the impact of the current 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; 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 other reports that we file with the SEC. Montana is one of the largest states in terms of land mass but ranks as one of the least populated states. According to U.S. Census Bureau data for 2010, it had a population of 989,415. Helena, where we are headquartered, is Montana’s state capital. It is also the county seat of Lewis and Clark County, which has a population of approximately 63,395 and is located within 120 miles of four of Montana’s other five largest cities: Missoula, Great Falls, Bozeman and Butte. It is approximately midway between Yellowstone and Glacier National Parks. Its economy has shown moderate growth, in terms of both employment and income. State government and the numerous offices of the federal government comprise the largest employment sector. Helena also has significant employment in the service industries. Specifically, it has evolved into a central health care center with employment in the medical and the supporting professions as well as the medical insurance industry. The local economy is also dependent to a lesser extent upon ranching and agriculture. These have been more cyclical in nature and remain vulnerable to severe weather conditions, increased competition, both domestic and international, as well as commodity prices. Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin County, which has a population of approximately 89,513. Bozeman is home to Montana State University and experienced fairly significant growth from 1990 to 2007, in part due to the growth of the University as well as the increased tourism for resort areas in and near Bozeman. Agriculture, however, remains an important part of Bozeman’s economy. Bozeman has also become an attractive location for retirees, primarily from the West Coast, owing to its many winter and summer recreational opportunities and the presence of the University. Of the four communities that we serve, Bozeman has experienced the largest impact of the national and global economic downturn. Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a population of approximately 34,200. Butte’s economy is somewhat reliant on the mining industry. Butte’s economy has been volatile from the fluctuations in metal and mineral commodity prices. Townsend is the smallest community in which we operate. It has a population of about 1,878. Townsend is located in Broadwater County which has a population of approximately 5,612. Many of its residents commute to other Montana locations for work. Other employment in Townsend is primarily in agriculture and services. Townsend is approximately 32 miles southeast of Helena. On July 2, 2012, we announced the execution of a definitive agreement with Sterling Savings Bank of Spokane, Washington, to acquire certain liabilities and assets of Sterling’s seven branch operations in Montana. This transaction is subject to approval of federal bank regulators and is expected to close in late 2012. Competition We face strong competition in our primary market area for the attraction of retail deposits and the origination of loans. Historically, Montana was a unit banking state. This means that the ability of Montana state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of independent financial institutions serving a single community in a single location. While the state’s population is approximately 989,000 people, there are 57 credit unions in Montana as well as two federally chartered thrift institutions, and 74 commercial banks as of June 30, 2012. Our most direct competition for depositors has historically come from locally owned and out-of-state commercial banks, thrift institutions and credit unions operating in our primary market area. The number of such competitor locations has increased significantly in recent years. Our competition for loans also comes from banks, thrifts and credit unions in addition to mortgage bankers and brokers. Our principal market areas can be characterized as markets with moderately increasing incomes, relatively low unemployment, increasing wealth (particularly in the growing resort areas such as Bozeman), and moderate population growth. Lending Activities General. American Federal Savings Bank primarily originates one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, real estate construction loans, home equity loans, consumer loans and commercial business loans. Commercial real estate loans include loans on multi-family dwellings, loans on nonresidential property and loans on developed and undeveloped land. Home equity loans include loans secured by the borrower’s primary residence. Typically, the property securing such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial business loans consist of business loans and lines of credit on a secured and unsecured basis. 2012 At June 30, Loan Portfolio Composition. The following table analyzes the composition of the Bank’s loan portfolio by loan category at the dates indicated: Montana is one of the largest states in terms of land mass but ranks as one of the least populated states. According to U.S. Census Bureau data for 2010, it had a population of 989,415. Helena, where we are headquartered, is Montana’s state capital. It is also the county seat of Lewis and Clark County, which has a population of approximately 63,395 and is located within 120 miles of four of Montana’s other five largest cities: Missoula, Great Falls, Bozeman and Butte. It is approximately midway between Yellowstone and Glacier National Parks. Its economy has shown moderate growth, in terms of both employment and income. State government and the numerous offices of the federal government comprise the largest employment sector. Helena also has significant employment in the service industries. Specifically, it has evolved into a central health care center with employment in the medical and the supporting professions as well as the Amount medical insurance industry. The local economy is also dependent to a lesser extent upon ranching and agriculture. These have been more cyclical in nature and remain vulnerable to severe weather conditions, increased competition, both domestic and international, as well as commodity prices. Real estate loans: Residential mortgage (one- to four-family) (1) Commercial real estate Real estate construction Total real estate loans 61,671 64,672 Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin County, which has a population of approximately 89,513. Bozeman is home to Montana State University and experienced fairly significant growth from 1990 1,455 to 2007, in part due to the growth of the University as well as the increased tourism for resort areas in and near Bozeman. 127,798 Agriculture, however, remains an important part of Bozeman’s economy. Bozeman has also become an attractive location for retirees, primarily from the West Coast, owing to its many winter and summer recreational opportunities and the presence of the University. Of the four communities that we serve, Bozeman has experienced the largest impact of the national and global economic downturn. 35.11% $ 36.82% 0.83% 72.76% 70,003 64,701 5,020 139,724 37.34% 34.52% 2.68% 74.54% Percent of Total Percent of Total (Dollars in thousands) Amount 2011 $ Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a population of approximately 34,200. Butte’s economy is somewhat reliant on the mining industry. Butte’s economy has been volatile from the fluctuations in metal and mineral commodity prices. 13.50% 5.00% 8.74% 27.24% 27,816 9,343 10,564 47,723 14.84% 4.98% 5.64% 25.46% Other loans: Home equity Consumer Commercial Total other loans Total loans Townsend is the smallest community in which we operate. It has a population of about 1,878. Townsend is located in 175,628 Broadwater County which has a population of approximately 5,612. Many of its residents commute to other Montana locations for work. Other employment in Townsend is primarily in agriculture and services. Townsend is approximately 32 miles southeast of Helena. 100.00% 100.00% 187,447 On July 2, 2012, we announced the execution of a definitive agreement with Sterling Savings Bank of Spokane, Washington, to acquire certain liabilities and assets of Sterling’s seven branch operations in Montana. This transaction is subject to approval of federal bank regulators and is expected to close in late 2012. 176 1,800 Less: Deferred loan fees (expenses) Allowance for loan losses 23,709 8,778 15,343 47,830 164 1,625 Total loans, net Competition $ 173,839 $ 185,471 Total loans, net $ 173,839 $ 185,471 (1) Excludes loans held for sale. Fee Income. American Federal Savings Bank receives lending related fee income from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from mortgage loan servicing, which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing for loans held by others, were $891,000 and $830,000 for the years ended June 30, 2012 and 2011, respectively. Other loan related fee income for contract collections, late charges, credit life commissions and credit card fees were $86,000 and $78,000 for the years ended June 30, 2012 and 2011, respectively. We face strong competition in our primary market area for the attraction of retail deposits and the origination of loans. Historically, Montana was a unit banking state. This means that the ability of Montana state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of independent financial institutions serving a single community in a single location. While the state’s population is approximately 989,000 people, there are 57 credit unions in Montana as well as two federally chartered thrift institutions, and 74 commercial banks as of June 30, 2012. Our most direct competition for depositors has historically come from locally owned and out-of-state commercial banks, thrift institutions and credit unions operating in our primary market area. The number of such competitor locations has increased significantly in recent years. Our competition for loans also comes from banks, thrifts and credit unions in addition to mortgage bankers and brokers. Our principal market areas can be characterized as markets with moderately increasing incomes, relatively low unemployment, increasing wealth (particularly in the growing resort areas such as Bozeman), and moderate population growth. Loan Maturity Schedule. The following table sets forth the estimated maturity of the loan portfolio of the Bank at June 30, 2012. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give American Federal Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted. General. American Federal Savings Bank primarily originates one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, real estate construction loans, home equity loans, consumer loans and commercial business loans. Commercial real estate loans include loans on multi-family dwellings, loans on nonresidential property and loans on developed and undeveloped land. Home equity loans include loans secured by the borrower’s primary residence. Typically, the property securing such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial business loans consist of business loans and lines of credit on a secured and unsecured basis. Lending Activities Loan Portfolio Composition. The following table analyzes the composition of the Bank’s loan portfolio by loan category at the dates indicated: At June 30, 2012 2011 (Dollars in thousands) Amount Amount Percent of Total Percent of Total 35.11% $ 36.82% 0.83% 72.76% 70,003 64,701 5,020 139,724 13.50% 5.00% 8.74% 27.24% 27,816 9,343 10,564 47,723 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% 175,628 100.00% 187,447 100.00% 176 1,800 61,671 64,672 1,455 127,798 23,709 8,778 15,343 47,830 164 1,625 Residential mortgage (one- to four-family) (1) $ Real estate loans: Commercial real estate Real estate construction Total real estate loans Other loans: Home equity Consumer Commercial Total other loans Total loans Less: Deferred loan fees (expenses) Allowance for loan losses (1) Excludes loans held for sale. Fee Income. American Federal Savings Bank receives lending related fee income from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from mortgage loan servicing, which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing for loans held by others, were $891,000 and $830,000 for the years ended June 30, 2012 and 2011, respectively. Other loan related fee income for contract collections, late charges, credit life commissions and credit card fees were $86,000 and $78,000 for the years ended June 30, 2012 and 2011, respectively. Loan Maturity Schedule. The following table sets forth the estimated maturity of the loan portfolio of the Bank at June 30, 2012. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give American Federal Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted. 3 4 3 4 Montana is one of the largest states in terms of land mass but ranks as one of the least populated states. According to U.S. Census Bureau data for 2010, it had a population of 989,415. Helena, where we are headquartered, is Montana’s state capital. It is also the county seat of Lewis and Clark County, which has a population of approximately 63,395 and is located within 120 miles of four of Montana’s other five largest cities: Missoula, Great Falls, Bozeman and Butte. It is approximately midway between Yellowstone and Glacier National Parks. Its economy has shown moderate growth, in terms of both employment and income. State government and the numerous offices of the federal government comprise the largest employment sector. Helena also has significant employment in the service industries. Specifically, it has evolved into a central health care center with employment in the medical and the supporting professions as well as the medical insurance industry. The local economy is also dependent to a lesser extent upon ranching and agriculture. These have been more cyclical in nature and remain vulnerable to severe weather conditions, increased competition, both domestic and international, as well as commodity prices. Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin County, which has a population of approximately 89,513. Bozeman is home to Montana State University and experienced fairly significant growth from 1990 to 2007, in part due to the growth of the University as well as the increased tourism for resort areas in and near Bozeman. Agriculture, however, remains an important part of Bozeman’s economy. Bozeman has also become an attractive location for retirees, primarily from the West Coast, owing to its many winter and summer recreational opportunities and the presence of the University. Of the four communities that we serve, Bozeman has experienced the largest impact of the national and global economic downturn. Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a population of approximately 34,200. Butte’s economy is somewhat reliant on the mining industry. Butte’s economy has been volatile from the fluctuations in metal and mineral commodity prices. Townsend is the smallest community in which we operate. It has a population of about 1,878. Townsend is located in Broadwater County which has a population of approximately 5,612. Many of its residents commute to other Montana locations for work. Other employment in Townsend is primarily in agriculture and services. Townsend is approximately 32 miles southeast of Helena. On July 2, 2012, we announced the execution of a definitive agreement with Sterling Savings Bank of Spokane, Washington, to acquire certain liabilities and assets of Sterling’s seven branch operations in Montana. This transaction is subject to approval of federal bank regulators and is expected to close in late 2012. Competition We face strong competition in our primary market area for the attraction of retail deposits and the origination of loans. Historically, Montana was a unit banking state. This means that the ability of Montana state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of independent financial institutions serving a single community in a single location. While the state’s population is approximately 989,000 people, there are 57 credit unions in Montana as well as two federally chartered thrift institutions, and 74 commercial banks as of June 30, 2012. Our most direct competition for depositors has historically come from locally owned and out-of-state commercial banks, thrift institutions and credit unions operating in our primary market area. The number of such competitor locations has increased significantly in recent years. Our competition for loans also comes from banks, thrifts and credit unions in addition to mortgage bankers and brokers. Our principal market areas can be characterized as markets with moderately increasing incomes, relatively low unemployment, increasing wealth (particularly in the growing resort areas such as Bozeman), and moderate population growth. Lending Activities General. American Federal Savings Bank primarily originates one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, real estate construction loans, home equity loans, consumer loans and commercial business loans. Commercial real estate loans include loans on multi-family dwellings, loans on nonresidential property and loans on developed and undeveloped land. Home equity loans include loans secured by the borrower’s primary residence. Typically, the property securing such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial business loans consist of business loans and lines of credit on a secured and unsecured basis. 2012 At June 30, Loan Portfolio Composition. The following table analyzes the composition of the Bank’s loan portfolio by loan category at the dates indicated: Montana is one of the largest states in terms of land mass but ranks as one of the least populated states. According to U.S. Census Bureau data for 2010, it had a population of 989,415. Helena, where we are headquartered, is Montana’s state capital. It is also the county seat of Lewis and Clark County, which has a population of approximately 63,395 and is located within 120 miles of four of Montana’s other five largest cities: Missoula, Great Falls, Bozeman and Butte. It is approximately midway between Yellowstone and Glacier National Parks. Its economy has shown moderate growth, in terms of both employment and income. State government and the numerous offices of the federal government comprise the largest employment sector. Helena also has significant employment in the service industries. Specifically, it has evolved into a central health care center with employment in the medical and the supporting professions as well as the Amount medical insurance industry. The local economy is also dependent to a lesser extent upon ranching and agriculture. These have been more cyclical in nature and remain vulnerable to severe weather conditions, increased competition, both domestic and international, as well as commodity prices. Real estate loans: Residential mortgage (one- to four-family) (1) Commercial real estate Real estate construction Total real estate loans 61,671 64,672 Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin County, which has a population of approximately 89,513. Bozeman is home to Montana State University and experienced fairly significant growth from 1990 1,455 to 2007, in part due to the growth of the University as well as the increased tourism for resort areas in and near Bozeman. 127,798 Agriculture, however, remains an important part of Bozeman’s economy. Bozeman has also become an attractive location for retirees, primarily from the West Coast, owing to its many winter and summer recreational opportunities and the presence of the University. Of the four communities that we serve, Bozeman has experienced the largest impact of the national and global economic downturn. 35.11% $ 36.82% 0.83% 72.76% 70,003 64,701 5,020 139,724 37.34% 34.52% 2.68% 74.54% Percent of Total Percent of Total (Dollars in thousands) Amount 2011 $ Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a population of approximately 34,200. Butte’s economy is somewhat reliant on the mining industry. Butte’s economy has been volatile from the fluctuations in metal and mineral commodity prices. 13.50% 5.00% 8.74% 27.24% 27,816 9,343 10,564 47,723 14.84% 4.98% 5.64% 25.46% Other loans: Home equity Consumer Commercial Total other loans Total loans Townsend is the smallest community in which we operate. It has a population of about 1,878. Townsend is located in 175,628 Broadwater County which has a population of approximately 5,612. Many of its residents commute to other Montana locations for work. Other employment in Townsend is primarily in agriculture and services. Townsend is approximately 32 miles southeast of Helena. 100.00% 100.00% 187,447 On July 2, 2012, we announced the execution of a definitive agreement with Sterling Savings Bank of Spokane, Washington, to acquire certain liabilities and assets of Sterling’s seven branch operations in Montana. This transaction is subject to approval of federal bank regulators and is expected to close in late 2012. 176 1,800 Less: Deferred loan fees (expenses) Allowance for loan losses 23,709 8,778 15,343 47,830 164 1,625 Loan Portfolio Composition. The following table analyzes the composition of the Bank’s loan portfolio by loan category at the dates indicated: Real estate loans: Residential mortgage (one- to four-family) (1) Commercial real estate Real estate construction Total real estate loans $ Amount 61,671 64,672 1,455 127,798 35.11% $ 36.82% 0.83% 72.76% 70,003 64,701 5,020 139,724 At June 30, 2012 2011 (Dollars in thousands) Percent of Total Amount Percent of Total 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% 23,709 8,778 15,343 47,830 13.50% 5.00% 8.74% 27.24% 27,816 9,343 10,564 47,723 175,628 100.00% 187,447 100.00% 164 1,625 176 1,800 Other loans: Home equity Consumer Commercial Total other loans Total loans Less: Deferred loan fees (expenses) Allowance for loan losses Total loans, net Competition $ 173,839 $ 185,471 Total loans, net $ 173,839 $ 185,471 (1) Excludes loans held for sale. Fee Income. American Federal Savings Bank receives lending related fee income from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from mortgage loan servicing, which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing for loans held by others, were $891,000 and $830,000 for the years ended June 30, 2012 and 2011, respectively. Other loan related fee income for contract collections, late charges, credit life commissions and credit card fees were $86,000 and $78,000 for the years ended June 30, 2012 and 2011, respectively. We face strong competition in our primary market area for the attraction of retail deposits and the origination of loans. Historically, Montana was a unit banking state. This means that the ability of Montana state banks to create branches was either prohibited or significantly restricted. As a result of unit banking, Montana has a significant number of independent financial institutions serving a single community in a single location. While the state’s population is approximately 989,000 people, there are 57 credit unions in Montana as well as two federally chartered thrift institutions, and 74 commercial banks as of June 30, 2012. Our most direct competition for depositors has historically come from locally owned and out-of-state commercial banks, thrift institutions and credit unions operating in our primary market area. The number of such competitor locations has increased significantly in recent years. Our competition for loans also comes from banks, thrifts and credit unions in addition to mortgage bankers and brokers. Our principal market areas can be characterized as markets with moderately increasing incomes, relatively low unemployment, increasing wealth (particularly in the growing resort areas such as Bozeman), and moderate population growth. Loan Maturity Schedule. The following table sets forth the estimated maturity of the loan portfolio of the Bank at June 30, 2012. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give American Federal Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted. General. American Federal Savings Bank primarily originates one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, real estate construction loans, home equity loans, consumer loans and commercial business loans. Commercial real estate loans include loans on multi-family dwellings, loans on nonresidential property and loans on developed and undeveloped land. Home equity loans include loans secured by the borrower’s primary residence. Typically, the property securing such loans is subject to a prior lien. Consumer loans consist of loans secured by collateral other than real estate, such as automobiles, recreational vehicles and boats. Personal loans and lines of credit are made on deposits held by the Bank and on an unsecured basis. Commercial business loans consist of business loans and lines of credit on a secured and unsecured basis. Lending Activities (1) Excludes loans held for sale. Fee Income. American Federal Savings Bank receives lending related fee income from a variety of sources. Its principal source of this income is from the origination and servicing of sold mortgage loans. Fees generated from mortgage loan servicing, which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing for loans held by others, were $891,000 and $830,000 for the years ended June 30, 2012 and 2011, respectively. Other loan related fee income for contract collections, late charges, credit life commissions and credit card fees were $86,000 and $78,000 for the years ended June 30, 2012 and 2011, respectively. Loan Maturity Schedule. The following table sets forth the estimated maturity of the loan portfolio of the Bank at June 30, 2012. Balances exclude deferred loan fees and allowance for loan losses. Scheduled principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of a loan is typically substantially less than its contractual terms because of prepayments. In addition, due on sale clauses on loans generally give American Federal Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property, subject to the mortgage, and the loan is not paid off. All mortgage loans are shown to be maturing based on the date of the last payment required by the loan agreement, except as noted. 3 4 3 4 Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months. The following table sets forth information with respect to our loan originations, purchases and sales activity for the periods indicated: Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months. indicated: The following table sets forth information with respect to our loan originations, purchases and sales activity for the periods Within 6 Months 6 to 12 Months More than 1 year to 2 years More than 2 years to 5 years (In thousands) Over 5 years Residential mortgage (one- to four-family) (1) Commercial real estate and land Real estate construction Home equity Consumer Commercial $ - $ 369 - 242 281 184 $ 30 3,286 1,455 3,318 1,058 4,865 $ 1,014 2,263 - 3,519 978 1,872 $ 2,208 6,703 - 9,844 4,826 3,231 $ 69,032 52,051 - 6,786 1,635 5,191 Total 72,284 64,672 1,455 23,709 8,778 15,343 Total loans (1) (1) Includes loans held for sale. $ 1,076 $ 14,012 $ 9,646 $ 26,812 $ 134,695 $ 186,241 The following table sets forth the dollar amount of all loans, at June 30, 2012, due after June 30, 2013, which have fixed interest rates and which have floating or adjustable interest rates: Year Ended June 30, More than 2012 2011 1 year to 2 years 6 to 12 Months (In thousands) More than 2 years to 5 years Over 5 years (In thousands) Net loans receivable at beginning of period (1) $ Residential mortgage (one- to four-family) (1) Commercial real estate and land Loans originated: Real estate construction Home equity Consumer Commercial Residential mortgage (one- to four-family) Commercial real estate and land Real estate construction Home equity Consumer Commercial Total loans (1) $ Within 6 Months $ - $ 369 - 242 281 184 1,076 $ 187,255 30 3,286 1,455 3,318 1,058 4,865 117,248 9,609 3,355 5,611 4,483 14,012 11,272 $ $ $ 177,197 1,014 2,263 - 115,030 3,519 38,131 978 13,180 1,872 16,550 6,068 9,646 15,311 $ $ 2,208 6,703 - 9,844 4,826 3,231 $ 69,032 52,051 - 6,786 1,635 5,191 Total 72,284 64,672 1,455 23,709 8,778 15,343 $ 26,812 $ 134,695 $ 186,241 (1) Includes loans held for sale. Total loans originated 151,578 204,270 Total loans originated 151,578 204,270 Loans sold: The following table sets forth the dollar amount of all loans, at June 30, 2012, due after June 30, 2013, which have fixed interest rates and which have floating or adjustable interest rates: Whole loans 112,444 99,507 Fixed Adjustable Total (Dollars in thousands) Principal repayments and loan refinancings Fixed Adjustable 55,061 Total 80,853 (Dollars in thousands) Principal repayments and loan refinancings 55,061 80,853 Residential mortgage (one- to four-family) $ Commercial real estate and land Home equity Consumer Commercial $ 61,053 55,495 14,290 6,684 6,362 $ 11,094 5,522 5,859 755 3,933 72,147 61,017 20,149 7,439 10,295 Total loans (1) Percent of total (1) Due after June 30, 2013. $ 143,884 $ 27,163 $ 171,047 84.12% 15.88% 100.00% Allowance for losses decrease (increase) Deferred loan fees decrease (increase) Residential mortgage (one- to four-family) $ Commercial real estate and land Home equity Consumer Commercial Net loan increase (decrease) $ 61,053 55,495 14,290 6,684 6,362 175 12 11,094 5,522 5,859 755 3,933 (2,803) $ (215) Deferred loan fees decrease (increase) (700) 72,147 61,017 20,149 7,439 10,295 10,058 Net loans receivable at end of period (1) Total loans (1) $ 143,884 $ 184,452 $ 27,163 187,255 $ 171,047 $ (1) Includes loans held for sale. Percent of total (1) Due after June 30, 2013. 84.12% 15.88% 100.00% Residential Lending. The Bank’s primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank’s market area. Approximately 35.1% of the Bank’s loans as of June 30, 2012 were comprised of such loans. American Federal generally originates one- to four-family residential mortgage loans in amounts of up to 80% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds substantially all of its adjustable rate and its 8, 10 and 12-year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Bank’s fixed rate 15-year and 20-year loans are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30-year fixed rate loans are sold in the secondary market. The volume of loan sales is dependent on the volume, type and term of loan originations. Residential Lending. The Bank’s primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank’s market area. Approximately 35.1% of the Bank’s loans as of June 30, 2012 were comprised of such loans. American Federal generally originates one- to four-family residential mortgage loans in amounts of up to 80% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds substantially all of its adjustable rate and its 8, 10 and 12-year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Bank’s fixed rate 15-year and 20-year loans are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30-year fixed rate loans are sold in the secondary market. The volume of loan sales is dependent on the volume, type and term of loan originations. 5 6 5 6 Net loans receivable at beginning of period (1) $ 187,255 $ 177,197 Residential mortgage (one- to four-family) 117,248 115,030 Loans originated: Commercial real estate and land Real estate construction Home equity Consumer Commercial Loans sold: Whole loans Year Ended June 30, 2012 2011 (In thousands) 9,609 3,355 5,611 4,483 11,272 38,131 13,180 16,550 6,068 15,311 99,507 112,444 12 175 (215) (700) Allowance for losses decrease (increase) Net loan increase (decrease) (2,803) 10,058 Net loans receivable at end of period (1) $ 184,452 $ 187,255 (1) Includes loans held for sale. Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months. The following table sets forth information with respect to our loan originations, purchases and sales activity for the periods indicated: Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due within six months. The following table sets forth information with respect to our loan originations, purchases and sales activity for the periods indicated: Residential mortgage (one- to four-family) (1) $ $ - 30 $ 1,014 $ 2,208 $ 69,032 $ Within 6 Months 6 to 12 Months More than More than 1 year to 2 2 years to years 5 years (In thousands) 369 - 242 281 184 3,286 1,455 3,318 1,058 4,865 2,263 - 3,519 978 1,872 6,703 - 9,844 4,826 3,231 Over 5 years 52,051 - 6,786 1,635 5,191 Total 72,284 64,672 1,455 23,709 8,778 15,343 $ 1,076 $ 14,012 $ 9,646 $ 26,812 $ 134,695 $ 186,241 Commercial real estate and land Real estate construction Home equity Consumer Commercial Total loans (1) (1) Includes loans held for sale. The following table sets forth the dollar amount of all loans, at June 30, 2012, due after June 30, 2013, which have fixed interest rates and which have floating or adjustable interest rates: Residential mortgage (one- to four-family) $ 61,053 $ 11,094 $ Commercial real estate and land Fixed Adjustable Total (Dollars in thousands) 55,495 14,290 6,684 6,362 5,522 5,859 755 3,933 72,147 61,017 20,149 7,439 10,295 $ 143,884 $ 27,163 $ 171,047 Percent of total 84.12% 15.88% 100.00% Home equity Consumer Commercial Total loans (1) (1) Due after June 30, 2013. Year Ended June 30, More than 2011 2012 1 year to 2 years 6 to 12 Months (In thousands) More than 2 years to 5 years Over 5 years (In thousands) Net loans receivable at beginning of period (1) $ Residential mortgage (one- to four-family) (1) Commercial real estate and land Loans originated: Real estate construction Home equity Consumer Commercial Residential mortgage (one- to four-family) Commercial real estate and land Real estate construction Home equity Consumer Commercial Total loans (1) $ Within 6 Months $ $ - 369 - 242 281 184 1,076 $ 187,255 30 3,286 1,455 3,318 1,058 4,865 117,248 9,609 3,355 5,611 4,483 14,012 11,272 $ $ $ 177,197 1,014 2,263 - 115,030 3,519 38,131 978 13,180 1,872 16,550 6,068 9,646 15,311 $ $ 2,208 6,703 - 9,844 4,826 3,231 $ 69,032 52,051 - 6,786 1,635 5,191 Total 72,284 64,672 1,455 23,709 8,778 15,343 $ 26,812 $ 134,695 $ 186,241 (1) Includes loans held for sale. Total loans originated 151,578 204,270 Loans sold: The following table sets forth the dollar amount of all loans, at June 30, 2012, due after June 30, 2013, which have fixed interest rates and which have floating or adjustable interest rates: Whole loans 112,444 99,507 Principal repayments and loan refinancings Fixed Adjustable 55,061 Total 80,853 (Dollars in thousands) Year Ended June 30, 2012 2011 (In thousands) Net loans receivable at beginning of period (1) $ 187,255 $ 177,197 Loans originated: Residential mortgage (one- to four-family) Commercial real estate and land Real estate construction Home equity Consumer Commercial 117,248 9,609 3,355 5,611 4,483 11,272 115,030 38,131 13,180 16,550 6,068 15,311 Total loans originated 151,578 204,270 Loans sold: Whole loans 99,507 112,444 Principal repayments and loan refinancings 55,061 80,853 (215) Deferred loan fees decrease (increase) Allowance for losses decrease (increase) Deferred loan fees decrease (increase) Residential mortgage (one- to four-family) $ Commercial real estate and land Home equity Consumer Commercial Net loan increase (decrease) $ 61,053 55,495 14,290 6,684 6,362 175 12 11,094 5,522 5,859 755 3,933 (2,803) $ (700) 72,147 61,017 20,149 7,439 10,295 10,058 Net loans receivable at end of period (1) Total loans (1) $ 143,884 $ 184,452 $ 27,163 187,255 $ 171,047 $ (1) Includes loans held for sale. Percent of total (1) Due after June 30, 2013. 84.12% 15.88% 100.00% 12 175 (215) (700) Allowance for losses decrease (increase) Net loan increase (decrease) (2,803) 10,058 Net loans receivable at end of period (1) $ 184,452 $ 187,255 (1) Includes loans held for sale. Residential Lending. The Bank’s primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank’s market area. Approximately 35.1% of the Bank’s loans as of June 30, 2012 were comprised of such loans. American Federal generally originates one- to four-family residential mortgage loans in amounts of up to 80% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds substantially all of its adjustable rate and its 8, 10 and 12-year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Bank’s fixed rate 15-year and 20-year loans are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30-year fixed rate loans are sold in the secondary market. The volume of loan sales is dependent on the volume, type and term of loan originations. Residential Lending. The Bank’s primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank’s market area. Approximately 35.1% of the Bank’s loans as of June 30, 2012 were comprised of such loans. American Federal generally originates one- to four-family residential mortgage loans in amounts of up to 80% of the lesser of the appraised value or the selling price of the mortgaged property without requiring private mortgage insurance. A mortgage loan originated by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years. The Bank holds substantially all of its adjustable rate and its 8, 10 and 12-year fixed rate loans in portfolio. Adjustable rate loans limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan. The Bank’s fixed rate 15-year and 20-year loans are held in portfolio or sold in the secondary market depending on market conditions. Generally, all 30-year fixed rate loans are sold in the secondary market. The volume of loan sales is dependent on the volume, type and term of loan originations. 5 6 5 6 The Bank obtains a significant portion of its noninterest income from servicing of loans that it has sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis. This means that we process the borrower’s payments and send them to the purchaser of the loan. This retention of servicing enables the Bank to increase fee income and maintain a relationship with the borrower. Servicing income was $891,000 for the year ended June 30, 2012. At June 30, 2012, American Federal Savings Bank had $338.9 million in residential mortgage loans and $16.1 million in commercial real estate loans sold with servicing retained. American Federal Savings Bank does not ordinarily purchase home mortgage loans from other financial institutions. Property appraisals on real estate securing the Bank’s single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the board of directors. Appraisals are performed in accordance with applicable regulations and policies. American Federal Savings Bank generally obtains title insurance policies on all first mortgage real estate loans originated. On occasion, refinancings of mortgage loans are approved using title reports instead of title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and interest, to a loan escrow account from which American Federal Savings Bank makes disbursements for such items as real estate taxes and hazard and mortgage insurance premiums as they become due. Home Equity Loans. American Federal Savings Bank also originates home equity loans. These loans are secured by the borrowers’ primary residence, but are typically subject to a prior lien, which may or may not be held by the Bank. At June 30, 2012, $23.7 million or 13.5% of our total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity loans for many purposes, including home improvement, debt consolidation, or other purchasing needs. The Bank offers fixed rate, fixed payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home equity loans typically have terms of not longer than 15 years. Although home equity loans are secured by real estate, they carry a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the flexibility the borrower has with respect to the loan proceeds. American Federal Savings Bank attempts to minimize this risk by maintaining conservative underwriting policies on such loans. We generally make home equity loans for up to only 85% of appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Commercial Real Estate and Land Loans. American Federal Savings Bank originates commercial real estate mortgage and land loans, including both developed and undeveloped land loans, and loans on multi-family dwellings. Commercial real estate and land loans made up 36.8% of the Bank’s total loan portfolio, or $64.7 million at June 30, 2012. The majority of these loans are non-residential commercial real estate loans. American Federal Savings Bank’s commercial real estate mortgage loans are primarily permanent loans secured by improved property such as office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not exceed 75% of the appraised value or the selling price of the property, whichever is less. The average loan size is approximately $311,000 and is typically made with fixed rates of interest and 5- to 15-year maturities. Upon maturity, the loan is repaid or the terms and conditions are renegotiated. Generally, all originated commercial real estate loans are secured by property located in the state of Montana and within the market area of the Bank. American Federal Savings Bank’s largest single commercial real estate loan had a balance of approximately $11.5 million ($10.4 million is guaranteed by Rural Development of the U.S. Department of Agriculture, leaving approximately $1.1 million unguaranteed) on June 30, 2012, and is secured by a detention facility. Real Estate Construction Lending. American Federal Savings Bank also lends funds for the construction of one-to-four-family homes and commercial real estate. Real estate construction loans are made both to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Real estate construction loans accounted for $1.5 million or 0.8% of the Bank’s loan portfolio at June 30, 2012. Consumer Loans. As part of its strategy to invest in higher yielding shorter term loans, American Federal Savings Bank emphasized growth of its consumer lending portfolio in recent years. This portfolio includes personal loans secured by collateral other than real estate, unsecured personal loans and lines of credit, and loans secured by deposits held by the Bank. As of June 30, 2012, consumer loans totaled $8.8 million or 5.0% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in the Bank’s market area and generally have maturities of up to 7 years. For loans secured by savings accounts, American Federal Savings Bank will lend up to 90% of the account balance on single payment loans and up to 100% for monthly payment loans. The Bank obtains a significant portion of its noninterest income from servicing of loans that it has sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis. This means that we process the borrower’s payments and send them to the purchaser of the loan. This retention of servicing enables the Bank to increase fee income and maintain a relationship with the borrower. Servicing income was $891,000 for the year ended June 30, 2012. At June 30, 2012, American Federal Savings Bank had $338.9 million in residential mortgage loans and $16.1 million in commercial real estate loans sold with servicing retained. American Federal Savings Bank does not ordinarily purchase home mortgage loans from other financial institutions. Consumer loans have a shorter term and generally provide higher interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the same time improve the matching of the maturities of rate sensitive assets and liabilities. Although the amount of such loans declined slightly over 2011 levels, increasing consumer loans continues to be a major part of the Bank’s strategy of operating more like a commercial bank than a traditional savings bank. Property appraisals on real estate securing the Bank’s single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the board of directors. Appraisals are performed in accordance with applicable regulations and policies. American Federal Savings Bank generally obtains title insurance policies on all first mortgage real estate loans originated. On occasion, refinancings of mortgage loans are approved using title reports instead of title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and interest, to a loan escrow account from which American Federal Savings Bank makes disbursements for such items as real estate taxes and hazard and mortgage insurance premiums as they become due. The underwriting standards employed by American Federal Savings Bank for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Home Equity Loans. Commercial Business Loans. American Federal Savings Bank also originates home equity loans. These loans are secured by the borrowers’ primary Commercial business loans amounted to $15.3 million, or 8.7% of the Bank’s total loan portfolio at June 30, 2012. residence, but are typically subject to a prior lien, which may or may not be held by the Bank. At June 30, 2012, $23.7 American Federal Savings Bank’s commercial business loans are traditional business loans and are not secured by real million or 13.5% of our total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or loans for many purposes, including home improvement, debt consolidation, or other purchasing needs. The Bank offers other business assets. While the commercial business loan portfolio amounted to only 8.7% of the total portfolio at fixed rate, fixed payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home June 30, 2012, American Federal intends to increase such lending by focusing on market segments which it has not equity loans typically have terms of not longer than 15 years. previously emphasized, such as business loans to doctors, lawyers, architects and other professionals as well as to small businesses within its market area. Our management believes that this strategy provides opportunities for growth, without significant additional cost outlays for staff and infrastructure. Although home equity loans are secured by real estate, they carry a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the flexibility the borrower has with respect to the loan proceeds. American Federal Savings Bank attempts to minimize this risk by maintaining conservative underwriting policies on such loans. We generally make home equity loans for up to only 85% of appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Commercial business loans of this nature usually involve greater credit risk than one- to four-family residential mortgage loans. The collateral we receive is typically related directly to the performance of the borrower’s business which means that repayment of commercial business loans is dependent on the successful operations and income stream of the borrower’s business. Such risks can be significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to residential real estate lending. Commercial Real Estate and Land Loans. American Federal Savings Bank originates commercial real estate mortgage and land loans, including both developed and undeveloped land loans, and loans on multi-family dwellings. Commercial real estate and land loans made up 36.8% of the Bank’s total loan portfolio, or $64.7 million at June 30, 2012. The majority of these loans are non-residential commercial real estate loans. American Federal Savings Bank’s commercial real estate mortgage loans are primarily permanent loans secured by improved property such as office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not exceed 75% of the appraised value or the selling price of the property, whichever is less. The average loan size is approximately $311,000 and is typically made with fixed rates of interest and 5- to 15-year maturities. Upon maturity, the loan is repaid or the terms and conditions are renegotiated. Generally, all originated commercial real estate loans are secured by property located in the state of Montana and within the market area of the Bank. American Federal Savings Bank’s largest single commercial real estate loan had a balance of approximately $11.5 million ($10.4 million is guaranteed by Rural Development of the U.S. Department of Agriculture, leaving approximately $1.1 million unguaranteed) on June 30, 2012, and is secured by a detention facility. Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus. As of June 30, 2012, our largest aggregation of loans to one borrower was approximately $17.7 million. This consisted of two commercial real estate loans secured by two separate detention facilities. The first commercial real estate loan had a principal balance of $6.1 million, but 90.0%, or $5.5 million of the principal balance was sold to the Montana Board of Investments, leaving a net principal balance to the Bank of $600,000. The second commercial real estate loan is to the same borrower for another detention facility. As of June 30, 2012, the principal balance on this loan was $11.5 million with 90.0% of the loan guaranteed by the USDA Rural Development. Due to the USDA Rural Development guarantee, 90.0% of this loan, or $10.4 million, is not required to be included in the Bank’s limitations to a single borrower, thus leaving approximately $1.1 million subject to the lending limit described above, thereby making a combined amount of $1.7 million subject to the lending limit. The Bank entered into an interest rate swap with a third party to change the underlying cash flows of the second loan to be a variable market rate tied to one-month LIBOR. At June 30, 2012, these loans were performing in accordance with their terms. The Bank maintains the servicing for both these loans. Real Estate Construction Lending. American Federal Savings Bank also lends funds for the construction of one-to-four-family homes and commercial real estate. Real estate construction loans are made both to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Real estate construction loans accounted for $1.5 million or 0.8% of the Bank’s loan portfolio at June 30, 2012. Loan Solicitation and Processing. Our customary sources of mortgage loan applications include repeat customers, walk-ins, and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the ability to accept online mortgage loan applications and provide pre-approvals through our website. Our branch managers and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans must be approved at our main offices as disclosed below. No loan consultants or loan brokers are currently utilized for either residential or commercial lending activities. Consumer Loans. As part of its strategy to invest in higher yielding shorter term loans, American Federal Savings Bank emphasized growth of its consumer lending portfolio in recent years. This portfolio includes personal loans secured by collateral other than real estate, unsecured personal loans and lines of credit, and loans secured by deposits held by the Bank. As of June 30, 2012, consumer loans totaled $8.8 million or 5.0% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm specific information relating to the loan applicant’s employment, income and credit standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. In connection with the loan approval process, our staff analyze the loan applications and the property involved. Officers the Bank’s market area and generally have maturities of up to 7 years. For loans secured by savings accounts, American Federal Savings Bank will lend up to 90% of the account balance on single payment loans and up to 100% for monthly payment loans. Consumer loans have a shorter term and generally provide higher interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the same time improve the matching of the maturities of rate sensitive assets and liabilities. Although the amount of such loans declined slightly over 2011 levels, increasing consumer loans continues to be a major part of the Bank’s strategy of operating more like a commercial bank than a traditional savings bank. The underwriting standards employed by American Federal Savings Bank for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Commercial Business Loans. Commercial business loans amounted to $15.3 million, or 8.7% of the Bank’s total loan portfolio at June 30, 2012. American Federal Savings Bank’s commercial business loans are traditional business loans and are not secured by real estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or other business assets. While the commercial business loan portfolio amounted to only 8.7% of the total portfolio at June 30, 2012, American Federal intends to increase such lending by focusing on market segments which it has not previously emphasized, such as business loans to doctors, lawyers, architects and other professionals as well as to small businesses within its market area. Our management believes that this strategy provides opportunities for growth, without significant additional cost outlays for staff and infrastructure. Commercial business loans of this nature usually involve greater credit risk than one- to four-family residential mortgage loans. The collateral we receive is typically related directly to the performance of the borrower’s business which means that repayment of commercial business loans is dependent on the successful operations and income stream of the borrower’s business. Such risks can be significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to residential real estate lending. Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus. As of June 30, 2012, our largest aggregation of loans to one borrower was approximately $17.7 million. This consisted of two commercial real estate loans secured by two separate detention facilities. The first commercial real estate loan had a principal balance of $6.1 million, but 90.0%, or $5.5 million of the principal balance was sold to the Montana Board of Investments, leaving a net principal balance to the Bank of $600,000. The second commercial real estate loan is to the same borrower for another detention facility. As of June 30, 2012, the principal balance on this loan was $11.5 million with 90.0% of the loan guaranteed by the USDA Rural Development. Due to the USDA Rural Development guarantee, 90.0% of this loan, or $10.4 million, is not required to be included in the Bank’s limitations to a single borrower, thus leaving approximately $1.1 million subject to the lending limit described above, thereby making a combined amount of $1.7 million subject to the lending limit. The Bank entered into an interest rate swap with a third party to change the underlying cash flows of the second loan to be a variable market rate tied to one-month LIBOR. At June 30, 2012, these loans were performing in accordance with their terms. The Bank maintains the servicing for both these loans. Loan Solicitation and Processing. Our customary sources of mortgage loan applications include repeat customers, walk-ins, and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the ability to accept online mortgage loan applications and provide pre-approvals through our website. Our branch managers and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans must be approved at our main offices as disclosed below. No loan consultants or loan brokers are currently utilized for either residential or commercial lending activities. After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm specific information relating to the loan applicant’s employment, income and credit standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. In connection with the loan approval process, our staff analyze the loan applications and the property involved. Officers 7 8 7 8 The Bank obtains a significant portion of its noninterest income from servicing of loans that it has sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis. This means that we process the borrower’s payments and send them to the purchaser of the loan. This retention of servicing enables the Bank to increase fee income and maintain a relationship with the borrower. Servicing income was $891,000 for the year ended June 30, 2012. At June 30, 2012, American Federal Savings Bank had $338.9 million in residential mortgage loans and $16.1 million in commercial real estate loans sold with servicing retained. American Federal Savings Bank does not ordinarily purchase home mortgage loans from other financial institutions. Property appraisals on real estate securing the Bank’s single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the board of directors. Appraisals are performed in accordance with applicable regulations and policies. American Federal Savings Bank generally obtains title insurance policies on all first mortgage real estate loans originated. On occasion, refinancings of mortgage loans are approved using title reports instead of title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and interest, to a loan escrow account from which American Federal Savings Bank makes disbursements for such items as real estate taxes and hazard and mortgage insurance premiums as they become due. Home Equity Loans. American Federal Savings Bank also originates home equity loans. These loans are secured by the borrowers’ primary residence, but are typically subject to a prior lien, which may or may not be held by the Bank. At June 30, 2012, $23.7 million or 13.5% of our total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity loans for many purposes, including home improvement, debt consolidation, or other purchasing needs. The Bank offers fixed rate, fixed payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home equity loans typically have terms of not longer than 15 years. Although home equity loans are secured by real estate, they carry a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the flexibility the borrower has with respect to the loan proceeds. American Federal Savings Bank attempts to minimize this risk by maintaining conservative underwriting policies on such loans. We generally make home equity loans for up to only 85% of appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Commercial Real Estate and Land Loans. American Federal Savings Bank originates commercial real estate mortgage and land loans, including both developed and undeveloped land loans, and loans on multi-family dwellings. Commercial real estate and land loans made up 36.8% of the Bank’s total loan portfolio, or $64.7 million at June 30, 2012. The majority of these loans are non-residential commercial real estate loans. American Federal Savings Bank’s commercial real estate mortgage loans are primarily permanent loans secured by improved property such as office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not exceed 75% of the appraised value or the selling price of the property, whichever is less. The average loan size is approximately $311,000 and is typically made with fixed rates of interest and 5- to 15-year maturities. Upon maturity, the loan is repaid or the terms and conditions are renegotiated. Generally, all originated commercial real estate loans are secured by property located in the state of Montana and within the market area of the Bank. American Federal Savings Bank’s largest single commercial real estate loan had a balance of approximately $11.5 million ($10.4 million is guaranteed by Rural Development of the U.S. Department of Agriculture, leaving approximately $1.1 million unguaranteed) on June 30, 2012, and is secured by a detention facility. Real Estate Construction Lending. June 30, 2012. Consumer Loans. American Federal Savings Bank also lends funds for the construction of one-to-four-family homes and commercial real estate. Real estate construction loans are made both to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Real estate construction loans accounted for $1.5 million or 0.8% of the Bank’s loan portfolio at As part of its strategy to invest in higher yielding shorter term loans, American Federal Savings Bank emphasized growth of its consumer lending portfolio in recent years. This portfolio includes personal loans secured by collateral other than real estate, unsecured personal loans and lines of credit, and loans secured by deposits held by the Bank. As of June 30, 2012, consumer loans totaled $8.8 million or 5.0% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in the Bank’s market area and generally have maturities of up to 7 years. For loans secured by savings accounts, American Federal Savings Bank will lend up to 90% of the account balance on single payment loans and up to 100% for monthly payment loans. The Bank obtains a significant portion of its noninterest income from servicing of loans that it has sold. The Bank offers many of the fixed rate loans it originates for sale in the secondary market on a servicing retained basis. This means that we process the borrower’s payments and send them to the purchaser of the loan. This retention of servicing enables the Bank to increase fee income and maintain a relationship with the borrower. Servicing income was $891,000 for the year ended June 30, 2012. At June 30, 2012, American Federal Savings Bank had $338.9 million in residential mortgage loans and $16.1 million in commercial real estate loans sold with servicing retained. American Federal Savings Bank does not ordinarily purchase home mortgage loans from other financial institutions. Consumer loans have a shorter term and generally provide higher interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the same time improve the matching of the maturities of rate sensitive assets and liabilities. Although the amount of such loans declined slightly over 2011 levels, increasing consumer loans continues to be a major part of the Bank’s strategy of operating more like a commercial bank than a traditional savings bank. Property appraisals on real estate securing the Bank’s single-family residential loans are made by state certified and licensed independent appraisers who are approved annually by the board of directors. Appraisals are performed in accordance with applicable regulations and policies. American Federal Savings Bank generally obtains title insurance policies on all first mortgage real estate loans originated. On occasion, refinancings of mortgage loans are approved using title reports instead of title insurance. Title reports are also allowed on home equity loans. Borrowers generally remit funds with each monthly payment of principal and interest, to a loan escrow account from which American Federal Savings Bank makes disbursements for such items as real estate taxes and hazard and mortgage insurance premiums as they become due. The underwriting standards employed by American Federal Savings Bank for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Home Equity Loans. Commercial Business Loans. American Federal Savings Bank also originates home equity loans. These loans are secured by the borrowers’ primary Commercial business loans amounted to $15.3 million, or 8.7% of the Bank’s total loan portfolio at June 30, 2012. residence, but are typically subject to a prior lien, which may or may not be held by the Bank. At June 30, 2012, $23.7 American Federal Savings Bank’s commercial business loans are traditional business loans and are not secured by real million or 13.5% of our total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or loans for many purposes, including home improvement, debt consolidation, or other purchasing needs. The Bank offers other business assets. While the commercial business loan portfolio amounted to only 8.7% of the total portfolio at fixed rate, fixed payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home June 30, 2012, American Federal intends to increase such lending by focusing on market segments which it has not equity loans typically have terms of not longer than 15 years. previously emphasized, such as business loans to doctors, lawyers, architects and other professionals as well as to small businesses within its market area. Our management believes that this strategy provides opportunities for growth, without significant additional cost outlays for staff and infrastructure. Although home equity loans are secured by real estate, they carry a greater risk than first lien residential mortgages because of the existence of a prior lien on the property securing the loan, as well as the flexibility the borrower has with respect to the loan proceeds. American Federal Savings Bank attempts to minimize this risk by maintaining conservative underwriting policies on such loans. We generally make home equity loans for up to only 85% of appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Commercial business loans of this nature usually involve greater credit risk than one- to four-family residential mortgage loans. The collateral we receive is typically related directly to the performance of the borrower’s business which means that repayment of commercial business loans is dependent on the successful operations and income stream of the borrower’s business. Such risks can be significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to residential real estate lending. Commercial Real Estate and Land Loans. American Federal Savings Bank originates commercial real estate mortgage and land loans, including both developed and undeveloped land loans, and loans on multi-family dwellings. Commercial real estate and land loans made up 36.8% of the Bank’s total loan portfolio, or $64.7 million at June 30, 2012. The majority of these loans are non-residential commercial real estate loans. American Federal Savings Bank’s commercial real estate mortgage loans are primarily permanent loans secured by improved property such as office buildings, retail stores, commercial warehouses and apartment buildings. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. Generally, commercial real estate loans originated by the Bank will not exceed 75% of the appraised value or the selling price of the property, whichever is less. The average loan size is approximately $311,000 and is typically made with fixed rates of interest and 5- to 15-year maturities. Upon maturity, the loan is repaid or the terms and conditions are renegotiated. Generally, all originated commercial real estate loans are secured by property located in the state of Montana and within the market area of the Bank. American Federal Savings Bank’s largest single commercial real estate loan had a balance of approximately $11.5 million ($10.4 million is guaranteed by Rural Development of the U.S. Department of Agriculture, leaving approximately $1.1 million unguaranteed) on June 30, 2012, and is secured by a detention facility. Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus. As of June 30, 2012, our largest aggregation of loans to one borrower was approximately $17.7 million. This consisted of two commercial real estate loans secured by two separate detention facilities. The first commercial real estate loan had a principal balance of $6.1 million, but 90.0%, or $5.5 million of the principal balance was sold to the Montana Board of Investments, leaving a net principal balance to the Bank of $600,000. The second commercial real estate loan is to the same borrower for another detention facility. As of June 30, 2012, the principal balance on this loan was $11.5 million with 90.0% of the loan guaranteed by the USDA Rural Development. Due to the USDA Rural Development guarantee, 90.0% of this loan, or $10.4 million, is not required to be included in the Bank’s limitations to a single borrower, thus leaving approximately $1.1 million subject to the lending limit described above, thereby making a combined amount of $1.7 million subject to the lending limit. The Bank entered into an interest rate swap with a third party to change the underlying cash flows of the second loan to be a variable market rate tied to one-month LIBOR. At June 30, 2012, these loans were performing in accordance with their terms. The Bank maintains the servicing for both these loans. Real Estate Construction Lending. American Federal Savings Bank also lends funds for the construction of one-to-four-family homes and commercial real estate. Real estate construction loans are made both to individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. Real estate construction loans accounted for $1.5 million or 0.8% of the Bank’s loan portfolio at June 30, 2012. Loan Solicitation and Processing. Our customary sources of mortgage loan applications include repeat customers, walk-ins, and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the ability to accept online mortgage loan applications and provide pre-approvals through our website. Our branch managers and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans must be approved at our main offices as disclosed below. No loan consultants or loan brokers are currently utilized for either residential or commercial lending activities. Consumer Loans. As part of its strategy to invest in higher yielding shorter term loans, American Federal Savings Bank emphasized growth of its consumer lending portfolio in recent years. This portfolio includes personal loans secured by collateral other than real estate, unsecured personal loans and lines of credit, and loans secured by deposits held by the Bank. As of June 30, 2012, consumer loans totaled $8.8 million or 5.0% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm specific information relating to the loan applicant’s employment, income and credit standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. In connection with the loan approval process, our staff analyze the loan applications and the property involved. Officers the Bank’s market area and generally have maturities of up to 7 years. For loans secured by savings accounts, American Federal Savings Bank will lend up to 90% of the account balance on single payment loans and up to 100% for monthly payment loans. Consumer loans have a shorter term and generally provide higher interest rates than residential loans. Consumer loans can be helpful in improving the spread between average loan yield and cost of funds and at the same time improve the matching of the maturities of rate sensitive assets and liabilities. Although the amount of such loans declined slightly over 2011 levels, increasing consumer loans continues to be a major part of the Bank’s strategy of operating more like a commercial bank than a traditional savings bank. The underwriting standards employed by American Federal Savings Bank for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Commercial Business Loans. Commercial business loans amounted to $15.3 million, or 8.7% of the Bank’s total loan portfolio at June 30, 2012. American Federal Savings Bank’s commercial business loans are traditional business loans and are not secured by real estate. Such loans may be structured as unsecured lines of credit or may be secured by inventory, accounts receivable or other business assets. While the commercial business loan portfolio amounted to only 8.7% of the total portfolio at June 30, 2012, American Federal intends to increase such lending by focusing on market segments which it has not previously emphasized, such as business loans to doctors, lawyers, architects and other professionals as well as to small businesses within its market area. Our management believes that this strategy provides opportunities for growth, without significant additional cost outlays for staff and infrastructure. Commercial business loans of this nature usually involve greater credit risk than one- to four-family residential mortgage loans. The collateral we receive is typically related directly to the performance of the borrower’s business which means that repayment of commercial business loans is dependent on the successful operations and income stream of the borrower’s business. Such risks can be significantly affected by economic conditions. In addition, commercial lending generally requires substantially greater oversight efforts compared to residential real estate lending. Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus. As of June 30, 2012, our largest aggregation of loans to one borrower was approximately $17.7 million. This consisted of two commercial real estate loans secured by two separate detention facilities. The first commercial real estate loan had a principal balance of $6.1 million, but 90.0%, or $5.5 million of the principal balance was sold to the Montana Board of Investments, leaving a net principal balance to the Bank of $600,000. The second commercial real estate loan is to the same borrower for another detention facility. As of June 30, 2012, the principal balance on this loan was $11.5 million with 90.0% of the loan guaranteed by the USDA Rural Development. Due to the USDA Rural Development guarantee, 90.0% of this loan, or $10.4 million, is not required to be included in the Bank’s limitations to a single borrower, thus leaving approximately $1.1 million subject to the lending limit described above, thereby making a combined amount of $1.7 million subject to the lending limit. The Bank entered into an interest rate swap with a third party to change the underlying cash flows of the second loan to be a variable market rate tied to one-month LIBOR. At June 30, 2012, these loans were performing in accordance with their terms. The Bank maintains the servicing for both these loans. Loan Solicitation and Processing. Our customary sources of mortgage loan applications include repeat customers, walk-ins, and referrals from home builders and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the ability to accept online mortgage loan applications and provide pre-approvals through our website. Our branch managers and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when presented with a completed application. Other loans must be approved at our main offices as disclosed below. No loan consultants or loan brokers are currently utilized for either residential or commercial lending activities. After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm specific information relating to the loan applicant’s employment, income and credit standing. When required by our policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. In connection with the loan approval process, our staff analyze the loan applications and the property involved. Officers 7 8 7 8 and branch managers are granted lending authority based on the nature of the loan and the managers’ level of experience. We have established a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. A quorum (five directors) of the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, that exceeds $1,250,000. Loan applicants are promptly notified of the decision by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis, amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained. We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be maintained during the entire term of the loan. Loan Commitments. We generally provide commitments to fund fixed and adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter time periods. The total amount of our commitments to extend credit as of June 30, 2012, was approximately $6.48 million, all of which was for residential mortgage loans. Nonperforming Loans and Problem Assets Collection Procedures. 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. As of June 30, 2012, American Federal Savings Bank had $2.7 million of real estate owned ($2.4 million net of valuation loss allowance). Loans are reviewed on a quarterly basis and are placed on non-accrual status when they are 90 days or more delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. At June 30, 2012, we had $1.8 million ($1.8 million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status. Delinquent Loans. The following table provides information regarding the Bank’s loans that are delinquent 30 to 89 days as of the date indicated: and branch managers are granted lending authority based on the nature of the loan and the managers’ level of experience. We have established a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. A quorum (five directors) of the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, that exceeds $1,250,000. At June 30, 2012 Loan applicants are promptly notified of the decision by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis, amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained. We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be maintained during the entire term of the loan. (Dollars in thousands) Number Amount Percentage of Total Delinquent Loans 5 - - 13 29 6 44.84% 0.00% 0.00% 26.48% 16.17% 12.51% Loan Commitments. Loan type: We generally provide commitments to fund fixed and adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter time periods. The total amount of our commitments to extend credit as of June 30, 2012, was approximately $6.48 million, all of which was for residential mortgage loans. $ Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land Home equity Consumer Commercial business Nonperforming Loans and Problem Assets Collection Procedures. 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. 100.00% 1,367 Total 53 $ Nonperforming Assets. The following table sets forth information regarding American Federal Savings Bank’s nonperforming assets as of the dates indicated. For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. As of June 30, 2012, American Federal Savings Bank had $2.7 million of real estate owned ($2.4 million net of valuation loss allowance). (Dollars in thousands) At June 30, 2011 2012 Non-accrual loans Real estate loans: Loans are reviewed on a quarterly basis and are placed on non-accrual status when they are 90 days or more delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. At June 30, 2012, we had $1.8 million ($1.8 million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status. Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land $ $ 613 - - 362 221 171 660 - 833 265 36 20 - Home equity Consumer Commercial business Accruing loans delinquent 90 days or more Restructured loans: Commercial business Commercial real estate and land Total nonperforming loans Real estate owned and other repossed property, net Total nonperforming assets $ Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to non-performing loans Total nonperforming assets to total assets 1,424 650 186 376 56 247 - 90 1,314 3,218 2,361 5,579 $ 1.85% 0.98% 50.50% 1.70% - - 2,939 1,181 4,120 1.57% 0.89% 61.25% 1.24% Delinquent Loans. indicated: The following table provides information regarding the Bank’s loans that are delinquent 30 to 89 days as of the date At June 30, 2012 Percentage of Total Delinquent Loans Number Amount (Dollars in thousands) $ 5 - - 13 29 6 613 - - 362 221 171 44.84% 0.00% 0.00% 26.48% 16.17% 12.51% Loan type: Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land Home equity Consumer Commercial business Total 53 $ 1,367 100.00% Nonperforming Assets. dates indicated. The following table sets forth information regarding American Federal Savings Bank’s nonperforming assets as of the Residential mortgage (one- to four-family) $ 660 $ 1,424 Non-accrual loans Real estate loans: Real estate construction Commercial real estate and land Home equity Consumer Commercial business Accruing loans delinquent 90 days or more Restructured loans: Commercial business Commercial real estate and land Total nonperforming loans Real estate owned and other repossed property, net Total nonperforming assets $ 5,579 $ Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to non-performing loans Total nonperforming assets to total assets At June 30, 2012 2011 (Dollars in thousands) - 833 265 36 20 - 90 1,314 3,218 2,361 1.85% 0.98% 50.50% 1.70% 650 186 376 56 247 - - - 2,939 1,181 4,120 1.57% 0.89% 61.25% 1.24% 9 10 9 10 and branch managers are granted lending authority based on the nature of the loan and the managers’ level of experience. We have established a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. A quorum (five directors) of the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, that exceeds $1,250,000. Loan applicants are promptly notified of the decision by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis, amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained. We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be maintained during the entire term of the loan. We generally provide commitments to fund fixed and adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter time periods. The total amount of our commitments to extend credit as of June 30, 2012, was approximately $6.48 million, all of which was for residential Loan Commitments. mortgage loans. Nonperforming Loans and Problem Assets Collection Procedures. 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. As of June 30, 2012, American Federal Savings Bank had $2.7 million of real estate owned ($2.4 million net of valuation loss allowance). Loans are reviewed on a quarterly basis and are placed on non-accrual status when they are 90 days or more delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. At June 30, 2012, we had $1.8 million ($1.8 million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status. Delinquent Loans. The following table provides information regarding the Bank’s loans that are delinquent 30 to 89 days as of the date indicated: and branch managers are granted lending authority based on the nature of the loan and the managers’ level of experience. We have established a series of loan committees to approve any loans which may exceed the lending authority of particular officers or branch managers. A quorum (five directors) of the board of directors is required for approval of any loan, or aggregation of loans to a single borrower, that exceeds $1,250,000. At June 30, 2012 Loan applicants are promptly notified of the decision by a letter setting forth the terms and conditions of the decision. If approved, these terms and conditions include the amount of the loan, interest rate basis, amortization term, a brief description of real estate to be mortgaged, tax escrow and the notice of requirement of insurance coverage to be maintained. We generally require title insurance on first mortgage loans and fire and casualty insurance on all properties securing loans, which insurance must be maintained during the entire term of the loan. (Dollars in thousands) Number Amount Percentage of Total Delinquent Loans 5 - - 13 29 6 44.84% 0.00% 0.00% 26.48% 16.17% 12.51% Loan Commitments. Loan type: We generally provide commitments to fund fixed and adjustable-rate single-family mortgage loans for periods up to 60 days at a specified term and interest rate, and other loan categories for shorter time periods. The total amount of our commitments to extend credit as of June 30, 2012, was approximately $6.48 million, all of which was for residential mortgage loans. $ Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land Home equity Consumer Commercial business Nonperforming Loans and Problem Assets Collection Procedures. 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. 100.00% 1,367 Total 53 $ Nonperforming Assets. The following table sets forth information regarding American Federal Savings Bank’s nonperforming assets as of the dates indicated. For mortgage loans and home equity loans, if the borrower is unable to cure the delinquency or reach a payment agreement, we will institute foreclosure actions. If a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure, or by deed in lieu of foreclosure, is classified as real estate owned until such time as it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial recording of any loss is charged to the allowance for loan losses. As of June 30, 2012, American Federal Savings Bank had $2.7 million of real estate owned ($2.4 million net of valuation loss allowance). (Dollars in thousands) At June 30, 2011 2012 Non-accrual loans Real estate loans: Loans are reviewed on a quarterly basis and are placed on non-accrual status when they are 90 days or more delinquent. Loans may be placed on non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. At June 30, 2012, we had $1.8 million ($1.8 million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status. Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land $ $ 613 - - 362 221 171 660 - 833 265 36 20 - Home equity Consumer Commercial business Accruing loans delinquent 90 days or more Restructured loans: Commercial business Commercial real estate and land Total nonperforming loans Real estate owned and other repossed property, net Total nonperforming assets $ Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to non-performing loans Total nonperforming assets to total assets 1,424 650 186 376 56 247 - 90 1,314 3,218 2,361 5,579 $ 1.85% 0.98% 50.50% 1.70% - - 2,939 1,181 4,120 1.57% 0.89% 61.25% 1.24% Delinquent Loans. The following table provides information regarding the Bank’s loans that are delinquent 30 to 89 days as of the date indicated: At June 30, 2012 Number Amount Percentage of Total Delinquent Loans (Dollars in thousands) $ 5 - - 13 29 6 613 - - 362 221 171 44.84% 0.00% 0.00% 26.48% 16.17% 12.51% Loan type: Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land Home equity Consumer Commercial business Total 53 $ 1,367 100.00% Nonperforming Assets. The following table sets forth information regarding American Federal Savings Bank’s nonperforming assets as of the dates indicated. Non-accrual loans Real estate loans: Residential mortgage (one- to four-family) Real estate construction Commercial real estate and land Home equity Consumer Commercial business Accruing loans delinquent 90 days or more Restructured loans: Commercial business Commercial real estate and land Total nonperforming loans Real estate owned and other repossed property, net Total nonperforming assets At June 30, 2012 2011 (Dollars in thousands) $ $ $ 660 - 833 265 36 20 - 90 1,314 3,218 2,361 5,579 $ 1,424 650 186 376 56 247 - - - 2,939 1,181 4,120 Total nonperforming loans to total loans Total nonperforming loans to total assets Total allowance for loan loss to non-performing loans Total nonperforming assets to total assets 1.85% 0.98% 50.50% 1.70% 1.57% 0.89% 61.25% 1.24% 9 10 9 10 During the year ended June 30, 2012, the Bank had one foreclosed real estate property resulting in a loss of $11,000 upon sale and one resulting in a gain of $2,000 after incurring valuation losses of $58,000, and 5 other foreclosed real estate properties that incurred a provision for valuation losses of $111,000. During the year ended June 30, 2012, a minimal amount of interest was recorded on loans previously accounted for on a non-accrual basis. Classified Assets. Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to establish an allowance for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss asset, an allowance equal up to 100% of the loan balance is required to be established or the loan is required to be charged- off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and specific problem assets. Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process. In addition, each loan that exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more closely. The following table reflects our classified assets as of the dates indicated: During the year ended June 30, 2012, the Bank had one foreclosed real estate property resulting in a loss of $11,000 upon sale and one resulting in a gain of $2,000 after incurring valuation losses of $58,000, and 5 other foreclosed real estate properties that incurred a provision for valuation losses of $111,000. During the year ended June 30, 2012, a minimal amount of interest was recorded on loans previously accounted for on a non-accrual basis. 2012 2011 (Dollars in thousands) At June 30, Residential mortgage (one- to four-family): Special Mention Substandard Doubtful Loss Classified Assets. Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to Commercial Real Estate and Land: establish an allowance for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss Special Mention asset, an allowance equal up to 100% of the loan balance is required to be established or the loan is required to be charged- Substandard off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and Doubtful specific problem assets. Loss - 738 - 260 51 782 - - $ $ - 923 - - - 1,300 - 111 Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process. In addition, each loan that exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more closely. The following table reflects our classified assets as of the dates indicated: Real Estate construction: Special Mention Substandard Doubtful Loss - 721 - - - - - - Home equity loans: Special Mention Substandard Doubtful Loss Consumer loans: Special Mention Substandard Doubtful Loss Commercial loans: Special Mention Substandard Doubtful Loss Securities available for sale: Special Mention Substandard Doubtful Loss Real estate owned/repossessed property: Special Mention Substandard Doubtful Loss - 242 148 - - 76 15 2 5 1,492 - - - 209 - - - 2,361 - 300 Total classified loans and real estate owned $ 6,606 $ - 233 - 378 - 121 - 14 1,454 446 - 125 - 436 - - - 1,181 - 189 7,707 11 12 11 12 Residential mortgage (one- to four-family): At June 30, 2012 2011 (Dollars in thousands) $ $ - Commercial Real Estate and Land: Real Estate construction: Special Mention Special Mention Substandard Doubtful Loss Special Mention Substandard Doubtful Loss Substandard Doubtful Loss Home equity loans: Special Mention Substandard Doubtful Loss Consumer loans: Special Mention Substandard Doubtful Loss Commercial loans: Special Mention Substandard Doubtful Loss Special Mention Substandard Doubtful Loss Special Mention Substandard Doubtful Loss Securities available for sale: Real estate owned/repossessed property: 923 51 782 242 148 76 15 2 5 1,492 - - - - - - - - - - - - - - - - - - 1,300 111 738 260 721 233 378 121 14 1,454 446 125 - - - - - - - - - - - - - - - - - 209 436 2,361 300 1,181 189 Total classified loans and real estate owned $ 6,606 $ 7,707 During the year ended June 30, 2012, the Bank had one foreclosed real estate property resulting in a loss of $11,000 upon sale and one resulting in a gain of $2,000 after incurring valuation losses of $58,000, and 5 other foreclosed real estate properties that incurred a provision for valuation losses of $111,000. During the year ended June 30, 2012, a minimal amount of interest was recorded on loans previously accounted for on a non-accrual basis. Classified Assets. Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to establish an allowance for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss asset, an allowance equal up to 100% of the loan balance is required to be established or the loan is required to be charged- off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and specific problem assets. Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process. In addition, each loan that exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more closely. The following table reflects our classified assets as of the dates indicated: During the year ended June 30, 2012, the Bank had one foreclosed real estate property resulting in a loss of $11,000 upon sale and one resulting in a gain of $2,000 after incurring valuation losses of $58,000, and 5 other foreclosed real estate properties that incurred a provision for valuation losses of $111,000. During the year ended June 30, 2012, a minimal amount of interest was recorded on loans previously accounted for on a non-accrual basis. 2012 2011 (Dollars in thousands) At June 30, Residential mortgage (one- to four-family): Special Mention Substandard Doubtful Loss Classified Assets. Management, in compliance with regulatory guidelines, conducts an internal loan review program, whereby loans are placed or classified in categories depending upon the level of risk of nonpayment or loss. These categories are special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to Commercial Real Estate and Land: establish an allowance for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss Special Mention asset, an allowance equal up to 100% of the loan balance is required to be established or the loan is required to be charged- Substandard off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and Doubtful specific problem assets. Loss - 738 - 260 51 782 - - $ $ - 923 - - - 1,300 - 111 Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process. In addition, each loan that exceeds $500,000 and each group of loans that exceeds $500,000 is monitored more closely. The following table reflects our classified assets as of the dates indicated: Real Estate construction: Special Mention Substandard Doubtful Loss - 721 - - - - - - Home equity loans: Special Mention Substandard Doubtful Loss Consumer loans: Special Mention Substandard Doubtful Loss Commercial loans: Special Mention Substandard Doubtful Loss Securities available for sale: Special Mention Substandard Doubtful Loss Real estate owned/repossessed property: Special Mention Substandard Doubtful Loss - 242 148 - - 76 15 2 5 1,492 - - - 209 - - - 2,361 - 300 Total classified loans and real estate owned $ 6,606 $ - 233 - 378 - 121 - 14 1,454 446 - 125 - 436 - - - 1,181 - 189 7,707 Residential mortgage (one- to four-family): Special Mention Substandard Doubtful Loss Commercial Real Estate and Land: Special Mention Substandard Doubtful Loss Real Estate construction: Special Mention Substandard Doubtful Loss Home equity loans: Special Mention Substandard Doubtful Loss Consumer loans: Special Mention Substandard Doubtful Loss Commercial loans: Special Mention Substandard Doubtful Loss Securities available for sale: Special Mention Substandard Doubtful Loss Real estate owned/repossessed property: Special Mention Substandard Doubtful Loss At June 30, 2012 2011 (Dollars in thousands) $ $ - 923 - - - 1,300 - 111 51 782 - - - - - - - 242 148 - - 76 15 2 5 1,492 - - - 209 - - - 2,361 - 300 - 738 - 260 - 721 - - - 233 - 378 - 121 - 14 1,454 446 - 125 - 436 - - - 1,181 - 189 7,707 Total classified loans and real estate owned $ 6,606 $ 11 12 11 12 Allowance for Loan Losses and Real Estate Owned. The Bank segregates its loan portfolio for loan losses into the following broad categories: real estate loans (residential mortgages [one- to four-family], real estate construction, commercial real estate and land) home equity loans, consumer loans, and commercial business loans. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above, which consists of two components: General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards, and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local, regional and national economy. At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans and other assets based on estimated losses on specific loans and on any real estate owned when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectibility may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. We had $1,625,000 in allowances for loan losses and $300,000 in allowance for valuation losses for other real estate owned at June 30, 2012. While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. In making loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. 2011 2012 (Dollars in thousands) Balance at beginning of period For the Years Ended June 30, The following table sets forth information with respect to our allowance for loan losses at the dates and for the periods indicated: Allowance for Loan Losses and Real Estate Owned. The Bank segregates its loan portfolio for loan losses into the following broad categories: real estate loans (residential mortgages [one- to four-family], real estate construction, commercial real estate and land) home equity loans, consumer loans, and commercial business loans. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above, which consists of two components: General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards, and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local, regional and national economy. Provision for loan losses Loans charged-off Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans and (125) other assets based on estimated losses on specific loans and on any real estate owned when a finding is made that a loss is (309) estimable and probable. Such evaluation includes a review of all loans for which full collectibility may not be reasonably (239) assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. (351) (33) (239) Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. We had $1,625,000 in allowances for loan losses and $300,000 in allowance for valuation losses for other real estate owned at June 30, 2012. (75) (130) - (30) (17) - Recoveries 1,800 1,100 1,101 948 $ $ While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans In making loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. Net loans charged-off (1,276) Balance at end of period $ 1,625 $ 1,800 It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. - - - - 4 - (248) - 8 - - 12 Allowance for loan losses to total loans Allowance for loan losses to total non-performing loans Net recoveries (charge-offs) to average loans outstanding during the period 0.93% 0.96% 50.50% 61.25% -0.68% -0.13% 13 14 13 14 The following table sets forth information with respect to our allowance for loan losses at the dates and for the periods indicated: Balance at beginning of period $ 1,800 $ 1,100 For the Years Ended June 30, 2012 2011 (Dollars in thousands) 1,101 (125) (309) (239) (351) (33) (239) - 8 - - 12 948 (75) (130) (30) (17) - - - - - - 4 - Provision for loan losses Loans charged-off Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans Recoveries Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans Net loans charged-off (1,276) (248) Balance at end of period $ 1,625 $ 1,800 Allowance for loan losses to total loans 0.93% 0.96% Allowance for loan losses to total non-performing loans 50.50% 61.25% Net recoveries (charge-offs) to average loans outstanding during the period -0.68% -0.13% Allowance for Loan Losses and Real Estate Owned. The Bank segregates its loan portfolio for loan losses into the following broad categories: real estate loans (residential mortgages [one- to four-family], real estate construction, commercial real estate and land) home equity loans, consumer loans, and commercial business loans. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above, which consists of two components: General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards, and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local, regional and national economy. At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans and other assets based on estimated losses on specific loans and on any real estate owned when a finding is made that a loss is estimable and probable. Such evaluation includes a review of all loans for which full collectibility may not be reasonably assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. We had $1,625,000 in allowances for loan losses and $300,000 in allowance for valuation losses for other real estate owned at June 30, 2012. While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. In making loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. 2011 2012 (Dollars in thousands) Balance at beginning of period For the Years Ended June 30, The following table sets forth information with respect to our allowance for loan losses at the dates and for the periods indicated: Allowance for Loan Losses and Real Estate Owned. The Bank segregates its loan portfolio for loan losses into the following broad categories: real estate loans (residential mortgages [one- to four-family], real estate construction, commercial real estate and land) home equity loans, consumer loans, and commercial business loans. The Bank provides for a general allowance for losses inherent in the portfolio in the categories referenced above, which consists of two components: General loss percentages which are calculated based on historical analyses and other factors such as volume and severity of delinquencies, local and national economy, underwriting standards, and other factors. This portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or inherent imprecision in the process. This portion of the allowance is subjective in nature and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and non-accruals; trends in volume; terms and portfolio mix; new credit products; changes in lending policies and procedures; and changes in the outlook for the local, regional and national economy. Provision for loan losses Loans charged-off Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans At least quarterly, the management of the Bank evaluates the need to establish an allowance against losses on loans and (125) other assets based on estimated losses on specific loans and on any real estate owned when a finding is made that a loss is (309) estimable and probable. Such evaluation includes a review of all loans for which full collectibility may not be reasonably (239) assured and considers, among other matters: the estimated market value of the underlying collateral of problem loans; prior loss experience; economic conditions; and overall portfolio quality. (351) (33) (239) Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. We had $1,625,000 in allowances for loan losses and $300,000 in allowance for valuation losses for other real estate owned at June 30, 2012. (75) (130) - (30) (17) - Recoveries 1,101 1,800 1,100 948 $ $ - 8 - - 12 - - - - 4 - (248) While we believe we have established our existing allowance for loan losses in accordance with generally accepted accounting principles, there can be no assurance that bank regulators, in reviewing our loan portfolio, will not request that we significantly increase our allowance for loan losses, or that general economic conditions, a deteriorating real estate market, or other factors will not cause us to significantly increase our allowance for loan losses, therefore negatively affecting our financial condition and earnings. Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans In making loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. Net loans charged-off (1,276) Balance at end of period $ 1,625 $ 1,800 It is our policy to review our loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. Allowance for loan losses to total loans Allowance for loan losses to total non-performing loans Net recoveries (charge-offs) to average loans outstanding during the period 0.93% 0.96% 50.50% 61.25% -0.68% -0.13% The following table sets forth information with respect to our allowance for loan losses at the dates and for the periods indicated: For the Years Ended June 30, 2012 2011 (Dollars in thousands) Balance at beginning of period $ 1,800 $ 1,100 Provision for loan losses Loans charged-off Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans Recoveries Real estate loans Commercial real estate and land Real estate construction Home equity Consumer Commercial business loans 1,101 (125) (309) (239) (351) (33) (239) - 8 - - 12 Net loans charged-off (1,276) 948 (75) (130) - (30) (17) - - - - - 4 - (248) Balance at end of period $ 1,625 $ 1,800 Allowance for loan losses to total loans Allowance for loan losses to total non-performing loans Net recoveries (charge-offs) to average loans outstanding during the period 0.93% 0.96% 50.50% 61.25% -0.68% -0.13% 13 14 13 14 The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated: INVESTMENT ACTIVITIES The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated: 2012 Percentage of Allowance to Total Allowance 24.80% 47.51% 0.62% 72.92% 9.60% 4.80% 12.68% 27.08% (Dollars in thousands) Loan Category to Total Loans Amount 35.11% $ 36.82% 0.83% 72.76% 369 652 18 1,039 13.50% 5.00% 8.74% 27.24% 481 57 223 761 2011 Percentage of Allowance to Total Allowance 20.56% 36.22% 0.94% 57.72% 26.72% 3.17% 12.39% 42.28% Loan Category to Total Loans 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% Amount 403 772 10 1,185 156 78 206 440 Real estate loans: Residential mortgage (one- to four-family) $ Commercial real estate and land Real estate construction Total real estate loans Other loans: Home equity Consumer Commercial business Total other loans Total $ 1,625 100.00% 100.00% $ 1,800 100.00% 100.00% General. Federally chartered savings banks such as American Federal Savings Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities, corporate debt securities and loans to other banking institutions. (Dollars in thousands) 2011 2012 Percentage of Allowance to Total Allowance Loan Category to Total Loans Percentage of Allowance to Total Allowance 403 772 10 1,185 Eagle maintains liquid assets that may be invested in specified short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They may also be increased based on management’s judgment as to the attractiveness of the yields then available in relation to other opportunities. Liquidity levels can also change based on management’s expectation of future yield levels, as well as management’s projections as to the short-term demand for funds to be used in the Bank’s loan origination and other activities. Eagle maintains an investment securities portfolio and a mortgage-backed securities portfolio as part of its investment portfolio. Amount Amount Real estate loans: Residential mortgage (one- to four-family) $ Commercial real estate and land Real estate construction Total real estate loans Investment Policies. The investment policy of Eagle, which is established by the board of directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing American Federal’s lending activities. The policy provides for available-for-sale (including those accounted for under FASB ASC 825), held-to-maturity, and trading classifications. However, Eagle currently does not hold any securities for purposes of trading or held-to-maturity. The policy permits investments in high credit quality instruments with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency obligations, state, county and municipal obligations, and mortgage-backed securities. Collateralized mortgage obligations, investment grade corporate debt securities, and commercial paper are also included. We also invest in Federal Home Loan Bank (FHLB) overnight deposits and federal funds, but these instruments are not considered part of the investment Total portfolio. Other loans: Home equity Consumer Commercial business Total other loans 26.72% 3.17% 12.39% 42.28% 13.50% 5.00% 8.74% 27.24% 9.60% 4.80% 12.68% 27.08% 481 57 223 761 156 78 206 440 100.00% $ 100.00% 100.00% 1,625 1,800 $ 35.11% $ 36.82% 0.83% 72.76% 24.80% 47.51% 0.62% 72.92% 20.56% 36.22% 0.94% 57.72% 369 652 18 1,039 Loan Category to Total Loans 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% 100.00% INVESTMENT ACTIVITIES General. Federally chartered savings banks such as American Federal Savings Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities, corporate debt securities and loans to other banking institutions. Eagle maintains liquid assets that may be invested in specified short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They may also be increased based on management’s judgment as to the attractiveness of the yields then available in relation to other opportunities. Liquidity levels can also change based on management’s expectation of future yield levels, as well as management’s projections as to the short-term demand for funds to be used in the Bank’s loan origination and other activities. Eagle maintains an investment securities portfolio and a mortgage-backed securities portfolio as part of its investment portfolio. Investment Policies. The investment policy of Eagle, which is established by the board of directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing American Federal’s lending activities. The policy provides for available-for-sale (including those accounted for under FASB ASC 825), held-to-maturity, and trading classifications. However, Eagle currently does not hold any securities for purposes of trading or held-to-maturity. The policy permits investments in high credit quality instruments with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency obligations, state, county and municipal obligations, and mortgage-backed securities. Collateralized mortgage obligations, investment grade corporate debt securities, and commercial paper are also included. We also invest in Federal Home Loan Bank (FHLB) overnight deposits and federal funds, but these instruments are not considered part of the investment portfolio. Our investment policy also includes several specific guidelines and restrictions to ensure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as defined within the policy) without prior approval from the board of directors. To secure such approval, management must demonstrate the business advantage of such investments. Our investment policy also includes several specific guidelines and restrictions to ensure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as defined within the policy) without prior approval from the board of directors. To secure such approval, management must demonstrate the business advantage of such investments. We do not participate in the use of off-balance sheet derivative financial instruments, except interest rate caps and certain financial instruments designated as cash flow hedges related to loans committed to be sold in the secondary market and interest rate swaps designated as fair-value hedges. Further, Eagle does not invest in securities which are not rated investment grade at time of purchase. We do not participate in the use of off-balance sheet derivative financial instruments, except interest rate caps and certain financial instruments designated as cash flow hedges related to loans committed to be sold in the secondary market and interest rate swaps designated as fair-value hedges. Further, Eagle does not invest in securities which are not rated investment grade at time of purchase. The Board, through its asset liability committee, has charged the President and CEO with implementation of the investment policy. All transactions are reported to the board of directors monthly, as well as the current composition of the portfolio, including market values and unrealized gains and losses. The Board, through its asset liability committee, has charged the President and CEO with implementation of the investment policy. All transactions are reported to the board of directors monthly, as well as the current composition of the portfolio, including market values and unrealized gains and losses. Investment Securities. We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under FASB ASC 825) or held-to-maturity to enhance total return on investments. At June 30, 2012, our investment securities included U.S. government and agency obligations, Small Business Administration pools, municipal securities, mortgage- backed securities, collateralized mortgage obligations and corporate obligations, all with varying characteristics as to rate, maturity and call provisions. Investment securities held-to-maturity represented none of Eagle’s total investment portfolio. Securities available-for-sale totaled 83% of Eagle’s total investment portfolio. The remaining percentage is comprised of interest-bearing deposits in banks and stock in the FHLB of Seattle. The Bank does not expect to alter the mix of U.S. Treasury obligations it will hold and purchase, notwithstanding the downgrade of U.S. Treasury debt obligations to AA+ by Standard & Poors. It will, however, continue to monitor developments. Investment Securities. We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under FASB ASC 825) or held-to-maturity to enhance total return on investments. At June 30, 2012, our investment securities included U.S. government and agency obligations, Small Business Administration pools, municipal securities, mortgage- backed securities, collateralized mortgage obligations and corporate obligations, all with varying characteristics as to rate, maturity and call provisions. Investment securities held-to-maturity represented none of Eagle’s total investment portfolio. Securities available-for-sale totaled 83% of Eagle’s total investment portfolio. The remaining percentage is comprised of interest-bearing deposits in banks and stock in the FHLB of Seattle. The Bank does not expect to alter the mix of U.S. Treasury obligations it will hold and purchase, notwithstanding the downgrade of U.S. Treasury debt obligations to AA+ by Standard & Poors. It will, however, continue to monitor developments. 15 16 15 16 The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated: INVESTMENT ACTIVITIES The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated: INVESTMENT ACTIVITIES (Dollars in thousands) 2012 Percentage of Allowance to Total Allowance Loan Category to Total Loans Amount Amount 403 772 10 1,185 156 78 206 440 24.80% 47.51% 0.62% 72.92% 9.60% 4.80% 12.68% 27.08% 35.11% $ 36.82% 0.83% 72.76% 369 652 18 1,039 13.50% 5.00% 8.74% 27.24% 481 57 223 761 2011 Percentage of Allowance to Total Allowance 20.56% 36.22% 0.94% 57.72% 26.72% 3.17% 12.39% 42.28% Loan Category to Total Loans 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% Real estate loans: Residential mortgage (one- to four-family) $ Commercial real estate and land Real estate construction Total real estate loans Other loans: Home equity Consumer Commercial business Total other loans Total $ 1,625 100.00% 100.00% $ 1,800 100.00% 100.00% General. Federally chartered savings banks such as American Federal Savings Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities, corporate debt securities and loans to other banking institutions. (Dollars in thousands) 2012 2011 Percentage of Allowance to Total Allowance Loan Category to Total Loans Percentage of Allowance to Total Allowance 403 772 10 1,185 Eagle maintains liquid assets that may be invested in specified short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They may also be increased based on management’s judgment as to the attractiveness of the yields then available in relation to other opportunities. Liquidity levels can also change based on management’s expectation of future yield levels, as well as management’s projections as to the short-term demand for funds to be used in the Bank’s loan origination and other activities. Eagle maintains an investment securities portfolio and a mortgage-backed securities portfolio as part of its investment portfolio. Amount Amount Real estate loans: Residential mortgage (one- to four-family) $ Commercial real estate and land Real estate construction Total real estate loans Investment Policies. The investment policy of Eagle, which is established by the board of directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing American Federal’s lending activities. The policy provides for available-for-sale (including those accounted for under FASB ASC 825), held-to-maturity, and trading classifications. However, Eagle currently does not hold any securities for purposes of trading or held-to-maturity. The policy permits investments in high credit quality instruments with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency obligations, state, county and municipal obligations, and mortgage-backed securities. Collateralized mortgage obligations, investment grade corporate debt securities, and commercial paper are also included. We also invest in Federal Home Loan Bank (FHLB) overnight deposits and federal funds, but these instruments are not considered part of the investment Total portfolio. Other loans: Home equity Consumer Commercial business Total other loans 13.50% 5.00% 8.74% 27.24% 26.72% 3.17% 12.39% 42.28% 9.60% 4.80% 12.68% 27.08% 481 57 223 761 156 78 206 440 100.00% $ 100.00% 100.00% 1,625 1,800 $ 35.11% $ 36.82% 0.83% 72.76% 24.80% 47.51% 0.62% 72.92% 20.56% 36.22% 0.94% 57.72% 369 652 18 1,039 Loan Category to Total Loans 37.34% 34.52% 2.68% 74.54% 14.84% 4.98% 5.64% 25.46% 100.00% General. Federally chartered savings banks such as American Federal Savings Bank have the authority to invest in various types of investment securities, including United States Treasury obligations, securities of various Federal agencies (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities, corporate debt securities and loans to other banking institutions. Eagle maintains liquid assets that may be invested in specified short-term securities and other investments. Liquidity levels may be increased or decreased depending on the yields on investment alternatives. They may also be increased based on management’s judgment as to the attractiveness of the yields then available in relation to other opportunities. Liquidity levels can also change based on management’s expectation of future yield levels, as well as management’s projections as to the short-term demand for funds to be used in the Bank’s loan origination and other activities. Eagle maintains an investment securities portfolio and a mortgage-backed securities portfolio as part of its investment portfolio. Investment Policies. The investment policy of Eagle, which is established by the board of directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing American Federal’s lending activities. The policy provides for available-for-sale (including those accounted for under FASB ASC 825), held-to-maturity, and trading classifications. However, Eagle currently does not hold any securities for purposes of trading or held-to-maturity. The policy permits investments in high credit quality instruments with diversified cash flows while permitting us to maximize total return within the guidelines set forth in our interest rate risk and liquidity management policies. Permitted investments include but are not limited to U.S. government obligations, government agency or government-sponsored agency obligations, state, county and municipal obligations, and mortgage-backed securities. Collateralized mortgage obligations, investment grade corporate debt securities, and commercial paper are also included. We also invest in Federal Home Loan Bank (FHLB) overnight deposits and federal funds, but these instruments are not considered part of the investment portfolio. Our investment policy also includes several specific guidelines and restrictions to ensure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as defined within the policy) without prior approval from the board of directors. To secure such approval, management must demonstrate the business advantage of such investments. Our investment policy also includes several specific guidelines and restrictions to ensure adherence with safe and sound activities. The policy prohibits investments in high-risk mortgage derivative products (as defined within the policy) without prior approval from the board of directors. To secure such approval, management must demonstrate the business advantage of such investments. We do not participate in the use of off-balance sheet derivative financial instruments, except interest rate caps and certain financial instruments designated as cash flow hedges related to loans committed to be sold in the secondary market and interest rate swaps designated as fair-value hedges. Further, Eagle does not invest in securities which are not rated investment grade at time of purchase. We do not participate in the use of off-balance sheet derivative financial instruments, except interest rate caps and certain financial instruments designated as cash flow hedges related to loans committed to be sold in the secondary market and interest rate swaps designated as fair-value hedges. Further, Eagle does not invest in securities which are not rated investment grade at time of purchase. The Board, through its asset liability committee, has charged the President and CEO with implementation of the investment policy. All transactions are reported to the board of directors monthly, as well as the current composition of the portfolio, including market values and unrealized gains and losses. The Board, through its asset liability committee, has charged the President and CEO with implementation of the investment policy. All transactions are reported to the board of directors monthly, as well as the current composition of the portfolio, including market values and unrealized gains and losses. Investment Securities. We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under FASB ASC 825) or held-to-maturity to enhance total return on investments. At June 30, 2012, our investment securities included U.S. government and agency obligations, Small Business Administration pools, municipal securities, mortgage- backed securities, collateralized mortgage obligations and corporate obligations, all with varying characteristics as to rate, maturity and call provisions. Investment securities held-to-maturity represented none of Eagle’s total investment portfolio. Securities available-for-sale totaled 83% of Eagle’s total investment portfolio. The remaining percentage is comprised of interest-bearing deposits in banks and stock in the FHLB of Seattle. The Bank does not expect to alter the mix of U.S. Treasury obligations it will hold and purchase, notwithstanding the downgrade of U.S. Treasury debt obligations to AA+ by Standard & Poors. It will, however, continue to monitor developments. Investment Securities. We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under FASB ASC 825) or held-to-maturity to enhance total return on investments. At June 30, 2012, our investment securities included U.S. government and agency obligations, Small Business Administration pools, municipal securities, mortgage- backed securities, collateralized mortgage obligations and corporate obligations, all with varying characteristics as to rate, maturity and call provisions. Investment securities held-to-maturity represented none of Eagle’s total investment portfolio. Securities available-for-sale totaled 83% of Eagle’s total investment portfolio. The remaining percentage is comprised of interest-bearing deposits in banks and stock in the FHLB of Seattle. The Bank does not expect to alter the mix of U.S. Treasury obligations it will hold and purchase, notwithstanding the downgrade of U.S. Treasury debt obligations to AA+ by Standard & Poors. It will, however, continue to monitor developments. 15 16 15 16 The following table sets forth the carrying value of our investment securities portfolio at the dates indicated: The following table sets forth the carrying value of our investment securities portfolio at the dates indicated: At June 30, 2012 2011 Carrying Value (Dollars in Thousands) Carrying Value Percentage of Total Percentage of Total Securities available-for-sale, at fair value: U.S. Government and agency obligations Corporate obligations Municipal obligations Collateralized mortgage obligations Mortgage-backed securities Total securities available for sale $ 21,055 3,945 42,060 15,370 6,847 89,277 19.58% $ 3.67% 39.10% 14.29% 6.37% 26,208 6,216 39,186 24,718 6,372 83.00% 102,700 Interest-bearing deposits 16,280 15.14% Federal funds sold - Federal Home Loan Bank capital stock, at cost 2,003 0.00% 1.86% 1,837 5,000 2,003 23.50% 5.57% 35.13% 22.16% 5.71% 92.07% 1.65% 4.48% 1.80% At June 30, 2012 2011 Carrying Value (Dollars in Thousands) Carrying Value Percentage of Total Percentage of Total Securities available-for-sale, at fair value: U.S. Government and agency obligations Corporate obligations Municipal obligations Collateralized mortgage obligations Mortgage-backed securities Total securities available for sale $ 21,055 3,945 42,060 15,370 6,847 89,277 19.58% $ 3.67% 39.10% 14.29% 6.37% 26,208 6,216 39,186 24,718 6,372 83.00% 102,700 Interest-bearing deposits 16,280 15.14% Federal funds sold - Federal Home Loan Bank capital stock, at cost 2,003 0.00% 1.86% 1,837 5,000 2,003 23.50% 5.57% 35.13% 22.16% 5.71% 92.07% 1.65% 4.48% 1.80% Total $ 107,560 100.00% $ 111,540 100.00% Total $ 107,560 100.00% $ 111,540 100.00% 17 17 The following table sets forth the carrying value of our investment securities portfolio at the dates indicated: The following table sets forth information regarding the carrying values, weighted average yields and maturities of our The following table sets forth the carrying value of our investment securities portfolio at the dates indicated: investment securities portfolio at June 30, 2012: The following table sets forth information regarding the carrying values, weighted average yields and maturities of our investment securities portfolio at June 30, 2012: The following table sets forth information regarding the carrying values, weighted average yields and maturities of our investment securities portfolio at June 30, 2012: The following table sets forth information regarding the carrying values, weighted average yields and maturities of our investment securities portfolio at June 30, 2012: One Year or Less One to Five Years More than Five to Ten Years More than Ten Years At June 30, 2012 2012 2011 Total Investment Securities One Year or Less One to Five Years More than Five to Ten Years More than Ten Years Total Investment Securities At June 30, 2012 At June 30, Securities available-for-sale, at fair value: U.S. Government and agency obligations $ 21,055 19.58% $ 26,208 Corporate obligations Municipal obligations Collateralized mortgage obligations Mortgage-backed securities Total securities available for sale 83.00% 102,700 Interest-bearing deposits 16,280 15.14% Federal funds sold At June 30, 2012 2011 (Dollars in Thousands) Carrying Percentage Carrying Percentage Value of Total Value of Total 3,945 42,060 15,370 6,847 89,277 3.67% 39.10% 14.29% 6.37% - 0.00% 1.86% 6,216 39,186 24,718 6,372 1,837 5,000 2,003 23.50% 5.57% 35.13% 22.16% 5.71% 92.07% 1.65% 4.48% 1.80% Annualized Weighted Average Yield Carrying Value Annualized Weighted Average Yield Carrying Value $ Securities available-for-sale: U.S. Government and agency obligations Corporate obligations Municipal obligations Private collateralized mortgage obligations Collateralized mortgage obligations Mortgage-backed securities 1.71 - - Securities available-for-sale, at fair value: U.S. Government and agency obligations % 2,564 - Corporate obligations - Municipal obligations - - - - Collateralized mortgage obligations 10 4.34 Mortgage-backed securities 13,152 3,945 5,719 2.36 3.19 3.89 - 3.38 5.32 - 359 33 $ % Total securities available for sale 23,208 2,574 1.72 2.90 Interest-bearing deposits Federal funds sold Federal Home Loan Bank capital stock Total Total securities available for sale 16,280 0.02 - 0 Interest-bearing deposits - - - Federal funds sold 0.25 18,854 $ - - - - - Carrying Value $ $ 2,913 - 15,933 - 2,552 376 21,774 - - 2,003 % $ 23,208 2.90 % $ 23,777 Federal Home Loan Bank capital stock, at cost 2,003 Federal Home Loan Bank capital stock, at cost Carrying Annualized Weighted Value Average Yield % 21,055 1.32 - 3,945 4.99 42,060 - 3.75 15,370 3.39 6,847 4.33 89,277 - - 16,280 - - 3.96 2,003 % (Dollars in Thousands) Carrying Value Percentage of Total Carrying Value Annualized Weighted Average Yield Carrying Value Percentage of Total Approximate Market Value Annualized Weighted Average Yield % $ 19.58% $ 2,426 2.42 - - 3.67% 20,408 6.27 39.10% 169 12,290 14.29% 6,428 6.37% 7.01 3.46 3.60 41,721 4.81 21,055 3,945 42,060 26,208 $ 6,216 39,186 24,718 6,372 169 15,201 6,847 89,277 $ 23.50% 21,055 3,945 5.57% 42,060 35.13% 169 15,201 22.16% 6,847 5.71% 89,277 % 2.14 3.19 5.46 7.01 3.51 3.60 4.11 83.00% - - 15.14% - - - - 0.00% $ 41,721 4.81 % 1.86% 102,700 16,280 92.07% 16,280 0.02 0 1,837 2,003 107,560 5,000 $ 2,003 - 1.65% 2,003 - - 4.48% $ 107,560 1.80% Total $ 107,560 100.00% $ 111,540 100.00% Total $ 107,560 100.00% $ 111,540 100.00% 18 17 18 17 Securities available-for-sale: U.S. Government and agency obligations Corporate obligations Municipal obligations Private collateralized mortgage obligations Collateralized mortgage obligations Mortgage-backed securities Carrying Value $ 2,564 - - - - 10 Total securities available for sale 2,574 Interest-bearing deposits 16,280 Federal funds sold Federal Home Loan Bank capital stock 0 - Annualized Weighted Average Yield Annualized Weighted Average Yield Carrying Value 1.71 - - - - 4.34 1.72 0.02 - - % $ 13,152 3,945 5,719 - 359 33 23,208 - - - 2.36 3.19 3.89 - 3.38 5.32 2.90 - - - Carrying Value % $ 2,913 - 15,933 - 2,552 376 21,774 - - 2,003 Annualized Weighted Average Yield Carrying Value Annualized Weighted Average Yield Carrying Value Approximate Market Value Annualized Weighted Average Yield 1.32 - 4.99 - 3.75 3.39 4.33 - - - % $ 2,426 - 20,408 169 12,290 6,428 41,721 - - - 2.42 - 6.27 7.01 3.46 3.60 4.81 - - - % $ 21,055 3,945 42,060 $ 21,055 3,945 42,060 169 15,201 6,847 169 15,201 6,847 89,277 89,277 16,280 16,280 0 - 2,003 2,003 % 2.14 3.19 5.46 7.01 3.51 3.60 4.11 0.02 - - 3.41 % Total $ 18,854 0.25 % $ 23,208 2.90 % $ 23,777 3.96 % $ 41,721 4.81 % $ 107,560 $ 107,560 3.41 % 18 18 SOURCES OF FUNDS General. Deposits are the major source of our funds for lending and other investment purposes. Borrowings (principally from the FHLB of Seattle) are also used to compensate for reductions in the availability of funds from other sources. In addition to deposits and borrowings, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities and from the sale of loans. Loan and mortgage-backed securities payments are a relatively stable source of funds, while loan prepayments and deposit inflows are significantly influenced by general interest rates and financial market conditions. Deposits. We offer a variety of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate. Our current deposit products include certificates of deposit accounts ranging in terms from 90 days to five years as well as checking, savings and money market accounts. Individual retirement accounts (IRAs) are included in certificates of deposit. Deposits are obtained primarily from residents of Helena, Bozeman, Butte and Townsend. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates and convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television, print media advertising and sales training and incentive programs for employees. Management believes that non-residents of Montana hold an insignificant number and amount of deposit accounts. We pay interest rates on deposits which are competitive in our market. Interest rates on deposits are set by senior management, based on a number of factors, including: projected cash flow; a current survey of a selected group of competitors’ rates for similar products; external data which may influence interest rates; investment opportunities and loan demand; and scheduled certificate maturities and loan and investment repayments. Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are our checking, as well as NOW accounts, savings accounts, money market accounts and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits amounted to $163.6 million or 74.35% of the Bank’s deposits at June 30, 2012 ($138.6 million or 63.0% if IRA certificates of deposit are excluded). The presence of a high percentage of core deposits and, in particular, transaction accounts, is part of our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds. SOURCES OF FUNDS The following table sets forth American Federal’s distribution of deposit accounts at the dates indicated and the weighted average interest rate on each category of deposit represented: The following table sets forth American Federal’s distribution of deposit accounts at the dates indicated and the weighted average interest rate on each category of deposit represented: General. Deposits are the major source of our funds for lending and other investment purposes. Borrowings (principally from the FHLB of Seattle) are also used to compensate for reductions in the availability of funds from other sources. In addition to deposits and borrowings, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities and from the sale of loans. Loan Weighted and mortgage-backed securities payments are a relatively stable source of funds, while loan prepayments and deposit Average inflows are significantly influenced by general interest rates and financial market conditions. Amount Rate Weighted Average Rate (Dollars in thousands) Percent of Total Percent of Total At June 30, Amount 2011 2012 Deposits. We offer a variety of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, Noninterest checking 23,425 the amount of time that the funds must remain on deposit and the applicable interest rate. Savings 40,591 NOW account/Interest bearing checking Money market accounts Our current deposit products include certificates of deposit accounts ranging in terms from 90 days to five years as well as checking, savings and money market accounts. Individual retirement accounts (IRAs) are included in certificates of deposit. 20.97% 12.95% 19.29% 13.51% 10.65% 18.45% 9.11% 17.66% 40,352 28,284 46,125 28,489 19,052 36,945 0.05% 0.14% 0.00% 0.10% $ $ 0.00% 0.10% 0.05% 0.12% Total Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Deposits are obtained primarily from residents of Helena, Bozeman, Butte and Townsend. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates and convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television, print media advertising and sales training and incentive programs for employees. Management believes that non-residents of Montana hold an insignificant number and amount of deposit accounts. 124,633 138,630 59.58% 63.02% 0.08% 0.07% 24,941 - 56,418 81,359 11.34% 0.00% 25.65% 36.98% 0.98% 0.00% 1.18% 1.12% 25,020 - 59,533 84,553 11.96% 0.00% 28.46% 40.42% 1.07% 0.00% 1.38% 1.29% We pay interest rates on deposits which are competitive in our market. Interest rates on deposits are set by senior management, based on a number of factors, including: projected cash flow; a current survey of a selected group of competitors’ rates for similar products; external data which may influence interest rates; investment opportunities and loan demand; and scheduled certificate maturities and loan and investment repayments. $ 219,989 100.00% 0.46% $ 209,186 100.00% Total deposits 0.57% Noninterest checking Savings checking NOW account/Interest bearing Money market accounts Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Amount $ 23,425 40,591 46,125 28,489 24,941 - 56,418 81,359 2012 Percent of Total 10.65% 18.45% 20.97% 12.95% 11.34% 0.00% 25.65% 36.98% At June 30, (Dollars in thousands) 2011 Weighted Average Rate Amount Percent of Total Weighted Average Rate 0.00% 0.10% $ 19,052 36,945 0.05% 0.14% 40,352 28,284 0.98% 0.00% 1.18% 1.12% 25,020 - 59,533 84,553 9.11% 17.66% 19.29% 13.51% 11.96% 0.00% 28.46% 40.42% 0.00% 0.10% 0.05% 0.12% 1.07% 0.00% 1.38% 1.29% Total 138,630 63.02% 0.08% 124,633 59.58% 0.07% Total deposits $ 219,989 100.00% 0.46% $ 209,186 100.00% 0.57% The following table sets forth the amounts and maturities of our certificates of deposit as of June 30, 2012, for the maturity dates indicated: under 0.51% 0.51-0.75% 0.76-1.00% 1.01-1.25% 1.26-1.50% 1.51-2.00% 2.01% and higher $ 21,615 $ - $ - $ - $ 21,615 June 30, 2013 June 30, 2014 June 30, 2015 11,655 1,761 14,779 374 52 4,512 1,105 906 8,135 298 343 3,908 12 522 891 348 967 3,237 After June 30, 2015 - 6 97 908 3,015 1,913 Total 12,772 3,195 23,902 1,928 4,377 13,570 The following table sets forth the amounts and maturities of our certificates of deposit as of June 30, 2012, for the maturity dates indicated: Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are our checking, as well as NOW accounts, savings accounts, money market accounts and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits amounted to $163.6 million or 74.35% of the Bank’s deposits at June 30, 2012 ($138.6 million or 63.0% if IRA certificates of deposit are excluded). The presence of a high percentage of core deposits and, in particular, transaction accounts, is part of our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds. After June 30, 2015 June 30, 2013 June 30, 2014 June 30, 2015 Total $ $ - $ - under 0.51% 0.51-0.75% 0.76-1.00% 1.01-1.25% 1.26-1.50% 1.51-2.00% 2.01% and higher $ - 1,105 906 8,135 298 343 3,908 - $ 12 522 891 348 967 3,237 21,615 11,655 1,761 14,779 374 52 4,512 21,615 12,772 3,195 23,902 1,928 4,377 13,570 6 97 908 3,015 1,913 Total $ 54,748 $ 14,695 $ 5,977 $ 5,939 $ 81,359 Total $ 54,748 $ 14,695 $ 5,977 $ 5,939 $ 81,359 19 20 19 20 SOURCES OF FUNDS General. Deposits are the major source of our funds for lending and other investment purposes. Borrowings (principally from the FHLB of Seattle) are also used to compensate for reductions in the availability of funds from other sources. In addition to deposits and borrowings, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities and from the sale of loans. Loan and mortgage-backed securities payments are a relatively stable source of funds, while loan prepayments and deposit inflows are significantly influenced by general interest rates and financial market conditions. We offer a variety of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate. Our current deposit products include certificates of deposit accounts ranging in terms from 90 days to five years as well as checking, savings and money market accounts. Individual retirement accounts (IRAs) are included in certificates of Deposits. deposit. Deposits are obtained primarily from residents of Helena, Bozeman, Butte and Townsend. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates and convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television, print media advertising and sales training and incentive programs for employees. Management believes that non-residents of Montana hold an insignificant number and amount of deposit accounts. We pay interest rates on deposits which are competitive in our market. Interest rates on deposits are set by senior management, based on a number of factors, including: projected cash flow; a current survey of a selected group of competitors’ rates for similar products; external data which may influence interest rates; investment opportunities and loan demand; and scheduled certificate maturities and loan and investment repayments. Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are our checking, as well as NOW accounts, savings accounts, money market accounts and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits amounted to $163.6 million or 74.35% of the Bank’s deposits at June 30, 2012 ($138.6 million or 63.0% if IRA certificates of deposit are excluded). The presence of a high percentage of core deposits and, in particular, transaction accounts, is part of our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds. SOURCES OF FUNDS The following table sets forth American Federal’s distribution of deposit accounts at the dates indicated and the weighted average interest rate on each category of deposit represented: The following table sets forth American Federal’s distribution of deposit accounts at the dates indicated and the weighted average interest rate on each category of deposit represented: General. Deposits are the major source of our funds for lending and other investment purposes. Borrowings (principally from the FHLB of Seattle) are also used to compensate for reductions in the availability of funds from other sources. In addition to deposits and borrowings, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities and from the sale of loans. Loan Weighted and mortgage-backed securities payments are a relatively stable source of funds, while loan prepayments and deposit Average inflows are significantly influenced by general interest rates and financial market conditions. Amount Rate Weighted Average Rate (Dollars in thousands) Percent of Total Percent of Total At June 30, Amount 2012 2011 Deposits. We offer a variety of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, Noninterest checking 23,425 the amount of time that the funds must remain on deposit and the applicable interest rate. Savings 40,591 NOW account/Interest bearing checking Money market accounts Our current deposit products include certificates of deposit accounts ranging in terms from 90 days to five years as well as checking, savings and money market accounts. Individual retirement accounts (IRAs) are included in certificates of deposit. 20.97% 12.95% 19.29% 13.51% 10.65% 18.45% 9.11% 17.66% 40,352 28,284 46,125 28,489 19,052 36,945 0.05% 0.14% 0.00% 0.10% $ $ 0.00% 0.10% 0.05% 0.12% Total Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Deposits are obtained primarily from residents of Helena, Bozeman, Butte and Townsend. We believe we are able to attract deposit accounts by offering outstanding service, competitive interest rates and convenient locations and service hours. We use traditional methods of advertising to attract new customers and deposits, including radio, television, print media advertising and sales training and incentive programs for employees. Management believes that non-residents of Montana hold an insignificant number and amount of deposit accounts. 138,630 124,633 63.02% 59.58% 0.08% 0.07% 24,941 - 56,418 81,359 11.34% 0.00% 25.65% 36.98% 0.98% 0.00% 1.18% 1.12% 25,020 - 59,533 84,553 11.96% 0.00% 28.46% 40.42% 1.07% 0.00% 1.38% 1.29% We pay interest rates on deposits which are competitive in our market. Interest rates on deposits are set by senior management, based on a number of factors, including: projected cash flow; a current survey of a selected group of competitors’ rates for similar products; external data which may influence interest rates; investment opportunities and loan demand; and scheduled certificate maturities and loan and investment repayments. $ 219,989 100.00% 0.46% $ 209,186 100.00% 0.57% Total deposits The following table sets forth the amounts and maturities of our certificates of deposit as of June 30, 2012, for the maturity dates indicated: Core deposits are deposits that are more stable and somewhat less sensitive to rate changes. They also represent a lower cost source of funds than rate sensitive, more volatile accounts such as certificates of deposit. We believe that our core deposits are our checking, as well as NOW accounts, savings accounts, money market accounts and IRA accounts. Based on our historical experience, we include IRA accounts funded by certificates of deposit as core deposits because they exhibit the principal features of core deposits in that they are stable and generally are not rate sensitive. Core deposits amounted to $163.6 million or 74.35% of the Bank’s deposits at June 30, 2012 ($138.6 million or 63.0% if IRA certificates of deposit are excluded). The presence of a high percentage of core deposits and, in particular, transaction accounts, is part of our strategy to restructure our liabilities to more closely resemble the lower cost liabilities of a commercial bank. However, a significant portion of our deposits remains in certificate of deposit form. These certificates of deposit, if they mature and are renewed at higher rates, would result in an increase in our cost of funds. After June 30, 2015 June 30, 2013 June 30, 2015 June 30, 2014 Total $ $ - $ - under 0.51% 0.51-0.75% 0.76-1.00% 1.01-1.25% 1.26-1.50% 1.51-2.00% 2.01% and higher 21,615 11,655 1,761 14,779 374 52 4,512 - $ 1,105 906 8,135 298 343 3,908 - $ 12 522 891 348 967 3,237 21,615 12,772 3,195 23,902 1,928 4,377 13,570 6 97 908 3,015 1,913 2012 Percent of Total 10.65% 18.45% 20.97% 12.95% At June 30, (Dollars in thousands) 2011 Weighted Average Rate Amount Percent of Total Weighted Average Rate 0.00% 0.10% $ 19,052 36,945 0.05% 0.14% 40,352 28,284 9.11% 17.66% 19.29% 13.51% 0.00% 0.10% 0.05% 0.12% Amount $ 23,425 40,591 46,125 28,489 138,630 63.02% 0.08% 124,633 59.58% 0.07% 24,941 - 56,418 81,359 11.34% 0.00% 25.65% 36.98% 0.98% 0.00% 1.18% 1.12% 25,020 - 59,533 84,553 11.96% 0.00% 28.46% 40.42% 1.07% 0.00% 1.38% 1.29% Noninterest checking Savings NOW account/Interest bearing checking Money market accounts Total Certificates of deposit accounts: IRA certificates Brokered certificates Other certificates Total certificates of deposit Total deposits $ 219,989 100.00% 0.46% $ 209,186 100.00% 0.57% The following table sets forth the amounts and maturities of our certificates of deposit as of June 30, 2012, for the maturity dates indicated: under 0.51% 0.51-0.75% 0.76-1.00% 1.01-1.25% 1.26-1.50% 1.51-2.00% 2.01% and higher June 30, 2013 June 30, 2014 June 30, 2015 $ 21,615 11,655 1,761 14,779 374 52 4,512 - $ 1,105 906 8,135 298 343 3,908 - $ 12 522 891 348 967 3,237 After June 30, 2015 - $ - 6 97 908 3,015 1,913 Total $ 21,615 12,772 3,195 23,902 1,928 4,377 13,570 Total $ 54,748 $ 14,695 $ 5,977 $ 5,939 $ 81,359 Total $ 54,748 $ 14,695 $ 5,977 $ 5,939 $ 81,359 19 20 19 20 The following table shows the amount of certificates of deposit with balances of $100,000 to $250,000 and of more than $250,000 by time remaining until maturity as of June 30, 2012: The following table sets forth information concerning our borrowing from the FHLB of Seattle and PNC at the end of, and during, the periods indicated: The following table shows the amount of certificates of deposit with balances of $100,000 to $250,000 and of more than $250,000 by time remaining until maturity as of June 30, 2012: during, the periods indicated: The following table sets forth information concerning our borrowing from the FHLB of Seattle and PNC at the end of, and (In thousands) 3 months or less Over 3 to 6 months Over 6 to 12 months Over 12 months Balance Greater than $250 $ 1,011 512 2,666 1,608 $100 - $250 3,910 $ 3,446 5,123 8,080 Total $ 4,921 3,958 7,789 9,688 Total $ 20,559 $ 5,797 $ 26,356 The following table sets forth the net changes in deposit accounts for the periods indicated: Opening balance Deposits, net Interest credited Ending balance Net increase Percent increase Weighted average cost of deposits during the period Weighted average cost of deposits at end of period Year Ended June 30, 2012 2011 (Dollars in thousands) $ 209,186 9,748 1,055 $ 197,939 9,867 1,380 $ 219,989 $ 209,186 $ 10,803 $ 11,247 5.16% 5.68% 0.56% 0.75% 0.46% 0.57% Our depositors are primarily residents of the state of Montana. Borrowings. Deposits are the primary source of funds for our lending and investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also borrow funds in the form of advances from the FHLB of Seattle and other borrowings from PNC Financial Services, Inc. (PNC) to supplement our supply of lendable funds and to meet deposit withdrawal requirements. During the fiscal year ended June 30, 2006, our predecessor entity formed a special purpose subsidiary, Eagle Bancorp Statutory Trust I (the “Trust”), for the purpose of issuing trust preferred securities in the amount of $5.0 million. Our predecessor entity has issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our predecessor in connection with the subordinated debentures and trust preferred securities. For regulatory purposes, the securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have a 30 year maturity and carried a fixed coupon of 6.02% for the first five years, at which time the coupon became variable, at a spread of 142 basis points over 3 month LIBOR. At June 30, 2012 the rate was 1.881%. (In thousands) The following table sets forth the net changes in deposit accounts for the periods indicated: $ $ 23,000 23,000 Year Ended June 30, 23,000 2012 2011 4.66% (Dollars in thousands) 4.66% 17,678 23,000 9,000 4.66% 4.61% Repurchase Agreements: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end 3 months or less FHLB Advances: Over 3 to 6 months Average balance Over 6 to 12 months Maximum balance at any month-end Over 12 months Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Total $ Balance $ Ended June 30, 2011 2012 Greater than $250 (Dollars in thousands) 1,011 512 2,666 1,608 $ $ Total $ 4,921 3,958 7,789 9,688 $100 - $250 3,910 $ 3,446 5,123 8,080 35,973 37,879 33,696 3.25% 3.19% 41,008 45,346 37,896 3.47% $ 3.26% 20,559 $ 5,797 26,356 FHLB Advances: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Repurchase Agreements: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Other: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Total borrowings: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Ended June 30, 2012 2011 (Dollars in thousands) $ 35,973 $ 41,008 $ 17,678 $ 23,000 37,879 33,696 3.25% 3.19% 23,000 9,000 4.66% 4.61% - - n/a n/a 45,346 37,896 3.47% 3.26% 23,000 23,000 4.66% 4.66% - - n/a n/a $ - $ - $ 53,651 $ 64,008 60,879 42,696 3.49% 3.49% 68,346 60,896 3.90% 3.79% Personnel As of June 30, 2012, we had 83 full-time employees and 7 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be good. Opening balance Other: Deposits, net Average balance Interest credited Maximum balance at any month-end Balance at period end Ending balance Weighted average interest rate during the period Weighted average interest rate at period end $ 209,186 9,748 - $ 1,055 - - $ 219,989 n/a n/a Net increase $ 10,803 Percent increase Total borrowings: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Weighted average cost of deposits during the period $ 5.16% 53,651 60,879 42,696 0.56% 3.49% 3.49% $ 197,939 9,867 - $ 1,380 - - 209,186 n/a n/a 11,247 $ $ $ 5.68% 64,008 68,346 60,896 0.75% 3.90% 3.79% SUBSIDIARY ACTIVITY Weighted average cost of deposits at end of period 0.46% 0.57% SUBSIDIARY ACTIVITY We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. We do not have any subsidiaries, except for American Federal Savings Bank and Eagle Bancorp Statutory Trust I. Our depositors are primarily residents of the state of Montana. We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. We do not have any subsidiaries, except for American Federal Savings Bank and Eagle Bancorp Statutory Trust I. Personnel Borrowings. Deposits are the primary source of funds for our lending and investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also borrow funds in the form of advances from the FHLB of Seattle and other borrowings from PNC Financial Services, Inc. (PNC) to supplement our supply of lendable funds and to meet deposit withdrawal requirements. As of June 30, 2012, we had 83 full-time employees and 7 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be good. During the fiscal year ended June 30, 2006, our predecessor entity formed a special purpose subsidiary, Eagle Bancorp Statutory Trust I (the “Trust”), for the purpose of issuing trust preferred securities in the amount of $5.0 million. Our predecessor entity has issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our predecessor in connection with the subordinated debentures and trust preferred securities. For regulatory purposes, the securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have a 30 year maturity and carried a fixed coupon of 6.02% for the first five years, at which time the coupon became variable, at a spread of 142 basis points over 3 month LIBOR. At June 30, 2012 the rate was 1.881%. 21 22 21 22 The following table shows the amount of certificates of deposit with balances of $100,000 to $250,000 and of more than $250,000 by time remaining until maturity as of June 30, 2012: The following table sets forth information concerning our borrowing from the FHLB of Seattle and PNC at the end of, and during, the periods indicated: The following table shows the amount of certificates of deposit with balances of $100,000 to $250,000 and of more than $250,000 by time remaining until maturity as of June 30, 2012: The following table sets forth information concerning our borrowing from the FHLB of Seattle and PNC at the end of, and during, the periods indicated: (In thousands) Balance $100 - $250 Greater than $250 3 months or less Over 3 to 6 months Over 6 to 12 months Over 12 months $ 3,910 $ 1,011 $ 4,921 3,446 5,123 8,080 512 2,666 1,608 Total 3,958 7,789 9,688 Total $ 20,559 $ 5,797 $ 26,356 The following table sets forth the net changes in deposit accounts for the periods indicated: Opening balance Deposits, net Interest credited Ending balance Net increase Percent increase Weighted average cost of deposits during the period Weighted average cost of deposits at end of period Year Ended June 30, 2012 2011 (Dollars in thousands) $ 209,186 $ 197,939 9,748 1,055 9,867 1,380 $ 219,989 $ 209,186 $ 10,803 $ 11,247 5.16% 5.68% 0.56% 0.75% 0.46% 0.57% Our depositors are primarily residents of the state of Montana. Borrowings. Deposits are the primary source of funds for our lending and investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also borrow funds in the form of advances from the FHLB of Seattle and other borrowings from PNC Financial Services, Inc. (PNC) to supplement our supply of lendable funds and to meet deposit withdrawal requirements. During the fiscal year ended June 30, 2006, our predecessor entity formed a special purpose subsidiary, Eagle Bancorp Statutory Trust I (the “Trust”), for the purpose of issuing trust preferred securities in the amount of $5.0 million. Our predecessor entity has issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our predecessor in connection with the subordinated debentures and trust preferred securities. For regulatory purposes, the securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have a 30 year maturity and carried a fixed coupon of 6.02% for the first five years, at which time the coupon became variable, at a spread of 142 basis points over 3 month LIBOR. At June 30, 2012 the rate was 1.881%. (In thousands) 3 months or less FHLB Advances: Over 3 to 6 months Average balance Over 6 to 12 months Maximum balance at any month-end Over 12 months Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Total $ Repurchase Agreements: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Balance $ Ended June 30, 2011 2012 Greater than $250 (Dollars in thousands) 1,011 512 2,666 1,608 $ $ Total $ 4,921 3,958 7,789 9,688 $100 - $250 3,910 $ 3,446 5,123 8,080 35,973 37,879 33,696 3.25% 3.19% 41,008 45,346 37,896 3.47% $ 3.26% 20,559 $ 5,797 26,356 $ $ 23,000 23,000 Year Ended June 30, 23,000 2012 2011 4.66% (Dollars in thousands) 4.66% 17,678 23,000 9,000 4.66% 4.61% The following table sets forth the net changes in deposit accounts for the periods indicated: Opening balance Other: Deposits, net Average balance Interest credited Maximum balance at any month-end Balance at period end Ending balance Weighted average interest rate during the period Weighted average interest rate at period end $ 209,186 9,748 $ - 1,055 - - $ 219,989 n/a n/a Net increase $ 10,803 Percent increase Total borrowings: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Weighted average cost of deposits during the period $ 5.16% 53,651 60,879 42,696 0.56% 3.49% 3.49% $ 197,939 9,867 - $ 1,380 - - 209,186 n/a n/a 11,247 $ $ $ 5.68% 64,008 68,346 60,896 0.75% 3.90% 3.79% FHLB Advances: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Repurchase Agreements: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Other: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Total borrowings: Average balance Maximum balance at any month-end Balance at period end Weighted average interest rate during the period Weighted average interest rate at period end Ended June 30, 2011 2012 (Dollars in thousands) $ 35,973 37,879 33,696 3.25% 3.19% $ 41,008 45,346 37,896 3.47% 3.26% $ 17,678 23,000 9,000 4.66% 4.61% $ 23,000 23,000 23,000 4.66% 4.66% $ - - - $ - - - n/a n/a n/a n/a $ 53,651 60,879 42,696 3.49% 3.49% $ 64,008 68,346 60,896 3.90% 3.79% SUBSIDIARY ACTIVITY Weighted average cost of deposits at end of period 0.46% 0.57% SUBSIDIARY ACTIVITY We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. We do not have any subsidiaries, except for American Federal Savings Bank and Eagle Bancorp Statutory Trust I. Our depositors are primarily residents of the state of Montana. We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. We do not have any subsidiaries, except for American Federal Savings Bank and Eagle Bancorp Statutory Trust I. Personnel Borrowings. Deposits are the primary source of funds for our lending and investment activities and for general business purposes. However, as the need arises, or in order to take advantage of funding opportunities, we also borrow funds in the form of advances from the FHLB of Seattle and other borrowings from PNC Financial Services, Inc. (PNC) to supplement our supply of lendable funds and to meet deposit withdrawal requirements. As of June 30, 2012, we had 83 full-time employees and 7 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be good. Personnel As of June 30, 2012, we had 83 full-time employees and 7 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees to be good. During the fiscal year ended June 30, 2006, our predecessor entity formed a special purpose subsidiary, Eagle Bancorp Statutory Trust I (the “Trust”), for the purpose of issuing trust preferred securities in the amount of $5.0 million. Our predecessor entity has issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our predecessor in connection with the subordinated debentures and trust preferred securities. For regulatory purposes, the securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have a 30 year maturity and carried a fixed coupon of 6.02% for the first five years, at which time the coupon became variable, at a spread of 142 basis points over 3 month LIBOR. At June 30, 2012 the rate was 1.881%. 21 22 21 22 REGULATION Set forth below is a brief description of certain laws and regulations applicable to Eagle and American Federal. These descriptions of laws and regulations as well as those contained elsewhere do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Legislative or regulatory changes in the future could adversely affect our operations or financial condition. General As a federally-chartered savings institution, American Federal is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency (“OCC”) which assumed jurisdiction over Eagle and American Federal after the close of Eagle’s June 30, 2011 fiscal year as its primary federal regulator, and the FDIC, as the insurer of its deposits. American Federal is a member of the Federal Home Loan Bank, or FHLB System, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC. There are periodic examinations to evaluate American Federal’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC may also examine American Federal. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for loan losses for regulatory purposes. Eagle, as a savings and loan holding company, was required to file certain reports with, is subject to examination by, and otherwise comply with the rules and regulations of the Office of Thrift Supervision which have been adopted by the OCC. The Federal Reserve Board assumed regulatory responsibility for Eagle during this year. Eagle is also subject to the rules and regulations of the SEC under the federal securities laws. See “—Holding Company Regulation.” Dodd-Frank Act On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. Regulations implementing the changes described below have not been promulgated by the federal banking agencies, so we cannot determine the full impact on our business and operations at this time. However, one important change is the transfer of regulatory jurisdiction over federal savings association regulation from the Office of Thrift Supervision to the OCC. The FDIC will regulate state-chartered savings associations. On July 21, 2011, under the requirements of the Dodd-Frank Act, our primary federal regulator, the Office of Thrift Supervision, was merged with and into the Office of the Comptroller of the Currency (the primary federal regulator for national banks). As a result, shortly after the conclusion of Eagle’s fiscal year of June 30, 2011, all federal savings associations (including American Federal) came under the principal jurisdiction of a different, federal bank regulatory agency, the OCC, which has historically regulated the national banks. The OCC has extensive experience in the regulation of community banks such as American Federal but it is unclear without more experience how the change in federal regulatory agencies will impact American Federal. American Federal will retain its federal thrift charter under the OCC, but may evaluate other charter options in the future. The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Eagle, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including, in the future, holding company capital requirements, will apply to savings and loan holding companies like Eagle. The capital requirements are expected to take effect in five years. The Dodd-Frank Act will require the Federal Reserve Board to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Under the Dodd- Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as American Federal Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. REGULATION The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Lastly, the Dodd-Frank Act directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Set forth below is a brief description of certain laws and regulations applicable to Eagle and American Federal. These descriptions of laws and regulations as well as those contained elsewhere do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Legislative or regulatory changes in the future could adversely affect our operations or financial condition. General Federal Regulation of Savings Institutions The following description relates to both Eagle and American Federal’s regulation through the completion of the fiscal year ending June 30, 2012, and a description of certain historical regulatory aspects. The information related to the Office of Thrift Supervision is expected to a significant degree to be descriptive of regulations and policies of the OCC which has adopted virtually all of the Office of Thrift Supervision rules. However, because neither Eagle nor American Federal has had any experience with federal bank regulators other than the Office of Thrift Supervision, and the FDIC with respect to insurance of accounts, the descriptions that follow refer to Eagle and American Federal’s past experience through the end of its fiscal year of June 30, 2012. As a federally-chartered savings institution, American Federal is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency (“OCC”) which assumed jurisdiction over Eagle and American Federal after the close of Eagle’s June 30, 2011 fiscal year as its primary federal regulator, and the FDIC, as the insurer of its deposits. American Federal is a member of the Federal Home Loan Bank, or FHLB System, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC. There are periodic examinations to evaluate American Federal’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC may also examine American Federal. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for loan losses for regulatory purposes. Eagle, as a savings and loan holding company, was required to file certain reports with, is subject to examination by, and otherwise comply with the rules and regulations of the Office of Thrift Supervision which have been adopted by the OCC. The Federal Reserve Board assumed regulatory responsibility for Eagle during this year. Eagle is also subject to the rules and regulations of the SEC under the federal securities laws. See “—Holding Company Regulation.” Office of Thrift Supervision. The Office of Thrift Supervision had extensive authority over the operations of savings institutions. As part of this authority, American Federal was required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations. The Office of Thrift Supervision also had extensive enforcement authority over all savings institutions and their holding companies, including American Federal and Eagle. Authority over Eagle has been transferred to the Federal Reserve Board as a result of enactment of the Dodd-Frank Act. Enforcement authority over Eagle includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with federal bank regulatory agencies. Except under certain circumstances, public disclosure of final enforcement actions is required. On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. Regulations implementing the changes described below have not been promulgated by the federal banking agencies, so we cannot determine the full impact on our business and operations at this time. However, one important change is the transfer of regulatory jurisdiction over federal savings association regulation from the Office of Thrift Supervision to the OCC. The FDIC will regulate state-chartered savings associations. In addition, the investment, lending and branching authority of American Federal also are prescribed by federal laws, which prohibit American Federal from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the Office of Thrift Supervision. Federal savings institutions are generally authorized to branch nationwide. American Federal is in compliance with the noted restrictions. Dodd-Frank Act American Federal paid assessments to the Office of the Comptroller of the Currency to fund its operations. The general assessments, paid on a semi-annual basis, are determined based on total assets, including consolidated subsidiaries. American Federal’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). The federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan. On July 21, 2011, under the requirements of the Dodd-Frank Act, our primary federal regulator, the Office of Thrift Supervision, was merged with and into the Office of the Comptroller of the Currency (the primary federal regulator for national banks). As a result, shortly after the conclusion of Eagle’s fiscal year of June 30, 2011, all federal savings associations (including American Federal) came under the principal jurisdiction of a different, federal bank regulatory agency, the OCC, which has historically regulated the national banks. The OCC has extensive experience in the regulation of community banks such as American Federal but it is unclear without more experience how the change in federal regulatory agencies will impact American Federal. American Federal will retain its federal thrift charter under the OCC, but may evaluate other charter options in the future. The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Eagle, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including, in the future, holding company capital requirements, will apply to savings and loan holding companies like Eagle. The capital requirements are expected to take effect in five years. The Dodd-Frank Act will require the Federal Reserve Board to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Under the Dodd- Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. Federal Home Loan Bank System. American Federal is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, American Federal is required to purchase and maintain stock in the FHLB of Seattle. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as American Federal Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection The FHLBs have continued and continue to contribute to low- and moderately-priced housing programs through direct Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Lastly, the Dodd-Frank Act directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Federal Regulation of Savings Institutions The following description relates to both Eagle and American Federal’s regulation through the completion of the fiscal year ending June 30, 2012, and a description of certain historical regulatory aspects. The information related to the Office of Thrift Supervision is expected to a significant degree to be descriptive of regulations and policies of the OCC which has adopted virtually all of the Office of Thrift Supervision rules. However, because neither Eagle nor American Federal has had any experience with federal bank regulators other than the Office of Thrift Supervision, and the FDIC with respect to insurance of accounts, the descriptions that follow refer to Eagle and American Federal’s past experience through the end of its fiscal year of June 30, 2012. Office of Thrift Supervision. The Office of Thrift Supervision had extensive authority over the operations of savings institutions. As part of this authority, American Federal was required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations. The Office of Thrift Supervision also had extensive enforcement authority over all savings institutions and their holding companies, including American Federal and Eagle. Authority over Eagle has been transferred to the Federal Reserve Board as a result of enactment of the Dodd-Frank Act. Enforcement authority over Eagle includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with federal bank regulatory agencies. Except under certain circumstances, public disclosure of final enforcement actions is required. In addition, the investment, lending and branching authority of American Federal also are prescribed by federal laws, which prohibit American Federal from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the Office of Thrift Supervision. Federal savings institutions are generally authorized to branch nationwide. American Federal is in compliance with the noted restrictions. American Federal paid assessments to the Office of the Comptroller of the Currency to fund its operations. The general assessments, paid on a semi-annual basis, are determined based on total assets, including consolidated subsidiaries. American Federal’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). The federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan. Federal Home Loan Bank System. American Federal is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, American Federal is required to purchase and maintain stock in the FHLB of Seattle. The FHLBs have continued and continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the 23 24 23 24 Set forth below is a brief description of certain laws and regulations applicable to Eagle and American Federal. These descriptions of laws and regulations as well as those contained elsewhere do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Legislative or regulatory changes in the future could adversely affect our operations or financial condition. As a federally-chartered savings institution, American Federal is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency (“OCC”) which assumed jurisdiction over Eagle and American Federal after the close of Eagle’s June 30, 2011 fiscal year as its primary federal regulator, and the FDIC, as the insurer of its deposits. American Federal is a member of the Federal Home Loan Bank, or FHLB System, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC. There are periodic examinations to evaluate American Federal’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC may also examine American Federal. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for loan losses for regulatory purposes. Eagle, as a savings and loan holding company, was required to file certain reports with, is subject to examination by, and otherwise comply with the rules and regulations of the Office of Thrift Supervision which have been adopted by the OCC. The Federal Reserve Board assumed regulatory responsibility for Eagle during this year. Eagle is also subject to the rules and regulations of the SEC under the federal securities laws. See “—Holding Company REGULATION General Regulation.” Dodd-Frank Act On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. Regulations implementing the changes described below have not been promulgated by the federal banking agencies, so we cannot determine the full impact on our business and operations at this time. However, one important change is the transfer of regulatory jurisdiction over federal savings association regulation from the Office of Thrift Supervision to the OCC. The FDIC will regulate state-chartered savings associations. On July 21, 2011, under the requirements of the Dodd-Frank Act, our primary federal regulator, the Office of Thrift Supervision, was merged with and into the Office of the Comptroller of the Currency (the primary federal regulator for national banks). As a result, shortly after the conclusion of Eagle’s fiscal year of June 30, 2011, all federal savings associations (including American Federal) came under the principal jurisdiction of a different, federal bank regulatory agency, the OCC, which has historically regulated the national banks. The OCC has extensive experience in the regulation of community banks such as American Federal but it is unclear without more experience how the change in federal regulatory agencies will impact American Federal. American Federal will retain its federal thrift charter under the OCC, but may evaluate other charter options in the future. The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Eagle, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including, in the future, holding company capital requirements, will apply to savings and loan holding companies like Eagle. The capital requirements are expected to take effect in five years. The Dodd-Frank Act will require the Federal Reserve Board to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Under the Dodd- Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as American Federal Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. REGULATION The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Lastly, the Dodd-Frank Act directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Set forth below is a brief description of certain laws and regulations applicable to Eagle and American Federal. These descriptions of laws and regulations as well as those contained elsewhere do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Legislative or regulatory changes in the future could adversely affect our operations or financial condition. General Federal Regulation of Savings Institutions The following description relates to both Eagle and American Federal’s regulation through the completion of the fiscal year ending June 30, 2012, and a description of certain historical regulatory aspects. The information related to the Office of Thrift Supervision is expected to a significant degree to be descriptive of regulations and policies of the OCC which has adopted virtually all of the Office of Thrift Supervision rules. However, because neither Eagle nor American Federal has had any experience with federal bank regulators other than the Office of Thrift Supervision, and the FDIC with respect to insurance of accounts, the descriptions that follow refer to Eagle and American Federal’s past experience through the end of its fiscal year of June 30, 2012. As a federally-chartered savings institution, American Federal is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency (“OCC”) which assumed jurisdiction over Eagle and American Federal after the close of Eagle’s June 30, 2011 fiscal year as its primary federal regulator, and the FDIC, as the insurer of its deposits. American Federal is a member of the Federal Home Loan Bank, or FHLB System, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC. There are periodic examinations to evaluate American Federal’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC may also examine American Federal. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for loan losses for regulatory purposes. Eagle, as a savings and loan holding company, was required to file certain reports with, is subject to examination by, and otherwise comply with the rules and regulations of the Office of Thrift Supervision which have been adopted by the OCC. The Federal Reserve Board assumed regulatory responsibility for Eagle during this year. Eagle is also subject to the rules and regulations of the SEC under the federal securities laws. See “—Holding Company Regulation.” Office of Thrift Supervision. The Office of Thrift Supervision had extensive authority over the operations of savings institutions. As part of this authority, American Federal was required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations. The Office of Thrift Supervision also had extensive enforcement authority over all savings institutions and their holding companies, including American Federal and Eagle. Authority over Eagle has been transferred to the Federal Reserve Board as a result of enactment of the Dodd-Frank Act. Enforcement authority over Eagle includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with federal bank regulatory agencies. Except under certain circumstances, public disclosure of final enforcement actions is required. On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. Regulations implementing the changes described below have not been promulgated by the federal banking agencies, so we cannot determine the full impact on our business and operations at this time. However, one important change is the transfer of regulatory jurisdiction over federal savings association regulation from the Office of Thrift Supervision to the OCC. The FDIC will regulate state-chartered savings associations. In addition, the investment, lending and branching authority of American Federal also are prescribed by federal laws, which prohibit American Federal from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the Office of Thrift Supervision. Federal savings institutions are generally authorized to branch nationwide. American Federal is in compliance with the noted restrictions. Dodd-Frank Act American Federal paid assessments to the Office of the Comptroller of the Currency to fund its operations. The general assessments, paid on a semi-annual basis, are determined based on total assets, including consolidated subsidiaries. American Federal’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). The federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan. On July 21, 2011, under the requirements of the Dodd-Frank Act, our primary federal regulator, the Office of Thrift Supervision, was merged with and into the Office of the Comptroller of the Currency (the primary federal regulator for national banks). As a result, shortly after the conclusion of Eagle’s fiscal year of June 30, 2011, all federal savings associations (including American Federal) came under the principal jurisdiction of a different, federal bank regulatory agency, the OCC, which has historically regulated the national banks. The OCC has extensive experience in the regulation of community banks such as American Federal but it is unclear without more experience how the change in federal regulatory agencies will impact American Federal. American Federal will retain its federal thrift charter under the OCC, but may evaluate other charter options in the future. The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Eagle, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including, in the future, holding company capital requirements, will apply to savings and loan holding companies like Eagle. The capital requirements are expected to take effect in five years. The Dodd-Frank Act will require the Federal Reserve Board to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Under the Dodd- Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. Federal Home Loan Bank System. American Federal is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, American Federal is required to purchase and maintain stock in the FHLB of Seattle. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as American Federal Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection The FHLBs have continued and continue to contribute to low- and moderately-priced housing programs through direct Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Lastly, the Dodd-Frank Act directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Federal Regulation of Savings Institutions The following description relates to both Eagle and American Federal’s regulation through the completion of the fiscal year ending June 30, 2012, and a description of certain historical regulatory aspects. The information related to the Office of Thrift Supervision is expected to a significant degree to be descriptive of regulations and policies of the OCC which has adopted virtually all of the Office of Thrift Supervision rules. However, because neither Eagle nor American Federal has had any experience with federal bank regulators other than the Office of Thrift Supervision, and the FDIC with respect to insurance of accounts, the descriptions that follow refer to Eagle and American Federal’s past experience through the end of its fiscal year of June 30, 2012. Office of Thrift Supervision. The Office of Thrift Supervision had extensive authority over the operations of savings institutions. As part of this authority, American Federal was required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations. The Office of Thrift Supervision also had extensive enforcement authority over all savings institutions and their holding companies, including American Federal and Eagle. Authority over Eagle has been transferred to the Federal Reserve Board as a result of enactment of the Dodd-Frank Act. Enforcement authority over Eagle includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with federal bank regulatory agencies. Except under certain circumstances, public disclosure of final enforcement actions is required. In addition, the investment, lending and branching authority of American Federal also are prescribed by federal laws, which prohibit American Federal from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the Office of Thrift Supervision. Federal savings institutions are generally authorized to branch nationwide. American Federal is in compliance with the noted restrictions. American Federal paid assessments to the Office of the Comptroller of the Currency to fund its operations. The general assessments, paid on a semi-annual basis, are determined based on total assets, including consolidated subsidiaries. American Federal’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). The federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan. Federal Home Loan Bank System. American Federal is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, American Federal is required to purchase and maintain stock in the FHLB of Seattle. The FHLBs have continued and continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the 23 24 23 24 future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of American Federal’s FHLB stock may result in a corresponding reduction in American Federal’s capital. adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in assessment rates will be in the future. value of American Federal’s FHLB stock may result in a corresponding reduction in American Federal’s capital. assessment rates will be in the future. adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their checking, NOW, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy liquidity requirements. In addition to the assessment for deposit insurance, through 2019, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and as of the quarter ended March 31, 2012 was 0.66 basis points of assessable deposits. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their checking, NOW, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy liquidity requirements. In addition to the assessment for deposit insurance, through 2019, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and as of the quarter ended March 31, 2012 was 0.66 basis points of assessable deposits. Savings institutions have authority to borrow from the Federal Reserve System “discount window”. American Federal maintains a “primary credit” facility at the Federal Reserve’s discount window. Insurance of Deposit Accounts. Deposit accounts at American Federal are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. American Federal’s deposits, therefore, are subject to Federal Deposit Insurance Corporation deposit insurance assessments. Assessments paid to the FDIC by American Federal and other banking institutions are used to fund the FDIC’s Federal Deposit Insurance Fund (“DIF”). Insurance of Accounts and Regulation by the FDIC. As insurer of deposits in banks, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of the Comptroller of the Currency an opportunity to take such action. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement with the FDIC. We are not aware of any practice, condition or violation that might lead to the termination of American Federal’s deposit insurance. New Assessments Under Dodd-Frank. The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier I capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion is assigned to a Risk Category and a range of initial base assessment rates applies to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Effective April 1, 2011, total base assessment rates will range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FD1C-insured institution. The FDIC may increase or decrease its rates for each quarter by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment. Prepaid FDIC Premiums. As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution's assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution's assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The balance of American Federal’s prepaid assessment at June 30, 2012 was $394,000. The FDIC will continue to offset prepared assessments through the earlier of June 30, 2013, or exhaustion of the prepaid assessment of the DIF. Minimum Reserve Ratios. The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act, The Dodd- Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must designate a reserve ratio, known as the designated reserve ratio, or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. Savings institutions have authority to borrow from the Federal Reserve System “discount window”. American Federal maintains a “primary credit” facility at the Federal Reserve’s discount window. Capital Requirements. Federally insured savings institutions, such as American Federal, are required by the Office of the Comptroller of the Currency to maintain minimum levels of regulatory capital. These minimum capital standards include: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards, discussed below, also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. Insurance of Deposit Accounts. Deposit accounts at American Federal are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. American Federal’s deposits, therefore, are subject to Federal Deposit Insurance Corporation deposit insurance assessments. Assessments paid to the FDIC by American Federal and other banking institutions are used to fund the FDIC’s Federal Deposit Insurance Fund (“DIF”). Insurance of Accounts and Regulation by the FDIC. As insurer of deposits in banks, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of the Comptroller of the Currency an opportunity to take such action. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement with the FDIC. We are not aware of any practice, condition or violation that might lead to the termination of American Federal’s deposit insurance. The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Comptroller of the Currency capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Comptroller of the Currency also has authority to establish individual minimum capital requirements for financial institutions. New Assessments Under Dodd-Frank. The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier I capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion is assigned to a Risk Category and a range of initial base assessment rates applies to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Effective April 1, 2011, total base assessment rates will range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FD1C-insured institution. The FDIC may increase or decrease its rates for each quarter by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment. Prompt Corrective Action. Federal bank regulatory agencies are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk- weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Comptroller of the Currency is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized.” Regulations also require that a capital restoration plan be filed with the Comptroller of the Currency within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. ”Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Comptroller of the Currency also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. At June 30, 2012, American Federal’s capital ratios met the “well capitalized” standards. Prepaid FDIC Premiums. As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution's assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution's assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The balance of American Federal’s prepaid assessment at June 30, 2012 was $394,000. The FDIC will continue to offset prepared assessments through the earlier of June 30, 2013, or exhaustion of the prepaid assessment of the DIF. Limitations on Capital Distributions. Federal banking regulations impose various restrictions on institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as American Federal, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision may have its dividend authority restricted. Minimum Reserve Ratios. The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act, The Dodd- Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must designate a reserve ratio, known as the designated reserve ratio, or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. Generally, savings institutions proposing to make any capital distribution need not submit written notice to the Comptroller of the Currency prior to such distribution unless they are a subsidiary of a holding company or would not remain well capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain of Capital Requirements. Federally insured savings institutions, such as American Federal, are required by the Office of the Comptroller of the Currency to maintain minimum levels of regulatory capital. These minimum capital standards include: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards, discussed below, also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Comptroller of the Currency capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Comptroller of the Currency also has authority to establish individual minimum capital requirements for financial institutions. Prompt Corrective Action. Federal bank regulatory agencies are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk- weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Comptroller of the Currency is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized.” Regulations also require that a capital restoration plan be filed with the Comptroller of the Currency within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. ”Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Comptroller of the Currency also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. At June 30, 2012, American Federal’s capital ratios met the “well capitalized” standards. Limitations on Capital Distributions. Federal banking regulations impose various restrictions on institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as American Federal, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision may have its dividend authority restricted. Generally, savings institutions proposing to make any capital distribution need not submit written notice to the Comptroller of the Currency prior to such distribution unless they are a subsidiary of a holding company or would not remain well capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain of The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an 25 26 25 26 future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of American Federal’s FHLB stock may result in a corresponding reduction in American Federal’s capital. adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in assessment rates will be in the future. value of American Federal’s FHLB stock may result in a corresponding reduction in American Federal’s capital. adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance assessment rates will be in the future. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their checking, NOW, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy liquidity requirements. In addition to the assessment for deposit insurance, through 2019, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and as of the quarter ended March 31, 2012 was 0.66 basis points of assessable deposits. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their checking, NOW, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy liquidity requirements. In addition to the assessment for deposit insurance, through 2019, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and as of the quarter ended March 31, 2012 was 0.66 basis points of assessable deposits. Savings institutions have authority to borrow from the Federal Reserve System “discount window”. American Federal maintains a “primary credit” facility at the Federal Reserve’s discount window. Insurance of Deposit Accounts. Deposit accounts at American Federal are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. American Federal’s deposits, therefore, are subject to Federal Deposit Insurance Corporation deposit insurance assessments. Assessments paid to the FDIC by American Federal and other banking institutions are used to fund the FDIC’s Federal Deposit Insurance Fund (“DIF”). Insurance of Accounts and Regulation by the FDIC. As insurer of deposits in banks, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of the Comptroller of the Currency an opportunity to take such action. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement with the FDIC. We are not aware of any practice, condition or violation that might lead to the termination of American Federal’s deposit insurance. New Assessments Under Dodd-Frank. The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier I capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion is assigned to a Risk Category and a range of initial base assessment rates applies to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Effective April 1, 2011, total base assessment rates will range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FD1C-insured institution. The FDIC may increase or decrease its rates for each quarter by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment. Prepaid FDIC Premiums. As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution's assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution's assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The balance of American Federal’s prepaid assessment at June 30, 2012 was $394,000. The FDIC will continue to offset prepared assessments through the earlier of June 30, 2013, or exhaustion of the prepaid assessment of the DIF. Minimum Reserve Ratios. The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act, The Dodd- Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must designate a reserve ratio, known as the designated reserve ratio, or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. Savings institutions have authority to borrow from the Federal Reserve System “discount window”. American Federal maintains a “primary credit” facility at the Federal Reserve’s discount window. Capital Requirements. Federally insured savings institutions, such as American Federal, are required by the Office of the Comptroller of the Currency to maintain minimum levels of regulatory capital. These minimum capital standards include: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards, discussed below, also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. Insurance of Deposit Accounts. Deposit accounts at American Federal are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. American Federal’s deposits, therefore, are subject to Federal Deposit Insurance Corporation deposit insurance assessments. Assessments paid to the FDIC by American Federal and other banking institutions are used to fund the FDIC’s Federal Deposit Insurance Fund (“DIF”). Insurance of Accounts and Regulation by the FDIC. As insurer of deposits in banks, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of the Comptroller of the Currency an opportunity to take such action. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement with the FDIC. We are not aware of any practice, condition or violation that might lead to the termination of American Federal’s deposit insurance. The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Comptroller of the Currency capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Comptroller of the Currency also has authority to establish individual minimum capital requirements for financial institutions. New Assessments Under Dodd-Frank. The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk categories. As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier I capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion is assigned to a Risk Category and a range of initial base assessment rates applies to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Effective April 1, 2011, total base assessment rates will range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FD1C-insured institution. The FDIC may increase or decrease its rates for each quarter by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment. Prompt Corrective Action. Federal bank regulatory agencies are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk- weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Comptroller of the Currency is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized.” Regulations also require that a capital restoration plan be filed with the Comptroller of the Currency within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. ”Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Comptroller of the Currency also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. At June 30, 2012, American Federal’s capital ratios met the “well capitalized” standards. Prepaid FDIC Premiums. As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution's assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution's assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The balance of American Federal’s prepaid assessment at June 30, 2012 was $394,000. The FDIC will continue to offset prepared assessments through the earlier of June 30, 2013, or exhaustion of the prepaid assessment of the DIF. Limitations on Capital Distributions. Federal banking regulations impose various restrictions on institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as American Federal, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision may have its dividend authority restricted. Minimum Reserve Ratios. The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act, The Dodd- Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must designate a reserve ratio, known as the designated reserve ratio, or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. Generally, savings institutions proposing to make any capital distribution need not submit written notice to the Comptroller of the Currency prior to such distribution unless they are a subsidiary of a holding company or would not remain well capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain of Capital Requirements. Federally insured savings institutions, such as American Federal, are required by the Office of the Comptroller of the Currency to maintain minimum levels of regulatory capital. These minimum capital standards include: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards, discussed below, also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Comptroller of the Currency capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Comptroller of the Currency also has authority to establish individual minimum capital requirements for financial institutions. Prompt Corrective Action. Federal bank regulatory agencies are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk- weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Comptroller of the Currency is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized.” Regulations also require that a capital restoration plan be filed with the Comptroller of the Currency within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. ”Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Comptroller of the Currency also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. At June 30, 2012, American Federal’s capital ratios met the “well capitalized” standards. Limitations on Capital Distributions. Federal banking regulations impose various restrictions on institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as American Federal, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision may have its dividend authority restricted. Generally, savings institutions proposing to make any capital distribution need not submit written notice to the Comptroller of the Currency prior to such distribution unless they are a subsidiary of a holding company or would not remain well capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain of The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an 25 26 25 26 the Comptroller of the Currency approval prior to making such distribution. The Comptroller of the Currency may object to the distribution during that 30-day period based on safety and soundness concerns. Qualified Thrift Lender Test. All savings institutions, including American Federal, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. A savings institution that fails to meet the QTL is subject to certain operating restrictions and may be required to convert to a national bank charter. As of June 30, 2012, American Federal met the qualified thrift lender test. Activities of Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must file a notice or application with the FDIC and of the Comptroller of the Currency at least 30 days in advance and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The Comptroller of the Currency may determine that the continuation by a savings institution of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIC. Based upon that determination, the FDIC or the Comptroller of the Currency has the authority to order the savings institution to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Deposit Insurance Fund. If so, it may require that no FDIC insured institution engage in that activity directly. Transactions with Affiliates. American Federal’s authority to engage in transactions with “affiliates” is limited by regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Eagle is an affiliate of American Federal. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions, i.e. “covered transactions”¸ are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Holding Company Regulation General. Eagle is a unitary savings and loan holding company subject historically to regulatory oversight of the Office of Thrift Supervision. The Federal Reserve Board became the principal federal bank regulatory agency for Eagle during the fiscal year. Accordingly, Eagle is required to register and file reports with Federal Reserve Board and is subject to regulation and examination by the Federal Reserve Board. In addition, the Federal Reserve Board has enforcement authority over Eagle and its non-savings institution subsidiaries which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. Activities Restrictions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, or GLBA, provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Eagle of another savings association as a separate subsidiary, Eagle would become a multiple savings and loan holding company and would be limited to activities permitted multiple holding companies by the Comptroller of the Currency regulation. The Comptroller of the Currency has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies, including lending, trust services, insurance activities and underwriting, investment banking and real estate investments. Mergers and Acquisitions. Eagle must obtain approval from the Federal Reserve Board before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for Eagle to acquire control of a savings institution, the Federal Reserve Board would consider the financial and managerial resources and future prospects of Eagle and the target institution, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and the needs of the community and competitive factors. the Comptroller of the Currency approval prior to making such distribution. The Comptroller of the Currency may object to the distribution during that 30-day period based on safety and soundness concerns. Acquisition of Eagle. Under the Savings and Loan Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to the Comptroller of the Currency if any person (including a company), or a group acting in concert, seeks to acquire 10% or more of Eagle’s outstanding voting stock, unless the Comptroller of the Currency has found that the acquisition will not result in a change in control of Eagle. In acting on such a notice or application, the Comptroller of the Currency must take into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that acquires control will be subject to regulation as a savings and loan holding company. Qualified Thrift Lender Test. All savings institutions, including American Federal, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. Federal Securities Laws A savings institution that fails to meet the QTL is subject to certain operating restrictions and may be required to convert to a national bank charter. As of June 30, 2012, American Federal met the qualified thrift lender test. Eagle’s common stock is registered with the Securities and Exchange Commission under the Exchange Act. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through our Internet website, www.americanfederalsavingsbank.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on or accessible through, these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Activities of Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must file a notice or application with the FDIC and of the Comptroller of the Currency at least 30 days in advance and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The Comptroller of the Currency may determine that the continuation by a savings institution of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIC. Based upon that determination, the FDIC or the Comptroller of the Currency has the authority to order the savings institution to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Deposit Insurance Fund. If so, it may require that no FDIC insured institution engage in that activity directly. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. Transactions with Affiliates. American Federal’s authority to engage in transactions with “affiliates” is limited by regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Eagle is an affiliate of American Federal. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions, i.e. “covered transactions”¸ are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. ITEM 1A. Holding Company Regulation RISK FACTORS. If the allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease. We cannot accurately predict the effect of the current economic downturn on our future results of operations or market price of our stock. General. Eagle is a unitary savings and loan holding company subject historically to regulatory oversight of the Office of Thrift Supervision. The Federal Reserve Board became the principal federal bank regulatory agency for Eagle during the fiscal year. Accordingly, Eagle is required to register and file reports with Federal Reserve Board and is subject to regulation and examination by the Federal Reserve Board. In addition, the Federal Reserve Board has enforcement authority over Eagle and its non-savings institution subsidiaries which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. The national economy and the financial services sector in particular, are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long adverse economic conditions may exist, a slow or fragile recovery or subsequent recession could continue to present risks for some time for the industry and our company. Activities Restrictions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, or GLBA, provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Eagle of another savings association as a separate subsidiary, Eagle would become a multiple savings and loan holding company and would be limited to activities permitted multiple holding companies by the Comptroller of the Currency regulation. The Comptroller of the Currency has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies, including lending, trust services, insurance activities and underwriting, investment banking and real estate investments. Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income. Mergers and Acquisitions. Eagle must obtain approval from the Federal Reserve Board before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for Eagle to acquire control of a savings institution, the Federal Reserve Board would consider the financial and managerial resources and future prospects of Eagle and the target institution, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and the needs of the community and competitive factors. Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase the amount of such loans, additional or increased provisions for loan losses may be necessary and would decrease earnings. Acquisition of Eagle. Under the Savings and Loan Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to the Comptroller of the Currency if any person (including a company), or a group acting in concert, seeks to acquire 10% or more of Eagle’s outstanding voting stock, unless the Comptroller of the Currency has found that the acquisition will not result in a change in control of Eagle. In acting on such a notice or application, the Comptroller of the Currency must take into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that acquires control will be subject to regulation as a savings and loan holding company. Federal Securities Laws Eagle’s common stock is registered with the Securities and Exchange Commission under the Exchange Act. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through our Internet website, www.americanfederalsavingsbank.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on or accessible through, these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. ITEM 1A. RISK FACTORS. market price of our stock. We cannot accurately predict the effect of the current economic downturn on our future results of operations or The national economy and the financial services sector in particular, are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long adverse economic conditions may exist, a slow or fragile recovery or subsequent recession could continue to present risks for some time for the industry and our company. If the allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease. Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income. Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase the amount of such loans, additional or increased provisions for loan losses may be necessary and would decrease earnings. 27 28 27 28 the Comptroller of the Currency approval prior to making such distribution. The Comptroller of the Currency may object to the distribution during that 30-day period based on safety and soundness concerns. Qualified Thrift Lender Test. All savings institutions, including American Federal, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. A savings institution that fails to meet the QTL is subject to certain operating restrictions and may be required to convert to a national bank charter. As of June 30, 2012, American Federal met the qualified thrift lender test. Activities of Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must file a notice or application with the FDIC and of the Comptroller of the Currency at least 30 days in advance and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The Comptroller of the Currency may determine that the continuation by a savings institution of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIC. Based upon that determination, the FDIC or the Comptroller of the Currency has the authority to order the savings institution to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Deposit Insurance Fund. If so, it may require that no FDIC insured institution engage in that activity directly. Transactions with Affiliates. American Federal’s authority to engage in transactions with “affiliates” is limited by regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Eagle is an affiliate of American Federal. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions, i.e. “covered transactions”¸ are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Holding Company Regulation General. Eagle is a unitary savings and loan holding company subject historically to regulatory oversight of the Office of Thrift Supervision. The Federal Reserve Board became the principal federal bank regulatory agency for Eagle during the fiscal year. Accordingly, Eagle is required to register and file reports with Federal Reserve Board and is subject to regulation and examination by the Federal Reserve Board. In addition, the Federal Reserve Board has enforcement authority over Eagle and its non-savings institution subsidiaries which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. Activities Restrictions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, or GLBA, provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Eagle of another savings association as a separate subsidiary, Eagle would become a multiple savings and loan holding company and would be limited to activities permitted multiple holding companies by the Comptroller of the Currency regulation. The Comptroller of the Currency has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies, including lending, trust services, insurance activities and underwriting, investment banking and real estate investments. Mergers and Acquisitions. Eagle must obtain approval from the Federal Reserve Board before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for Eagle to acquire control of a savings institution, the Federal Reserve Board would consider the financial and managerial resources and future prospects of Eagle and the target institution, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and the needs of the community and competitive factors. the Comptroller of the Currency approval prior to making such distribution. The Comptroller of the Currency may object to the distribution during that 30-day period based on safety and soundness concerns. Acquisition of Eagle. Under the Savings and Loan Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to the Comptroller of the Currency if any person (including a company), or a group acting in concert, seeks to acquire 10% or more of Eagle’s outstanding voting stock, unless the Comptroller of the Currency has found that the acquisition will not result in a change in control of Eagle. In acting on such a notice or application, the Comptroller of the Currency must take into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that acquires control will be subject to regulation as a savings and loan holding company. Qualified Thrift Lender Test. All savings institutions, including American Federal, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. Federal Securities Laws A savings institution that fails to meet the QTL is subject to certain operating restrictions and may be required to convert to a national bank charter. As of June 30, 2012, American Federal met the qualified thrift lender test. Eagle’s common stock is registered with the Securities and Exchange Commission under the Exchange Act. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through our Internet website, www.americanfederalsavingsbank.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on or accessible through, these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Activities of Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must file a notice or application with the FDIC and of the Comptroller of the Currency at least 30 days in advance and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The Comptroller of the Currency may determine that the continuation by a savings institution of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIC. Based upon that determination, the FDIC or the Comptroller of the Currency has the authority to order the savings institution to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Deposit Insurance Fund. If so, it may require that no FDIC insured institution engage in that activity directly. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. Transactions with Affiliates. American Federal’s authority to engage in transactions with “affiliates” is limited by regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Eagle is an affiliate of American Federal. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions, i.e. “covered transactions”¸ are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. ITEM 1A. Holding Company Regulation RISK FACTORS. If the allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease. We cannot accurately predict the effect of the current economic downturn on our future results of operations or market price of our stock. General. Eagle is a unitary savings and loan holding company subject historically to regulatory oversight of the Office of Thrift Supervision. The Federal Reserve Board became the principal federal bank regulatory agency for Eagle during the fiscal year. Accordingly, Eagle is required to register and file reports with Federal Reserve Board and is subject to regulation and examination by the Federal Reserve Board. In addition, the Federal Reserve Board has enforcement authority over Eagle and its non-savings institution subsidiaries which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. The national economy and the financial services sector in particular, are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long adverse economic conditions may exist, a slow or fragile recovery or subsequent recession could continue to present risks for some time for the industry and our company. Activities Restrictions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, or GLBA, provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Eagle of another savings association as a separate subsidiary, Eagle would become a multiple savings and loan holding company and would be limited to activities permitted multiple holding companies by the Comptroller of the Currency regulation. The Comptroller of the Currency has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies, including lending, trust services, insurance activities and underwriting, investment banking and real estate investments. Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income. Mergers and Acquisitions. Eagle must obtain approval from the Federal Reserve Board before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for Eagle to acquire control of a savings institution, the Federal Reserve Board would consider the financial and managerial resources and future prospects of Eagle and the target institution, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and the needs of the community and competitive factors. Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase the amount of such loans, additional or increased provisions for loan losses may be necessary and would decrease earnings. Acquisition of Eagle. Under the Savings and Loan Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to the Comptroller of the Currency if any person (including a company), or a group acting in concert, seeks to acquire 10% or more of Eagle’s outstanding voting stock, unless the Comptroller of the Currency has found that the acquisition will not result in a change in control of Eagle. In acting on such a notice or application, the Comptroller of the Currency must take into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effect of the acquisition. Any company that acquires control will be subject to regulation as a savings and loan holding company. Federal Securities Laws Eagle’s common stock is registered with the Securities and Exchange Commission under the Exchange Act. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through our Internet website, www.americanfederalsavingsbank.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents on or accessible through, these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. ITEM 1A. RISK FACTORS. We cannot accurately predict the effect of the current economic downturn on our future results of operations or market price of our stock. The national economy and the financial services sector in particular, are currently facing challenges of a scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long adverse economic conditions may exist, a slow or fragile recovery or subsequent recession could continue to present risks for some time for the industry and our company. If the allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease. Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income. Our emphasis on the origination of consumer, commercial real estate and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase the amount of such loans, additional or increased provisions for loan losses may be necessary and would decrease earnings. 27 28 27 28 Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition. We could record future losses on our securities portfolio. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers continues to deteriorate and there remains limited liquidity for these securities. A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results. The United States and many industrial nations are experiencing adverse economic conditions and slow recovery which are expected to continue in 2013. Loan portfolio quality has improved at many institutions, reflecting in part, the improving U.S. economy and rising employment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages appear to have stabilized but may continue to decline. The continuing stagnation in the real estate market also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Financial institution stock prices have declined substantially, and it is significantly more difficult for financial institutions to raise capital or borrow in the debt markets. Continued negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability. Moreover, continued volatility or declines in the stock market in general, or stock values of financial institutions and their holding companies, could adversely affect our stock performance. As a federal savings bank, American Federal Savings Bank is required to maintain a certain percentage of its total assets in qualifying loans and investments, which limits our asset mix and could significantly restrict our ability to diversify our loan portfolio. A savings bank or thrift differs from a commercial bank in that it is required to maintain at least 65% of its total assets in housing-related loans and investments, such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate, home equity loans, educational loans and small business loans. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL test, in nine out of 12 of the immediately preceding months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However, a loan that does not exceed $2 million (including a group of loans to one borrower) and is for commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio. In addition, if we continue to grow our commercial loan portfolio and our single-family loan portfolio declines, it is possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other qualifying assets at times when the terms might not be attractive. Alternatively, we could find it necessary to pursue different structures, including converting American Federal Savings Bank’s current thrift charter to a commercial bank charter. Because we intend to increase our commercial real estate and commercial business loan originations, our credit risk will increase and continued downturns in the local real estate market or economy could adversely affect our earnings. We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. 29 We could record future losses on our securities portfolio. Declines in home values could decrease our loan originations and increase delinquencies and defaults. Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition. Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher loan losses. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers continues to deteriorate and there remains limited liquidity for these securities. Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations. We depend on the services of our executive officers and other key employees. Changes in interest rates could adversely affect our results of operations and financial condition. A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results. Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income. The United States and many industrial nations are experiencing adverse economic conditions and slow recovery which are expected to continue in 2013. Loan portfolio quality has improved at many institutions, reflecting in part, the improving U.S. economy and rising employment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages appear to have stabilized but may continue to decline. The continuing stagnation in the real estate market also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Financial institution stock prices have declined substantially, and it is significantly more difficult for financial institutions to raise capital or borrow in the debt markets. Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Continued negative developments in the financial services industry and the domestic and international credit markets may Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay significantly affect the markets in which we do business, the market for and value of our loans and investments, and our adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ongoing operations, costs and profitability. Moreover, continued volatility or declines in the stock market in general, or ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so stock values of financial institutions and their holding companies, could adversely affect our stock performance. long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. As a federal savings bank, American Federal Savings Bank is required to maintain a certain percentage of its total assets in qualifying loans and investments, which limits our asset mix and could significantly restrict our ability to diversify our loan portfolio. Strong competition may limit growth and profitability. Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas. A savings bank or thrift differs from a commercial bank in that it is required to maintain at least 65% of its total assets in housing-related loans and investments, such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate, home equity loans, educational loans and small business loans. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL test, in nine out of 12 of the immediately preceding months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However, a loan that does not exceed $2 million (including a group of loans to one borrower) and is for commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. In addition, if we continue to grow our commercial loan portfolio and our single-family loan portfolio declines, it is We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other qualifying System and the Office of the Comptroller of the Currency. The federal banking laws and regulations govern the activities assets at times when the terms might not be attractive. Alternatively, we could find it necessary to pursue different in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund at the Federal structures, including converting American Federal Savings Bank’s current thrift charter to a commercial bank charter. Deposit Insurance Corporation. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Because we intend to increase our commercial real estate and commercial business loan originations, our credit risk will increase and continued downturns in the local real estate market or economy could adversely affect our earnings. Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations. We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and 30 29 Declines in home values could decrease our loan originations and increase delinquencies and defaults. Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher loan losses. We depend on the services of our executive officers and other key employees. Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations. Changes in interest rates could adversely affect our results of operations and financial condition. Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income. Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. Strong competition may limit growth and profitability. Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency. The federal banking laws and regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund at the Federal Deposit Insurance Corporation. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and 30 Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition. We could record future losses on our securities portfolio. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers continues to deteriorate and there remains limited liquidity for these securities. A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results. The United States and many industrial nations are experiencing adverse economic conditions and slow recovery which are expected to continue in 2013. Loan portfolio quality has improved at many institutions, reflecting in part, the improving U.S. economy and rising employment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages appear to have stabilized but may continue to decline. The continuing stagnation in the real estate market also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Financial institution stock prices have declined substantially, and it is significantly more difficult for financial institutions to raise capital or borrow in the debt markets. Continued negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability. Moreover, continued volatility or declines in the stock market in general, or stock values of financial institutions and their holding companies, could adversely affect our stock performance. As a federal savings bank, American Federal Savings Bank is required to maintain a certain percentage of its total assets in qualifying loans and investments, which limits our asset mix and could significantly restrict our ability to diversify our loan portfolio. A savings bank or thrift differs from a commercial bank in that it is required to maintain at least 65% of its total assets in housing-related loans and investments, such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate, home equity loans, educational loans and small business loans. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL test, in nine out of 12 of the immediately preceding months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However, a loan that does not exceed $2 million (including a group of loans to one borrower) and is for commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio. In addition, if we continue to grow our commercial loan portfolio and our single-family loan portfolio declines, it is possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other qualifying assets at times when the terms might not be attractive. Alternatively, we could find it necessary to pursue different structures, including converting American Federal Savings Bank’s current thrift charter to a commercial bank charter. Because we intend to increase our commercial real estate and commercial business loan originations, our credit risk will increase and continued downturns in the local real estate market or economy could adversely affect our earnings. We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. 29 We could record future losses on our securities portfolio. Declines in home values could decrease our loan originations and increase delinquencies and defaults. Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition. Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher loan losses. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss exists with respect to our investment securities portfolio that constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers continues to deteriorate and there remains limited liquidity for these securities. Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations. We depend on the services of our executive officers and other key employees. Changes in interest rates could adversely affect our results of operations and financial condition. A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results. Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income. The United States and many industrial nations are experiencing adverse economic conditions and slow recovery which are expected to continue in 2013. Loan portfolio quality has improved at many institutions, reflecting in part, the improving U.S. economy and rising employment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages appear to have stabilized but may continue to decline. The continuing stagnation in the real estate market also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. Financial institution stock prices have declined substantially, and it is significantly more difficult for financial institutions to raise capital or borrow in the debt markets. Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Continued negative developments in the financial services industry and the domestic and international credit markets may Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay significantly affect the markets in which we do business, the market for and value of our loans and investments, and our adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ongoing operations, costs and profitability. Moreover, continued volatility or declines in the stock market in general, or ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so stock values of financial institutions and their holding companies, could adversely affect our stock performance. long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. As a federal savings bank, American Federal Savings Bank is required to maintain a certain percentage of its total assets in qualifying loans and investments, which limits our asset mix and could significantly restrict our ability to diversify our loan portfolio. Strong competition may limit growth and profitability. Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas. A savings bank or thrift differs from a commercial bank in that it is required to maintain at least 65% of its total assets in housing-related loans and investments, such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate, home equity loans, educational loans and small business loans. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL test, in nine out of 12 of the immediately preceding months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However, a loan that does not exceed $2 million (including a group of loans to one borrower) and is for commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. In addition, if we continue to grow our commercial loan portfolio and our single-family loan portfolio declines, it is We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other qualifying System and the Office of the Comptroller of the Currency. The federal banking laws and regulations govern the activities assets at times when the terms might not be attractive. Alternatively, we could find it necessary to pursue different in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund at the Federal structures, including converting American Federal Savings Bank’s current thrift charter to a commercial bank charter. Deposit Insurance Corporation. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Because we intend to increase our commercial real estate and commercial business loan originations, our credit risk will increase and continued downturns in the local real estate market or economy could adversely affect our earnings. Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations. We intend to continue our recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and 30 29 Declines in home values could decrease our loan originations and increase delinquencies and defaults. Declines in home values in our markets could adversely impact results from operations. Like all financial institutions, we are subject to the effects of any economic downturn, and in particular, a significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Declines in the average sale prices of homes in our primary markets could lead to higher loan losses. We depend on the services of our executive officers and other key employees. Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continued employment of the individuals that manage several of our key functional areas. The departure of any member of our senior management team may adversely affect our operations. Changes in interest rates could adversely affect our results of operations and financial condition. Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income. Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. Strong competition may limit growth and profitability. Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency. The federal banking laws and regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund at the Federal Deposit Insurance Corporation. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and 30 reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions against paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. So far this impact has been minimal, however, we suspect it will change once the current low interest rate environment changes. The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as American Federal Savings Bank with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators. It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community banks like American Federal. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and stockholders’ equity could decrease. We are required to own common stock of the Federal Home Loan Bank of Seattle to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. The aggregate cost of our Federal Home Loan Bank common stock as of June 30, 2012 was $2.00 million. Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank. Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Seattle common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge. Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral. There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor. reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Location Value At June 30, 2012 (In thousands) Square Footage Address Opened Helena Main Office Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions against paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. So far this impact has been minimal, however, we suspect it will change once the current low interest rate environment changes. 1400 Prospect Ave. Helena, MT 59601 $ 32,304 3,664 1997 Helena Neill Avenue Branch $ 1,017 1,391 1987 28 Neill Ave. Helena, MT 59601 Helena Skyway Branch The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as American Federal Savings Bank with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators. 2090 Cromwell Dixon Helena, MT 59602 3401 Harrison Ave. Butte, MT 59701 $ $ 4,643 3,890 2,208 1979 2009 500 Butte Office Bozeman Office It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community banks like American Federal. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. 1980 (closed August 1, 2010) 606 North Seventh Bozeman, MT 59715 $ 5,886 374 Bozeman Branch If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and stockholders’ equity could decrease. 1455 Oak St Bozeman, MT 59715 2009 $ 7,616 19,818 Townsend Office We are required to own common stock of the Federal Home Loan Bank of Seattle to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. The aggregate cost of our Federal Home Loan Bank common stock as of June 30, 2012 was $2.00 million. Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank. 416 Broadway Townsend, MT 59644 $ 1,973 1979 182 ITEM 3. LEGAL PROCEEDINGS. As of June 30, 2012, the net book value of land, buildings, furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $15.56 million. Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Seattle common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge. American Federal, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which American Federal Savings Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of American Federal. There were no lawsuits pending or known to be contemplated against Eagle or American Federal as of June 30, 2012. Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral. There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor. MINE SAFETY DISCLOSURES. ITEM 4. Not applicable. Location Address Opened Value At June 30, 2012 (In thousands) Square Footage Helena Main Office 1997 $ 3,664 32,304 Helena Neill Avenue Branch 28 Neill Ave. 1987 $ 1,017 1,391 Helena Skyway Branch 2090 Cromwell Dixon 2009 $ 2,208 4,643 Butte Office 1979 $ 500 3,890 Bozeman Office 606 North Seventh 1980 $ 374 5,886 Bozeman, MT 59715 (closed August 1, 2010) Bozeman Branch 1455 Oak St 2009 $ 7,616 19,818 Townsend Office 416 Broadway 1979 $ 182 1,973 1400 Prospect Ave. Helena, MT 59601 Helena, MT 59601 Helena, MT 59602 3401 Harrison Ave. Butte, MT 59701 Bozeman, MT 59715 Townsend, MT 59644 As of June 30, 2012, the net book value of land, buildings, furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $15.56 million. ITEM 3. LEGAL PROCEEDINGS. American Federal, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which American Federal Savings Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of American Federal. There were no lawsuits pending or known to be contemplated against Eagle or American Federal as of June 30, 2012. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. ITEM 1B. UNRESOLVED STAFF COMMENTS. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. None. ITEM 2. PROPERTIES. The Company’s business activities consist of its ownership of 100% of the common stock of the Bank. Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. American Federal conducts its business through six offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All of its offices are owned. Its principal banking office in Helena also serves as its executive headquarters and operations center. This office houses over 50% of American Federal’s full-time employees. The following table sets forth the location of each of American Federal’s offices, the year the office was opened, and the net book value including land, buildings, computer software and its related equipment and furniture. The square footage at each location is also shown. The Company’s business activities consist of its ownership of 100% of the common stock of the Bank. Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. American Federal conducts its business through six offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All of its offices are owned. Its principal banking office in Helena also serves as its executive headquarters and operations center. This office houses over 50% of American Federal’s full-time employees. The following table sets forth the location of each of American Federal’s offices, the year the office was opened, and the net book value including land, buildings, computer software and its related equipment and furniture. The square footage at each location is also shown. 31 32 31 32 reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions against paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. So far this impact has been minimal, however, we suspect it will change once the current low interest rate environment changes. The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as American Federal Savings Bank with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators. It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community banks like American Federal. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and stockholders’ equity could decrease. We are required to own common stock of the Federal Home Loan Bank of Seattle to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. The aggregate cost of our Federal Home Loan Bank common stock as of June 30, 2012 was $2.00 million. Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank. Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Seattle common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge. ability to foreclose on collateral. Future legislative or regulatory actions responding to perceived financial and market problems could impair our There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor. reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Location Value At June 30, 2012 (In thousands) Square Footage Address Opened Helena Main Office Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions against paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. So far this impact has been minimal, however, we suspect it will change once the current low interest rate environment changes. 1400 Prospect Ave. Helena, MT 59601 $ 32,304 3,664 1997 Helena Neill Avenue Branch $ 1,017 1,391 1987 28 Neill Ave. Helena, MT 59601 Helena Skyway Branch The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as American Federal Savings Bank with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators. 2090 Cromwell Dixon Helena, MT 59602 3401 Harrison Ave. Butte, MT 59701 $ $ 2,208 4,643 3,890 2009 1979 500 Butte Office Bozeman Office It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community banks like American Federal. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. 1980 (closed August 1, 2010) 606 North Seventh Bozeman, MT 59715 $ 5,886 374 Bozeman Branch If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and stockholders’ equity could decrease. 1455 Oak St Bozeman, MT 59715 2009 $ 7,616 19,818 Townsend Office We are required to own common stock of the Federal Home Loan Bank of Seattle to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. The aggregate cost of our Federal Home Loan Bank common stock as of June 30, 2012 was $2.00 million. Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank. 416 Broadway Townsend, MT 59644 $ 1,973 1979 182 ITEM 3. LEGAL PROCEEDINGS. As of June 30, 2012, the net book value of land, buildings, furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $15.56 million. Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Seattle common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge. American Federal, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which American Federal Savings Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of American Federal. There were no lawsuits pending or known to be contemplated against Eagle or American Federal as of June 30, 2012. Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral. There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor. MINE SAFETY DISCLOSURES. ITEM 4. Not applicable. Location Address Opened Value At June 30, 2012 (In thousands) Square Footage Helena Main Office Helena Neill Avenue Branch Helena Skyway Branch Butte Office Bozeman Office Bozeman Branch Townsend Office 1400 Prospect Ave. Helena, MT 59601 28 Neill Ave. Helena, MT 59601 2090 Cromwell Dixon Helena, MT 59602 3401 Harrison Ave. Butte, MT 59701 1997 $ 3,664 32,304 1987 $ 1,017 1,391 2009 $ 2,208 4,643 1979 $ 500 3,890 606 North Seventh Bozeman, MT 59715 1980 (closed August 1, 2010) $ 374 5,886 1455 Oak St Bozeman, MT 59715 416 Broadway Townsend, MT 59644 2009 $ 7,616 19,818 1979 $ 182 1,973 As of June 30, 2012, the net book value of land, buildings, furniture, and equipment owned by American Federal, less accumulated depreciation, totaled $15.56 million. ITEM 3. LEGAL PROCEEDINGS. American Federal, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which American Federal Savings Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of American Federal. There were no lawsuits pending or known to be contemplated against Eagle or American Federal as of June 30, 2012. ITEM 4. Not applicable. MINE SAFETY DISCLOSURES. ITEM 1B. UNRESOLVED STAFF COMMENTS. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. None. ITEM 2. PROPERTIES. The Company’s business activities consist of its ownership of 100% of the common stock of the Bank. Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. American Federal conducts its business through six offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All of its offices are owned. Its principal banking office in Helena also serves as its executive headquarters and operations center. This office houses over 50% of American Federal’s full-time employees. The following table sets forth the location of each of American Federal’s offices, the year the office was opened, and the net book value including land, buildings, computer software and its related equipment and furniture. The square footage at each location is also shown. The Company’s business activities consist of its ownership of 100% of the common stock of the Bank. Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. American Federal conducts its business through six offices, which are located in Helena, Bozeman, Butte, and Townsend, Montana. All of its offices are owned. Its principal banking office in Helena also serves as its executive headquarters and operations center. This office houses over 50% of American Federal’s full-time employees. The following table sets forth the location of each of American Federal’s offices, the year the office was opened, and the net book value including land, buildings, computer software and its related equipment and furniture. The square footage at each location is also shown. 31 32 31 32 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the NASDAQ Global Market under the symbol “EBMT.” At the close of business on June 30, 2012, there were 3,878,971 shares of common stock outstanding, held by approximately 1,000 shareholders of record. The closing price of the common stock on June 30, 2012, was $10.00 per share. Quarter Ended Fiscal Year 2012 Fiscal Year 2011 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 High Bid Low Bid $ $ $ $ 10.25 10.18 10.49 10.82 $ $ $ $ 11.75 11.81 10.83 9.95 $ $ $ $ 9.90 9.75 9.50 10.40 $ $ $ $ 10.49 10.58 9.05 9.00 Dividends Paid $ $ $ $ 0.07125 0.07125 0.07125 0.07125 $ $ $ $ 0.070 0.070 0.070 0.070 Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. The following table provides information regarding our purchases of our common stock during the fourth quarter of our fiscal year ended June 30, 2012: Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs Total number of shares purchased Average price paid per share - - - - $ - - - - - - - - Period April 1, 2012 through April 30, 2012 May 1, 2012 through May 31, 2012 June 1, 2012 through June 30, 2012 Total On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The program terminated on December 27, 2011 with its final purchase of shares within the program. ITEM 5. PART II On April 21, 2011, the Company entered into a pre-arranged Rule 10b5-1 written trading plan (“the Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. A broker selected by the Company had the authority under the terms and limitations specified in the Trading Plan to repurchase shares on the Company’s behalf in accordance with the terms of the Trading Plan. The Trading Plan facilitated the Company’s share repurchase program, went into effect on April 27, 2011 and was completed on December 27, 2011. The Trading Plan enabled the Company to continue to repurchase shares without suspension for self-imposed trading blackout periods. The shares repurchased under the Trading Plan were in accordance with and subject to the limitations of the stock repurchase program. Our common stock is traded on the NASDAQ Global Market under the symbol “EBMT.” At the close of business on June 30, 2012, there were 3,878,971 shares of common stock outstanding, held by approximately 1,000 shareholders of record. The closing price of the common stock on June 30, 2012, was $10.00 per share. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ITEM 6. SELECTED FINANCIAL DATA. ITEM 6. SELECTED FINANCIAL DATA. Low Bid Dividends Paid This item has been omitted based on Eagle’s status as a smaller reporting company. This item has been omitted based on Eagle’s status as a smaller reporting company. Quarter Ended Fiscal Year 2012 High Bid ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND $ RESULTS OF OPERATIONS. $ $ $ The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report. June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 $ $ $ $ 0.07125 0.07125 0.07125 0.07125 $ $ $ $ 9.90 9.75 9.50 10.40 10.25 10.18 10.49 10.82 Fiscal Year 2011 Overview June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 Historically, our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and non-financial institutions, account maturities, fee structures, and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations. Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. $ $ $ $ 11.75 11.81 10.83 9.95 $ $ $ $ 10.49 10.58 9.05 9.00 $ $ $ $ 0.070 0.070 0.070 0.070 The following table provides information regarding our purchases of our common stock during the fourth quarter of our fiscal year ended June 30, 2012: Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans, mortgage-backed securities and other investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest- bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense. Total number of shares purchased Period Average price paid per share June 1, 2012 through June 30, 2012 May 1, 2012 through May 31, 2012 April 1, 2012 through April 30, 2012 American Federal Savings Bank has a strong mortgage lending focus, with the majority of its loan originations in 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 we have also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of June 30, 2012, commercial real estate and land loans and commercial business loans represented 36.8% and 8.7% of the total loan portfolio, respectively, which represented increases from the 34.5% and 5.6% amounts at June 30, 2011, respectively. The purpose of this diversification is to mitigate our dependence on the mortgage market, as well as to improve our ability to manage our interest rate spread. American Federal Savings 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. As of June 30, 2012, we had mortgage servicing rights, net of $2.218 million compared to $2.142 million as of June 30, 2011. 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 our deposit accounts. American Federal Savings 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. On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The program terminated on December 27, 2011 with its final purchase of shares within the program. $ - Total - - - - - - - - - - - Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs On April 21, 2011, the Company entered into a pre-arranged Rule 10b5-1 written trading plan (“the Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. A broker selected by the Company had the authority under the terms and limitations specified in the Trading Plan to repurchase shares on the Company’s behalf in accordance with the terms of the Trading Plan. The Trading Plan facilitated the Company’s share repurchase program, went into effect on April 27, 2011 and was completed on December 27, 2011. The Trading Plan enabled the Company to continue to repurchase shares without suspension for self-imposed trading blackout periods. The shares repurchased under the Trading Plan were in accordance with and subject to the limitations of the stock repurchase program. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report. Overview Historically, our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and non-financial institutions, account maturities, fee structures, and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations. Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans, mortgage-backed securities and other investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest- bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense. American Federal Savings Bank has a strong mortgage lending focus, with the majority of its loan originations in 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 we have also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of June 30, 2012, commercial real estate and land loans and commercial business loans represented 36.8% and 8.7% of the total loan portfolio, respectively, which represented increases from the 34.5% and 5.6% amounts at June 30, 2011, respectively. The purpose of this diversification is to mitigate our dependence on the mortgage market, as well as to improve our ability to manage our interest rate spread. American Federal Savings 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. As of June 30, 2012, we had mortgage servicing rights, net of $2.218 million compared to $2.142 million as of June 30, 2011. 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 our deposit accounts. American Federal Savings 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. 33 34 33 34 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the NASDAQ Global Market under the symbol “EBMT.” At the close of business on June 30, 2012, there were 3,878,971 shares of common stock outstanding, held by approximately 1,000 shareholders of record. The closing price of the common stock on June 30, 2012, was $10.00 per share. Quarter Ended Fiscal Year 2012 Fiscal Year 2011 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 High Bid Low Bid Paid $ 10.25 $ 9.90 $ 10.18 $ 9.75 $ 10.49 $ 9.50 $ 10.82 $ 10.40 $ 11.75 $ 10.49 $ 11.81 $ 10.58 $ 10.83 $ 9.05 $ 9.95 $ 9.00 Dividends $ 0.07125 $ 0.07125 $ 0.07125 $ 0.07125 $ 0.070 $ 0.070 $ 0.070 $ 0.070 Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. The following table provides information regarding our purchases of our common stock during the fourth quarter of our fiscal year ended June 30, 2012: Period April 1, 2012 through April 30, 2012 May 1, 2012 through May 31, 2012 June 1, 2012 through June 30, 2012 Total On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The program terminated on December 27, 2011 with its final purchase of shares within the program. Total number of shares Maximum number of purchased as shares that part of publicly announced plans or programs may yet be purchased under the plans or programs - - - - - - - Total number of shares purchased Average price paid per share $ - - - - - 33 ITEM 5. PART II On April 21, 2011, the Company entered into a pre-arranged Rule 10b5-1 written trading plan (“the Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. A broker selected by the Company had the authority under the terms and limitations specified in the Trading Plan to repurchase shares on the Company’s behalf in accordance with the terms of the Trading Plan. The Trading Plan facilitated the Company’s share repurchase program, went into effect on April 27, 2011 and was completed on December 27, 2011. The Trading Plan enabled the Company to continue to repurchase shares without suspension for self-imposed trading blackout periods. The shares repurchased under the Trading Plan were in accordance with and subject to the limitations of the stock repurchase program. Our common stock is traded on the NASDAQ Global Market under the symbol “EBMT.” At the close of business on June 30, 2012, there were 3,878,971 shares of common stock outstanding, held by approximately 1,000 shareholders of record. The closing price of the common stock on June 30, 2012, was $10.00 per share. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. On April 21, 2011, the Company entered into a pre-arranged Rule 10b5-1 written trading plan (“the Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. A broker selected by the Company had the authority under the terms and limitations specified in the Trading Plan to repurchase shares on the Company’s behalf in accordance with the terms of the Trading Plan. The Trading Plan facilitated the Company’s share repurchase program, went into effect on April 27, 2011 and was completed on December 27, 2011. The Trading Plan enabled the Company to continue to repurchase shares without suspension for self-imposed trading blackout periods. The shares repurchased under the Trading Plan were in accordance with and subject to the limitations of the stock repurchase program. ITEM 6. SELECTED FINANCIAL DATA. ITEM 6. SELECTED FINANCIAL DATA. Low Bid Dividends Paid This item has been omitted based on Eagle’s status as a smaller reporting company. This item has been omitted based on Eagle’s status as a smaller reporting company. Quarter Ended Fiscal Year 2012 High Bid ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND $ RESULTS OF OPERATIONS. $ $ $ The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report. June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 $ $ $ $ 0.07125 0.07125 0.07125 0.07125 $ $ $ $ 9.90 9.75 9.50 10.40 10.25 10.18 10.49 10.82 Fiscal Year 2011 Overview June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 Historically, our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and non-financial institutions, account maturities, fee structures, and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations. Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. $ $ $ $ 11.75 11.81 10.83 9.95 $ $ $ $ 10.49 10.58 9.05 9.00 $ $ $ $ 0.070 0.070 0.070 0.070 The following table provides information regarding our purchases of our common stock during the fourth quarter of our fiscal year ended June 30, 2012: Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans, mortgage-backed securities and other investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest- bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense. Total number of shares purchased Period Average price paid per share June 1, 2012 through June 30, 2012 May 1, 2012 through May 31, 2012 April 1, 2012 through April 30, 2012 American Federal Savings Bank has a strong mortgage lending focus, with the majority of its loan originations in 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 we have also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of June 30, 2012, commercial real estate and land loans and commercial business loans represented 36.8% and 8.7% of the total loan portfolio, respectively, which represented increases from the 34.5% and 5.6% amounts at June 30, 2011, respectively. The purpose of this diversification is to mitigate our dependence on the mortgage market, as well as to improve our ability to manage our interest rate spread. American Federal Savings 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. As of June 30, 2012, we had mortgage servicing rights, net of $2.218 million compared to $2.142 million as of June 30, 2011. 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 our deposit accounts. American Federal Savings 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. On April 26, 2011, the Company announced that its Board of Directors authorized a common stock repurchase program for 204,156 shares of common stock, effective April 27, 2011. The program was intended to be implemented through purchases made from time to time in the open market or through private transactions. The program terminated on December 27, 2011 with its final purchase of shares within the program. $ - Total - - - - - - - - - - - Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report. Overview Historically, our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral, including real estate and other consumer assets. We are significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a number of factors, including interest rates paid on competing investments offered by other financial and non-financial institutions, account maturities, fee structures, and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from maturities of investment securities and income provided from operations. Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans, mortgage-backed securities and other investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest- bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and occupancy and equipment costs, as well as by state and federal income tax expense. American Federal Savings Bank has a strong mortgage lending focus, with the majority of its loan originations in 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 we have also focused on adding commercial loans to our portfolio, both real estate and non-real estate. We have made significant progress in this initiative. As of June 30, 2012, commercial real estate and land loans and commercial business loans represented 36.8% and 8.7% of the total loan portfolio, respectively, which represented increases from the 34.5% and 5.6% amounts at June 30, 2011, respectively. The purpose of this diversification is to mitigate our dependence on the mortgage market, as well as to improve our ability to manage our interest rate spread. American Federal Savings 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. As of June 30, 2012, we had mortgage servicing rights, net of $2.218 million compared to $2.142 million as of June 30, 2011. 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 our deposit accounts. American Federal Savings 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. 34 33 34 For the past three years, management’s focus has been on improving our 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 our loans serviced portfolio. Management believes that we will need to continue to focus on increasing net interest margin, other areas of fee income, and control operating expenses to achieve earnings growth going forward. Management’s strategy of growing the loan portfolio and deposit base is expected to help achieve these goals: loans typically earn higher rates of return than investments; a larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to management’s strategy is funding the growth of our balance sheet in an efficient manner. Though deposit growth this last year was robust, 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. Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). The level and movement of interest rates impacts the Bank’s earnings as well. For the 2012 fiscal year the short end of the yield curve was fairly static as the Federal Open Market Committee maintained the fed funds rate at a target of 0 to 25 basis points while the long end of the curve moved downward. RECENT ACCOUNTING PRONOUNCEMENTS In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, as noted above, management expects goodwill to be recorded and as such the Company’s financials will likely be effected by this pronouncement. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. For the past three years, management’s focus has been on improving our 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 our loans serviced portfolio. Management believes that we will need to continue to focus on increasing net interest margin, other areas of fee income, and control operating expenses to achieve earnings growth going forward. Management’s strategy of growing the loan portfolio and deposit base is expected to help achieve these goals: loans typically earn higher rates of return than investments; a larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to management’s strategy is funding the growth of our balance sheet in an efficient manner. Though deposit growth this last year was robust, 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. Critical Accounting Policies Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical. Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). The level and movement of interest rates impacts the Bank’s earnings as well. For the 2012 fiscal year the short end of the yield curve was fairly static as the Federal Open Market Committee maintained the fed funds rate at a target of 0 to 25 basis points while the long end of the curve moved downward. Allowance for Loan Losses. We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions. RECENT ACCOUNTING PRONOUNCEMENTS In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC 310 Receivables. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, as noted above, management expects goodwill to be recorded and as such the Company’s financials will likely be effected by this pronouncement. Valuation of Investment Securities. Substantially all of our investment securities are classified as available-for-sale and recorded at current fair value. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of stockholders’ equity. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes for similar assets. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. No adjustments were made to any broker quotes received by us. We conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, if applicable, and the delinquency or default rates of underlying collateral. We consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis. If impairment exists, credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Critical Accounting Policies Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical. Allowance for Loan Losses. We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions. As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC 310 Receivables. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results. Valuation of Investment Securities. Substantially all of our investment securities are classified as available-for-sale and recorded at current fair value. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of stockholders’ equity. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes for similar assets. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. No adjustments were made to any broker quotes received by us. We conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, if applicable, and the delinquency or default rates of underlying collateral. We consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis. If impairment exists, credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income. 35 36 35 36 For the past three years, management’s focus has been on improving our 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 our loans serviced portfolio. Management believes that we will need to continue to focus on increasing net interest margin, other areas of fee income, and control operating expenses to achieve earnings growth going forward. Management’s strategy of growing the loan portfolio and deposit base is expected to help achieve these goals: loans typically earn higher rates of return than investments; a larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to management’s strategy is funding the growth of our balance sheet in an efficient manner. Though deposit growth this last year was robust, 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. Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). The level and movement of interest rates impacts the Bank’s earnings as well. For the 2012 fiscal year the short end of the yield curve was fairly static as the Federal Open Market Committee maintained the fed funds rate at a target of 0 to 25 basis points while the long end of the curve moved downward. RECENT ACCOUNTING PRONOUNCEMENTS In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, as noted above, management expects goodwill to be recorded and as such the Company’s financials will likely be effected by this pronouncement. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. For the past three years, management’s focus has been on improving our 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 our loans serviced portfolio. Management believes that we will need to continue to focus on increasing net interest margin, other areas of fee income, and control operating expenses to achieve earnings growth going forward. Management’s strategy of growing the loan portfolio and deposit base is expected to help achieve these goals: loans typically earn higher rates of return than investments; a larger deposit base will yield higher fee income; increasing the asset base will reduce the relative impact of fixed operating costs. The biggest challenge to management’s strategy is funding the growth of our balance sheet in an efficient manner. Though deposit growth this last year was robust, 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. Critical Accounting Policies Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical. Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). The level and movement of interest rates impacts the Bank’s earnings as well. For the 2012 fiscal year the short end of the yield curve was fairly static as the Federal Open Market Committee maintained the fed funds rate at a target of 0 to 25 basis points while the long end of the curve moved downward. Allowance for Loan Losses. We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions. RECENT ACCOUNTING PRONOUNCEMENTS In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC 310 Receivables. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, as noted above, management expects goodwill to be recorded and as such the Company’s financials will likely be effected by this pronouncement. Valuation of Investment Securities. Substantially all of our investment securities are classified as available-for-sale and recorded at current fair value. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of stockholders’ equity. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes for similar assets. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. No adjustments were made to any broker quotes received by us. We conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, if applicable, and the delinquency or default rates of underlying collateral. We consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis. If impairment exists, credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Critical Accounting Policies Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting policies we believe are critical. Allowance for Loan Losses. We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, internal data including delinquencies among others, industry data, and economic conditions. As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date. Commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under FASB ASC 310 Receivables. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results. Valuation of Investment Securities. Substantially all of our investment securities are classified as available-for-sale and recorded at current fair value. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of stockholders’ equity. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes for similar assets. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. No adjustments were made to any broker quotes received by us. We conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, if applicable, and the delinquency or default rates of underlying collateral. We consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis. If impairment exists, credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income. 35 36 35 36 Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC 740 Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings. FINANCIAL CONDITION Introduction. Total assets decreased $3.79 million, or 1.15%, to $327.30 million at June 30, 2012, from $331.09 million at June 30, 2011. Total liabilities decreased by $4.96 million, or 1.78%, to $273.65 million at June 30, 2012, from $278.61 million at June 30, 2011. The loan portfolio decreased $11.63 million during the year. Total deposits increased $10.80 million. Noninterest checking increased $4.37 million or 22.95%, to $23.43 million at June 30, 2012, and money market accounts increased $205,000, or 0.72%. Interest bearing checking accounts increased $5.77 million, or 14.31%, to $46.13 million at June 30, 2012. Certificates of deposits decreased $3.19 million, or 3.78%, to $81.36 million at June 30, 2012. Balance Sheet Details. Loans receivable decreased $11.63 million, or 6.27% to $173.84 million from $185.47 million. Though loan originations were relatively strong, much of the loan origination volume was in 30 and 15 year fixed rate one- to four-family residential mortgages which were primarily sold in the secondary market. We sold $99.51 million in loans during fiscal year 2012, a decrease of $12.93 million from $112.44 million sold in fiscal year 2011. The amount of loans sold in fiscal year 2011 was exceptionally high, particularly in the first half of the previous fiscal year, as the Bank experienced a significant increase in refinance volume of one- to four-family residential mortgages. Origination activity in most loan categories, with the exception of one- to four-family residential mortgages, decreased in the current fiscal year. Commercial real estate and land loan originations decreased $28.52 million during the year, and residential mortgage loan originations increased $2.22 million. The available-for-sale investment portfolio decreased $13.42 million, or 13.07%, to $89.28 million at June 30, 2012 from $102.70 million at June 30, 2011. The investment category with the largest decrease was agency CMOs, which decreased $9.23 million. Premises and equipment decreased $590,000, which was primarily due to depreciation expense partially offset by equipment purchases. Total deposits increased by $10.80 million, notwithstanding lower rates on deposits. The growth was attributable to consumers seeking additional safety and protection afforded by increased federal deposit insurance. Of that increase, certificates of deposit decreased $3.19 million, to $81.36 million at June 30, 2012 from $84.55 million at June 30, 2011. The Bank had no brokered deposits as of June 30, 2012. Interest-earning checking accounts increased $5.77 million and noninterest checking increased $4.37 million. Money market accounts increased $205,000 and savings accounts increased $3.65 million. A portion of the deposit growth the Bank has experienced over the last three fiscal years has likely been the result of a flight to quality by individual investors during the financial crisis and ensuing economic downturn. As such, as the financial crisis subsides, we believe deposit growth will be more difficult to achieve on a long-term basis due to significant competition among financial institutions in our markets. Advances from the FHLB and other borrowings decreased to $42.70 million at year-end 2012 from $60.90 million at year-end 2011, a decrease of $18.20 million and is largely attributable to the availability of retail funding from deposits. Total shareholders’ equity was $53.65 million at June 30, 2012, an increase of $1.17 million over the comparable period. This increase was due to earnings, and increases in net accumulated other comprehensive gain, offset by dividends paid and treasury stock purchases. 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. Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC 740 Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings. The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. 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 set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. FINANCIAL CONDITION For the twelve months ended June 30, 2012 2011 Introduction. Interest Total assets decreased $3.79 million, or 1.15%, to $327.30 million at June 30, 2012, from $331.09 million at June 30, Yield/ and 2011. Total liabilities decreased by $4.96 million, or 1.78%, to $273.65 million at June 30, 2012, from $278.61 million at Cost(3) June 30, 2011. The loan portfolio decreased $11.63 million during the year. Total deposits increased $10.80 million. Dividends Noninterest checking increased $4.37 million or 22.95%, to $23.43 million at June 30, 2012, and money market accounts increased $205,000, or 0.72%. Interest bearing checking accounts increased $5.77 million, or 14.31%, to $46.13 million at June 30, 2012. Certificates of deposits decreased $3.19 million, or 3.78%, to $81.36 million at June 30, 2012. (Dollars in thousands) Average Daily Average Daily Interest and Yield/ Cost(3) Dividends Balance Balance Interest-earning assets: Assets: $ 2,003 $ - 0.00% $ 2,003 $ - 0.00% FHLB stock Noninterest-earning assets Total interest-earning assets Interest-bearing deposits with banks Loans receivable, net Investment securities 3,192 8,693 3.26% 5.77% 97,976 10,884 11,279 188,502 185,223 Balance Sheet Details. 6.09% Loans receivable decreased $11.63 million, or 6.27% to $173.84 million from $185.47 million. Though loan originations 3.42% were relatively strong, much of the loan origination volume was in 30 and 15 year fixed rate one- to four-family residential 0.36% mortgages which were primarily sold in the secondary market. We sold $99.51 million in loans during fiscal year 2012, a 4.98% decrease of $12.93 million from $112.44 million sold in fiscal year 2011. The amount of loans sold in fiscal year 2011 was exceptionally high, particularly in the first half of the previous fiscal year, as the Bank experienced a significant increase in refinance volume of one- to four-family residential mortgages. Origination activity in most loan categories, with the exception of one- to four-family residential mortgages, decreased in the current fiscal year. Commercial real estate and land loan originations decreased $28.52 million during the year, and residential mortgage loan originations increased $2.22 million. The available-for-sale investment portfolio decreased $13.42 million, or 13.07%, to $89.28 million at June 30, 2012 from $102.70 million at June 30, 2011. The investment category with the largest decrease was agency CMOs, which decreased $9.23 million. Premises and equipment decreased $590,000, which was primarily due to depreciation expense partially offset by equipment purchases. $ 0.16% $ 300,110 331,615 297,174 331,161 107,010 14,959 31,505 28,075 14,096 33,987 27,936 0.20% 4.74% 0.13% 5,874 3,659 $ $ $ $ 21 46 20 37 Deposit accounts: Money market Interest-bearing liabilities: Liabilities and Equity: Total assets Certificates of deposit Total interest-bearing liabilities Savings Checking Advances from FHLB & subordinated debt 38,344 39 0.10% 33,850 48 0.14% 24 82,317 43,863 Total deposits increased by $10.80 million, notwithstanding lower rates on deposits. The growth was attributable to 0.07% consumers seeking additional safety and protection afforded by increased federal deposit insurance. Of that increase, certificates of deposit decreased $3.19 million, to $81.36 million at June 30, 2012 from $84.55 million at June 30, 2011. 1.50% The Bank had no brokered deposits as of June 30, 2012. Interest-earning checking accounts increased $5.77 million and 3.90% noninterest checking increased $4.37 million. Money market accounts increased $205,000 and savings accounts increased 1.60% $3.65 million. A portion of the deposit growth the Bank has experienced over the last three fiscal years has likely been the result of a flight to quality by individual investors during the financial crisis and ensuing economic downturn. As such, as the financial crisis subsides, we believe deposit growth will be more difficult to achieve on a long-term basis due to significant competition among financial institutions in our markets. Advances from the FHLB and other borrowings decreased to $42.70 million at year-end 2012 from $60.90 million at year-end 2011, a decrease of $18.20 million and is largely attributable to the availability of retail funding from deposits. 255,536 278,075 251,266 277,486 40,057 84,391 69,163 19,381 58,806 22,030 0.05% 1.18% 3.55% 1.26% 1,270 2,694 4,086 3,158 2,091 3,165 4,190 974 28 Other noninterest-bearing liabilities Non-interest checking Total liabilities 53,675 53,540 Total equity Total liabilities and equity Total shareholders’ equity was $53.65 million at June 30, 2012, an increase of $1.17 million over the comparable period. This increase was due to earnings, and increases in net accumulated other comprehensive gain, offset by dividends paid and 3.38% treasury stock purchases. Net interest income/interest rate spread(1) 331,615 331,161 10,873 10,931 3.48% $ $ $ $ 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 tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. 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 set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. For the twelve months ended June 30, 2012 Interest and Average Daily Balance Dividends (Dollars in thousands) Yield/ Cost(3) Average Daily Balance $ 2,003 $ - $ 2,003 $ - Interest-bearing deposits with banks Assets: Interest-earning assets: FHLB stock Loans receivable, net Investment securities Total interest-earning assets Noninterest-earning assets Total assets Liabilities and Equity: Interest-bearing liabilities: Deposit accounts: Money market Savings Checking Certificates of deposit Advances from FHLB & subordinated debt Total interest-bearing liabilities Non-interest checking Other noninterest-bearing liabilities Total liabilities Total equity 188,502 97,976 8,693 297,174 33,987 $ 331,161 38,344 43,863 82,317 58,806 251,266 22,030 4,190 277,486 53,675 10,884 3,192 20 14,096 39 24 974 2,091 3,165 0.00% 5.77% 3.26% 0.20% 4.74% 0.13% 0.10% 0.05% 1.18% 3.55% 1.26% 185,223 107,010 5,874 300,110 31,505 $ 331,615 33,850 40,057 84,391 69,163 255,536 19,381 3,158 278,075 53,540 $ 27,936 $ 37 $ 28,075 $ 46 2011 Interest and Dividends 11,279 3,659 21 14,959 48 28 1,270 2,694 4,086 Yield/ Cost(3) 0.00% 6.09% 3.42% 0.36% 4.98% 0.16% 0.14% 0.07% 1.50% 3.90% 1.60% Total liabilities and equity $ 331,161 $ 331,615 Net interest income/interest rate spread(1) $ 10,931 3.48% $ 10,873 3.38% Net interest margin(2) Total interest-earning assets to interest-bearing liabilities 3.68% 118.27% 3.62% 117.44% Net interest margin(2) Total interest-earning assets to interest-bearing liabilities 3.68% 118.27% 3.62% 117.44% (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (2) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets. (3) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (2) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets. (3) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. 37 38 37 38 Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC 740 Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings. Introduction. FINANCIAL CONDITION Total assets decreased $3.79 million, or 1.15%, to $327.30 million at June 30, 2012, from $331.09 million at June 30, 2011. Total liabilities decreased by $4.96 million, or 1.78%, to $273.65 million at June 30, 2012, from $278.61 million at June 30, 2011. The loan portfolio decreased $11.63 million during the year. Total deposits increased $10.80 million. Noninterest checking increased $4.37 million or 22.95%, to $23.43 million at June 30, 2012, and money market accounts increased $205,000, or 0.72%. Interest bearing checking accounts increased $5.77 million, or 14.31%, to $46.13 million at June 30, 2012. Certificates of deposits decreased $3.19 million, or 3.78%, to $81.36 million at June 30, 2012. Balance Sheet Details. Loans receivable decreased $11.63 million, or 6.27% to $173.84 million from $185.47 million. Though loan originations were relatively strong, much of the loan origination volume was in 30 and 15 year fixed rate one- to four-family residential mortgages which were primarily sold in the secondary market. We sold $99.51 million in loans during fiscal year 2012, a decrease of $12.93 million from $112.44 million sold in fiscal year 2011. The amount of loans sold in fiscal year 2011 was exceptionally high, particularly in the first half of the previous fiscal year, as the Bank experienced a significant increase in refinance volume of one- to four-family residential mortgages. Origination activity in most loan categories, with the exception of one- to four-family residential mortgages, decreased in the current fiscal year. Commercial real estate and land loan originations decreased $28.52 million during the year, and residential mortgage loan originations increased $2.22 million. The available-for-sale investment portfolio decreased $13.42 million, or 13.07%, to $89.28 million at June 30, 2012 from $102.70 million at June 30, 2011. The investment category with the largest decrease was agency CMOs, which decreased $9.23 million. Premises and equipment decreased $590,000, which was primarily due to depreciation expense partially offset by equipment purchases. Total deposits increased by $10.80 million, notwithstanding lower rates on deposits. The growth was attributable to consumers seeking additional safety and protection afforded by increased federal deposit insurance. Of that increase, certificates of deposit decreased $3.19 million, to $81.36 million at June 30, 2012 from $84.55 million at June 30, 2011. The Bank had no brokered deposits as of June 30, 2012. Interest-earning checking accounts increased $5.77 million and noninterest checking increased $4.37 million. Money market accounts increased $205,000 and savings accounts increased $3.65 million. A portion of the deposit growth the Bank has experienced over the last three fiscal years has likely been the result of a flight to quality by individual investors during the financial crisis and ensuing economic downturn. As such, as the financial crisis subsides, we believe deposit growth will be more difficult to achieve on a long-term basis due to significant competition among financial institutions in our markets. Advances from the FHLB and other borrowings decreased to $42.70 million at year-end 2012 from $60.90 million at year-end 2011, a decrease of $18.20 million and is largely attributable to the availability of retail funding from deposits. Total shareholders’ equity was $53.65 million at June 30, 2012, an increase of $1.17 million over the comparable period. This increase was due to earnings, and increases in net accumulated other comprehensive gain, offset by dividends paid and treasury stock purchases. 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. Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in FASB ASC 740 Income Taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings. The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. 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 set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. FINANCIAL CONDITION For the twelve months ended June 30, 2012 2011 Introduction. Interest Total assets decreased $3.79 million, or 1.15%, to $327.30 million at June 30, 2012, from $331.09 million at June 30, Yield/ and 2011. Total liabilities decreased by $4.96 million, or 1.78%, to $273.65 million at June 30, 2012, from $278.61 million at Cost(3) June 30, 2011. The loan portfolio decreased $11.63 million during the year. Total deposits increased $10.80 million. Dividends Noninterest checking increased $4.37 million or 22.95%, to $23.43 million at June 30, 2012, and money market accounts increased $205,000, or 0.72%. Interest bearing checking accounts increased $5.77 million, or 14.31%, to $46.13 million at June 30, 2012. Certificates of deposits decreased $3.19 million, or 3.78%, to $81.36 million at June 30, 2012. (Dollars in thousands) Average Daily Average Daily Interest and Yield/ Cost(3) Dividends Balance Balance Interest-earning assets: Assets: $ 2,003 $ - 0.00% $ 2,003 $ - 0.00% FHLB stock Noninterest-earning assets Total interest-earning assets Interest-bearing deposits with banks Loans receivable, net Investment securities 3,192 8,693 3.26% 5.77% 11,279 97,976 10,884 185,223 188,502 Balance Sheet Details. 6.09% Loans receivable decreased $11.63 million, or 6.27% to $173.84 million from $185.47 million. Though loan originations 3.42% were relatively strong, much of the loan origination volume was in 30 and 15 year fixed rate one- to four-family residential 0.36% mortgages which were primarily sold in the secondary market. We sold $99.51 million in loans during fiscal year 2012, a 4.98% decrease of $12.93 million from $112.44 million sold in fiscal year 2011. The amount of loans sold in fiscal year 2011 was exceptionally high, particularly in the first half of the previous fiscal year, as the Bank experienced a significant increase in refinance volume of one- to four-family residential mortgages. Origination activity in most loan categories, with the exception of one- to four-family residential mortgages, decreased in the current fiscal year. Commercial real estate and land loan originations decreased $28.52 million during the year, and residential mortgage loan originations increased $2.22 million. The available-for-sale investment portfolio decreased $13.42 million, or 13.07%, to $89.28 million at June 30, 2012 from $102.70 million at June 30, 2011. The investment category with the largest decrease was agency CMOs, which decreased $9.23 million. Premises and equipment decreased $590,000, which was primarily due to depreciation expense partially offset by equipment purchases. $ 0.16% $ 297,174 300,110 331,161 331,615 107,010 14,096 33,987 31,505 27,936 28,075 14,959 0.20% 4.74% 0.13% 5,874 3,659 $ $ $ $ 20 37 21 46 Deposit accounts: Money market Interest-bearing liabilities: Liabilities and Equity: Total assets Certificates of deposit Total interest-bearing liabilities Savings Checking Advances from FHLB & subordinated debt 38,344 39 0.10% 33,850 48 0.14% 24 82,317 43,863 Total deposits increased by $10.80 million, notwithstanding lower rates on deposits. The growth was attributable to 0.07% consumers seeking additional safety and protection afforded by increased federal deposit insurance. Of that increase, certificates of deposit decreased $3.19 million, to $81.36 million at June 30, 2012 from $84.55 million at June 30, 2011. 1.50% The Bank had no brokered deposits as of June 30, 2012. Interest-earning checking accounts increased $5.77 million and 3.90% noninterest checking increased $4.37 million. Money market accounts increased $205,000 and savings accounts increased 1.60% $3.65 million. A portion of the deposit growth the Bank has experienced over the last three fiscal years has likely been the result of a flight to quality by individual investors during the financial crisis and ensuing economic downturn. As such, as the financial crisis subsides, we believe deposit growth will be more difficult to achieve on a long-term basis due to significant competition among financial institutions in our markets. Advances from the FHLB and other borrowings decreased to $42.70 million at year-end 2012 from $60.90 million at year-end 2011, a decrease of $18.20 million and is largely attributable to the availability of retail funding from deposits. 277,486 278,075 251,266 255,536 40,057 84,391 69,163 58,806 22,030 19,381 0.05% 1.18% 3.55% 1.26% 4,190 3,158 2,091 3,165 1,270 2,694 4,086 974 28 Other noninterest-bearing liabilities Non-interest checking Total liabilities 53,675 53,540 Total equity 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 tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. 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 set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. For the twelve months ended June 30, 2012 Interest and Average Daily Balance Dividends $ 2,003 $ - 10,884 3,192 20 14,096 188,502 97,976 8,693 297,174 33,987 $ 331,161 $ 27,936 $ 37 39 24 974 2,091 3,165 38,344 43,863 82,317 58,806 251,266 22,030 4,190 277,486 53,675 Assets: Interest-earning assets: FHLB stock Loans receivable, net Investment securities Interest-bearing deposits with banks Total interest-earning assets Noninterest-earning assets Total assets Liabilities and Equity: Interest-bearing liabilities: Deposit accounts: Money market Savings Checking Certificates of deposit Advances from FHLB & subordinated debt Total interest-bearing liabilities Non-interest checking Other noninterest-bearing liabilities Total liabilities Total equity (Dollars in thousands) Average Daily Yield/ Cost(3) 2011 Interest and 0.00% 5.77% 3.26% 0.20% 4.74% 0.13% 0.10% 0.05% 1.18% 3.55% 1.26% Balance Dividends $ 2,003 $ - 11,279 3,659 21 14,959 185,223 107,010 5,874 300,110 31,505 $ 331,615 $ 28,075 $ 46 48 28 1,270 2,694 4,086 33,850 40,057 84,391 69,163 255,536 19,381 3,158 278,075 53,540 Yield/ Cost(3) 0.00% 6.09% 3.42% 0.36% 4.98% 0.16% 0.14% 0.07% 1.50% 3.90% 1.60% Total liabilities and equity Total shareholders’ equity was $53.65 million at June 30, 2012, an increase of $1.17 million over the comparable period. This increase was due to earnings, and increases in net accumulated other comprehensive gain, offset by dividends paid and 3.38% treasury stock purchases. Net interest income/interest rate spread(1) 331,161 331,615 10,931 10,873 3.48% $ $ $ $ Total liabilities and equity $ 331,161 $ 331,615 Net interest income/interest rate spread(1) $ 10,931 3.48% $ 10,873 3.38% Net interest margin(2) Total interest-earning assets to interest-bearing liabilities 3.68% 118.27% 3.62% 117.44% Net interest margin(2) Total interest-earning assets to interest-bearing liabilities 3.68% 118.27% 3.62% 117.44% (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (2) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets. (3) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities. (2) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets. (3) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis. 37 38 37 38 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 the periods indicated. 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 Years Ended June 30, Increase (Decrease) (In thousands) 2012 vs 2011 Due to Rate Net Volume 2011 vs 2010 Due to Rate $ (595) (158) (14) - (767) $ (395) (467) (4) - (866) $ (323) 871 18 - 566 $ (231) (770) (6) - (1,007) Volume $ 200 (309) 10 - (99) Net $ (554) 101 12 - (441) 9 (31) (403) (425) (31) (266) (202) (499) (22) (297) (605) (924) 47 76 (68) 55 (325) (798) 58 (1,065) (278) (722) (10) (1,010) Interest earning assets: Loans receivable, net Investment securities Interest-bearing deposits with banks Other earning assets Total interest earning assets Interest-bearing liabilities: Savings, money market and checking accounts Certificates of deposit Borrowings & subordinated debentures Total interest-bearing liabilities Change in net interest income $ 326 $ (268) $ 58 $ 511 $ 58 $ 569 Comparison of Operating Results for the Years Ended June 30, 2012 and 2011 Net Income. Eagle’s net income decreased slightly to $2.178 million for the year ended June 30, 2012 from $2.410 million for the year ended June 30, 2011, a decrease of $232,000. This decrease was the result of decreases in noninterest income of $449,000, and increases in the provision for loan losses of $153,000 offset by increases in net interest income of $58,000 and decreases in noninterest expense of $48,000. Eagle’s tax provision was also $264,000 lower in 2012. Basic earnings per share for the year ended June 30, 2012 were $0.59, compared to $0.62 for the year ended June 30, 2011. Diluted earnings per share were $0.56 and $0.62 for 2012 and 2011, respectively. Net Interest Income. Net interest income increased to $10.93 million for the year ended June 30, 2012, from $10.87 million for the previous year. This increase of $58,000, or 0.53%, was the result of a decrease in interest expense of $921,000 and a decrease in interest income of $863,000. As shown in the “Rate/Volume Analysis”, this increase was mainly attributable to a decrease in average balances in borrowings, larger average balances of deposits and lower rates on deposits largely offset by lower rates on interest earning assets. Interest and Dividend Income. Total interest and dividend income was $14.10 million for the year ended June 30, 2012, compared to $14.96 million for the year ended June 30, 2011, a decrease of $863,000, or 5.77%. Interest and fees on loans decreased to $10.88 million for 2012 from $11.28 million for 2011. The decrease of $395,000, or 3.50%, was due to a slight increase in the average balances on loans receivable offset by the decrease in average rates, for the year ended June 30, 2012. Specifically, the average interest rate earned on loans receivable decreased by 32 basis points, to 5.77%, from 6.09% for the prior year. Average balances for loans receivable, including loans held for sale, net, for the year ended June 30, 2012 were $188.50 million, compared to $185.22 million for the previous year. This represents an increase of $3.28 million, or 1.77%. Interest and dividends on investment securities available-for-sale also decreased to $3.19 million for the year ended Rate/Volume Analysis For the Years Ended June 30, Increase (Decrease) (In thousands) June 30, 2012 from $3.65 million for the year ended June 30, 2011, a decrease of $461,000, or 12.62%. This decrease was the result of both lower average interest rates and lower average balances on the AFS portfolio during the year. Interest earned from deposits at other banks decreased slightly for the year ended June 30, 2012 due to lower yields. 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 the periods indicated. 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. Interest Expense. Total interest expense decreased to $3.17 million for the year ended June 30, 2012 from $4.09 million for the year ended June 30, 2011, a decrease of $921,000, or 22.54%. Interest on deposits decreased to $1.07 million for the year ended June 30, 2012 from $1.39 million for the year ended June 30, 2011. This decrease of $318,000, or 22.84%, was due primarily to a decrease in average rates paid. The average cost of deposits decreased 19 basis points, to 0.56% in 2012 from 0.75% in 2011. All deposit categories except certificates of deposits experienced increases in average balances in 2012. The decrease in the average balance of borrowings was augmented by a decrease in the average rate paid and resulted in a decrease in interest paid on borrowings to $2.09 million for the year ended June 30, 2012 from $2.69 million for the year ended June 30, 2011. The average balance of borrowings decreased by $10.36 million to $58.81 million for the year ended June 30, 2012, compared to $69.16 million for the year ended June 30, 2011 and resulted from decreases in FHLB borrowings and other borrowings stemming from significant inflows of retail deposits as funding sources. The average rate paid on borrowings decreased to 3.55% in 2012 from 3.90% in 2011. Interest earning assets: Loans receivable, net Provision for Loan Losses. Investment securities Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered Interest-bearing deposits with banks adequate by the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we Other earning assets conduct and past due loans in portfolio. The Bank’s policies require the review of assets on a quarterly basis. The Bank Total interest earning assets 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. Interest-bearing liabilities: Using this methodology, a provision to increase the allowance for loan loss by $1.10 million was made for the year ended June 30, 2012 while a provision of $948,000 was made for the year ended June 30, 2011. This, management believes, Savings, money market and adequately reflected a level of total allowances considered adequate. Total classified assets decreased to $6.61 million at checking accounts June 30, 2012 from $7.71 million at June 30, 2011. Total nonperforming loans as a percentage of the total loan portfolio Certificates of deposit increased to 1.83% at June 30, 2012, from 1.57% at June 30, 2011. As of June 30, 2012, American Federal Savings Bank had $2.66 million ($2.36 million net of allowance for valuation losses of $300,000) in other real estate owned, an increase Borrowings & subordinated debentures over the $1.18 million held at June 30, 2011. Total interest-bearing liabilities 2012 vs 2011 Due to Rate 2011 vs 2010 Due to Rate (325) (798) 58 (1,065) (595) (158) (14) - (767) 200 (309) 10 - (99) (323) 871 18 - 566 (22) (297) (605) (924) (31) (266) (202) (499) 9 (31) (403) (425) 47 76 (68) 55 (231) (770) (6) (395) (467) (4) - (1,007) - (866) Volume Volume $ $ $ $ $ $ Net Net (554) 101 12 - (441) (278) (722) (10) (1,010) 569 58 58 511 326 (268) $ $ $ $ $ Change in net interest income Comparison of Operating Results for the Years Ended June 30, 2012 and 2011 Noninterest Income. $ Total noninterest income decreased to $4.17 million for the year ended June 30, 2012, from $4.62 million for the year ended June 30, 2011, a decrease of $449,000 or 9.71%. This decrease was primarily due to decrease in net gain on sale of loans of $492,000 and a net decrease of $615,000 in the value of the fair-value-hedge interest rate swap implemented in August 2010. Service charges on deposit accounts decreased $61,000 to $672,000 for the year ended June 30, 2012 from $733,000 for the year ended June 30, 2011. This was primarily due to a decrease in overdraft fees. Other noninterest income increased $191,000 to $849,000, which primarily was from increased balances in bank owned life insurance. The single largest item in other noninterest income is earnings from bank owned life insurance of $336,000. Net Income. Eagle’s net income decreased slightly to $2.178 million for the year ended June 30, 2012 from $2.410 million for the year ended June 30, 2011, a decrease of $232,000. This decrease was the result of decreases in noninterest income of $449,000, and increases in the provision for loan losses of $153,000 offset by increases in net interest income of $58,000 and decreases in noninterest expense of $48,000. Eagle’s tax provision was also $264,000 lower in 2012. Basic earnings per share for the year ended June 30, 2012 were $0.59, compared to $0.62 for the year ended June 30, 2011. Diluted earnings per share were $0.56 and $0.62 for 2012 and 2011, respectively. Noninterest Expense. Noninterest expense decreased by $48,000 or 0.43% to $11.03 million for the year ended June 30, 2012 from $11.08 million for the year ended June 30, 2011. This decrease was primarily due to the reduction of the amortization of mortgage servicing rights of $529,000. Both the provision for valuation loss on OREO and Federal insurance premiums decreased as well, while all other expenses increased. The increase in salaries and benefits was due to normal pay raises and a slightly larger staff. Most noninterest expense items showed modest changes with the exception of consulting fees which increased $348,000. This increase is due to costs associated with potential acquisitions including certain expenses associated with the proposed acquisition of Sterling Bank’s Montana branches. Net Interest Income. Net interest income increased to $10.93 million for the year ended June 30, 2012, from $10.87 million for the previous year. This increase of $58,000, or 0.53%, was the result of a decrease in interest expense of $921,000 and a decrease in interest income of $863,000. As shown in the “Rate/Volume Analysis”, this increase was mainly attributable to a decrease in average balances in borrowings, larger average balances of deposits and lower rates on deposits largely offset by lower rates on interest earning assets. Income Tax Expense. Eagle’s income tax expense was $792,000 for the year ended June 30, 2012, compared to $1.06 million for the year ended June 30, 2011. The effective tax rate was 26.67% for the year ended June 30, 2012 and 30.47% for the year ended June 30, 2011. Liquidity and Capital Resources Interest and Dividend Income. Total interest and dividend income was $14.10 million for the year ended June 30, 2012, compared to $14.96 million for the year ended June 30, 2011, a decrease of $863,000, or 5.77%. Interest and fees on loans decreased to $10.88 million for 2012 from $11.28 million for 2011. The decrease of $395,000, or 3.50%, was due to a slight increase in the average Eagle’s subsidiary, American Federal Savings Bank, is required to maintain minimum levels of liquid assets as defined by balances on loans receivable offset by the decrease in average rates, for the year ended June 30, 2012. Specifically, the the Office of the Comptroller of the Currency regulations. The liquidity requirement is retained for safety and soundness average interest rate earned on loans receivable decreased by 32 basis points, to 5.77%, from 6.09% for the prior year. purposes, and that appropriate levels of liquidity will depend upon the types of activities in which the company engages. Average balances for loans receivable, including loans held for sale, net, for the year ended June 30, 2012 were $188.50 For internal reporting purposes, the Bank uses policy minimums of 1.0%, and 8.0% for “basic surplus” and “basic surplus million, compared to $185.22 million for the previous year. This represents an increase of $3.28 million, or 1.77%. with FHLB” as internally defined. In general, the “basic surplus” is a calculation of the ratio of unencumbered short-term Interest and dividends on investment securities available-for-sale also decreased to $3.19 million for the year ended assets reduced by estimated percentages of CD maturities and other deposits that may leave the Bank in the next 90 days June 30, 2012 from $3.65 million for the year ended June 30, 2011, a decrease of $461,000, or 12.62%. This decrease was the result of both lower average interest rates and lower average balances on the AFS portfolio during the year. Interest earned from deposits at other banks decreased slightly for the year ended June 30, 2012 due to lower yields. Interest Expense. Total interest expense decreased to $3.17 million for the year ended June 30, 2012 from $4.09 million for the year ended June 30, 2011, a decrease of $921,000, or 22.54%. Interest on deposits decreased to $1.07 million for the year ended June 30, 2012 from $1.39 million for the year ended June 30, 2011. This decrease of $318,000, or 22.84%, was due primarily to a decrease in average rates paid. The average cost of deposits decreased 19 basis points, to 0.56% in 2012 from 0.75% in 2011. All deposit categories except certificates of deposits experienced increases in average balances in 2012. The decrease in the average balance of borrowings was augmented by a decrease in the average rate paid and resulted in a decrease in interest paid on borrowings to $2.09 million for the year ended June 30, 2012 from $2.69 million for the year ended June 30, 2011. The average balance of borrowings decreased by $10.36 million to $58.81 million for the year ended June 30, 2012, compared to $69.16 million for the year ended June 30, 2011 and resulted from decreases in FHLB borrowings and other borrowings stemming from significant inflows of retail deposits as funding sources. The average rate paid on borrowings decreased to 3.55% in 2012 from 3.90% in 2011. 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 the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the 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. Using this methodology, a provision to increase the allowance for loan loss by $1.10 million was made for the year ended June 30, 2012 while a provision of $948,000 was made for the year ended June 30, 2011. This, management believes, adequately reflected a level of total allowances considered adequate. Total classified assets decreased to $6.61 million at June 30, 2012 from $7.71 million at June 30, 2011. Total nonperforming loans as a percentage of the total loan portfolio increased to 1.83% at June 30, 2012, from 1.57% at June 30, 2011. As of June 30, 2012, American Federal Savings Bank had $2.66 million ($2.36 million net of allowance for valuation losses of $300,000) in other real estate owned, an increase over the $1.18 million held at June 30, 2011. Noninterest Income. Total noninterest income decreased to $4.17 million for the year ended June 30, 2012, from $4.62 million for the year ended June 30, 2011, a decrease of $449,000 or 9.71%. This decrease was primarily due to decrease in net gain on sale of loans of $492,000 and a net decrease of $615,000 in the value of the fair-value-hedge interest rate swap implemented in August 2010. Service charges on deposit accounts decreased $61,000 to $672,000 for the year ended June 30, 2012 from $733,000 for the year ended June 30, 2011. This was primarily due to a decrease in overdraft fees. Other noninterest income increased $191,000 to $849,000, which primarily was from increased balances in bank owned life insurance. The single largest item in other noninterest income is earnings from bank owned life insurance of $336,000. Noninterest Expense. Noninterest expense decreased by $48,000 or 0.43% to $11.03 million for the year ended June 30, 2012 from $11.08 million for the year ended June 30, 2011. This decrease was primarily due to the reduction of the amortization of mortgage servicing rights of $529,000. Both the provision for valuation loss on OREO and Federal insurance premiums decreased as well, while all other expenses increased. The increase in salaries and benefits was due to normal pay raises and a slightly larger staff. Most noninterest expense items showed modest changes with the exception of consulting fees which increased $348,000. This increase is due to costs associated with potential acquisitions including certain expenses associated with the proposed acquisition of Sterling Bank’s Montana branches. Eagle’s income tax expense was $792,000 for the year ended June 30, 2012, compared to $1.06 million for the year ended June 30, 2011. The effective tax rate was 26.67% for the year ended June 30, 2012 and 30.47% for the year ended June 30, Income Tax Expense. 2011. Liquidity and Capital Resources Eagle’s subsidiary, American Federal Savings Bank, is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency regulations. 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 39 40 39 40 June 30, 2012 from $3.65 million for the year ended June 30, 2011, a decrease of $461,000, or 12.62%. This decrease was the result of both lower average interest rates and lower average balances on the AFS portfolio during the year. Interest earned from deposits at other banks decreased slightly for the year ended June 30, 2012 due to lower yields. June 30, 2012 from $3.65 million for the year ended June 30, 2011, a decrease of $461,000, or 12.62%. This decrease was the result of both lower average interest rates and lower average balances on the AFS portfolio during the year. Interest earned from deposits at other banks decreased slightly for the year ended June 30, 2012 due to lower yields. Interest Expense. Total interest expense decreased to $3.17 million for the year ended June 30, 2012 from $4.09 million for the year ended June 30, 2011, a decrease of $921,000, or 22.54%. Interest on deposits decreased to $1.07 million for the year ended June 30, 2012 from $1.39 million for the year ended June 30, 2011. This decrease of $318,000, or 22.84%, was due primarily to a decrease in average rates paid. The average cost of deposits decreased 19 basis points, to 0.56% in 2012 from 0.75% in 2011. All deposit categories except certificates of deposits experienced increases in average balances in 2012. The decrease in the average balance of borrowings was augmented by a decrease in the average rate paid and resulted in a decrease in interest paid on borrowings to $2.09 million for the year ended June 30, 2012 from $2.69 million for the year ended June 30, 2011. The average balance of borrowings decreased by $10.36 million to $58.81 million for the year ended June 30, 2012, compared to $69.16 million for the year ended June 30, 2011 and resulted from decreases in FHLB borrowings and other borrowings stemming from significant inflows of retail deposits as funding sources. The average rate paid on borrowings decreased to 3.55% in 2012 from 3.90% in 2011. 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 the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the 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. Using this methodology, a provision to increase the allowance for loan loss by $1.10 million was made for the year ended June 30, 2012 while a provision of $948,000 was made for the year ended June 30, 2011. This, management believes, adequately reflected a level of total allowances considered adequate. Total classified assets decreased to $6.61 million at June 30, 2012 from $7.71 million at June 30, 2011. Total nonperforming loans as a percentage of the total loan portfolio increased to 1.83% at June 30, 2012, from 1.57% at June 30, 2011. As of June 30, 2012, American Federal Savings Bank had $2.66 million ($2.36 million net of allowance for valuation losses of $300,000) in other real estate owned, an increase over the $1.18 million held at June 30, 2011. Noninterest Income. Total noninterest income decreased to $4.17 million for the year ended June 30, 2012, from $4.62 million for the year ended June 30, 2011, a decrease of $449,000 or 9.71%. This decrease was primarily due to decrease in net gain on sale of loans of $492,000 and a net decrease of $615,000 in the value of the fair-value-hedge interest rate swap implemented in August 2010. Service charges on deposit accounts decreased $61,000 to $672,000 for the year ended June 30, 2012 from $733,000 for the year ended June 30, 2011. This was primarily due to a decrease in overdraft fees. Other noninterest income increased $191,000 to $849,000, which primarily was from increased balances in bank owned life insurance. The single largest item in other noninterest income is earnings from bank owned life insurance of $336,000. Noninterest Expense. Noninterest expense decreased by $48,000 or 0.43% to $11.03 million for the year ended June 30, 2012 from $11.08 million for the year ended June 30, 2011. This decrease was primarily due to the reduction of the amortization of mortgage servicing rights of $529,000. Both the provision for valuation loss on OREO and Federal insurance premiums decreased as well, while all other expenses increased. The increase in salaries and benefits was due to normal pay raises and a slightly larger staff. Most noninterest expense items showed modest changes with the exception of consulting fees which increased $348,000. This increase is due to costs associated with potential acquisitions including certain expenses associated with the proposed acquisition of Sterling Bank’s Montana branches. Interest Expense. Total interest expense decreased to $3.17 million for the year ended June 30, 2012 from $4.09 million for the year ended June 30, 2011, a decrease of $921,000, or 22.54%. Interest on deposits decreased to $1.07 million for the year ended June 30, 2012 from $1.39 million for the year ended June 30, 2011. This decrease of $318,000, or 22.84%, was due primarily to a decrease in average rates paid. The average cost of deposits decreased 19 basis points, to 0.56% in 2012 from 0.75% in 2011. All deposit categories except certificates of deposits experienced increases in average balances in 2012. The decrease in the average balance of borrowings was augmented by a decrease in the average rate paid and resulted in a decrease in interest paid on borrowings to $2.09 million for the year ended June 30, 2012 from $2.69 million for the year ended June 30, 2011. The average balance of borrowings decreased by $10.36 million to $58.81 million for the year ended June 30, 2012, compared to $69.16 million for the year ended June 30, 2011 and resulted from decreases in FHLB borrowings and other borrowings stemming from significant inflows of retail deposits as funding sources. The average rate paid on borrowings decreased to 3.55% in 2012 from 3.90% in 2011. 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 the Bank to provide for probable loan losses based on prior loss experience, volume and type of lending we conduct and past due loans in portfolio. The Bank’s policies require the 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. Using this methodology, a provision to increase the allowance for loan loss by $1.10 million was made for the year ended June 30, 2012 while a provision of $948,000 was made for the year ended June 30, 2011. This, management believes, adequately reflected a level of total allowances considered adequate. Total classified assets decreased to $6.61 million at June 30, 2012 from $7.71 million at June 30, 2011. Total nonperforming loans as a percentage of the total loan portfolio increased to 1.83% at June 30, 2012, from 1.57% at June 30, 2011. As of June 30, 2012, American Federal Savings Bank had $2.66 million ($2.36 million net of allowance for valuation losses of $300,000) in other real estate owned, an increase over the $1.18 million held at June 30, 2011. Noninterest Income. Total noninterest income decreased to $4.17 million for the year ended June 30, 2012, from $4.62 million for the year ended June 30, 2011, a decrease of $449,000 or 9.71%. This decrease was primarily due to decrease in net gain on sale of loans of $492,000 and a net decrease of $615,000 in the value of the fair-value-hedge interest rate swap implemented in August 2010. Service charges on deposit accounts decreased $61,000 to $672,000 for the year ended June 30, 2012 from $733,000 for the year ended June 30, 2011. This was primarily due to a decrease in overdraft fees. Other noninterest income increased $191,000 to $849,000, which primarily was from increased balances in bank owned life insurance. The single largest item in other noninterest income is earnings from bank owned life insurance of $336,000. Noninterest Expense. Noninterest expense decreased by $48,000 or 0.43% to $11.03 million for the year ended June 30, 2012 from $11.08 million for the year ended June 30, 2011. This decrease was primarily due to the reduction of the amortization of mortgage servicing rights of $529,000. Both the provision for valuation loss on OREO and Federal insurance premiums decreased as well, while all other expenses increased. The increase in salaries and benefits was due to normal pay raises and a slightly larger staff. Most noninterest expense items showed modest changes with the exception of consulting fees which increased $348,000. This increase is due to costs associated with potential acquisitions including certain expenses associated with the proposed acquisition of Sterling Bank’s Montana branches. Income Tax Expense. Eagle’s income tax expense was $792,000 for the year ended June 30, 2012, compared to $1.06 million for the year ended June 30, 2011. The effective tax rate was 26.67% for the year ended June 30, 2012 and 30.47% for the year ended June 30, 2011. Income Tax Expense. Eagle’s income tax expense was $792,000 for the year ended June 30, 2012, compared to $1.06 million for the year ended June 30, 2011. The effective tax rate was 26.67% for the year ended June 30, 2012 and 30.47% for the year ended June 30, 2011. Liquidity and Capital Resources Liquidity and Capital Resources Eagle’s subsidiary, American Federal Savings Bank, is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency regulations. 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 Eagle’s subsidiary, American Federal Savings Bank, is required to maintain minimum levels of liquid assets as defined by the Office of the Comptroller of the Currency regulations. 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 40 40 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 June 30, 2012 and June 30, 2011. The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed 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. Net cash provided (used) by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was ($1.55 million) for the year ended June 30, 2012 and $11.50 million for the year ended June 30, 2011. The change was primarily a result of an increase in the amount of loans held for sale in 2012. Net cash provided (used) in the Company’s investing activities, which is primarily comprised of cash transactions from the investment securities and mortgage-backed securities portfolios and the loan portfolio, was $20.74 million for the year ended June 30, 2012, and ($7.44 million) for the year ended June 30, 2011. The increase in cash provided was primarily due to loan originations being less than loan pay-off and principal payments in 2012 compared to 2011. Net cash provided (used) by the Company’s financing activities was ($8.92 million) for the year ended June 30, 2012, and $1.98 million for the year ended June 30, 2011. The decrease in cash was primarily a result of net decreases in FHLB advances and other borrowings, partially offset by net increases in deposits. 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 Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds. Changes in Market Interest Rates (Basis Points) 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 June 30, 2012 and June 30, 2011. Economic Value of Equity as % of PV of Assets Board Policy Limit (if applicable) Must be no greater than: At June 30, 2012 Projected EVE The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed 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. -30.0% -20.0% -10.0% - -2.7% -0.4% 0.8% 0.0% -3.7% +300 +200 +100 0 -100 -10.0% Net cash provided (used) by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was ($1.55 million) for the year ended June 30, 2012 and $11.50 million for the year ended June 30, 2011. The change was primarily a result of an increase in the amount of loans held for sale in 2012. Off-Balance Sheet Arrangements Net cash provided (used) in the Company’s investing activities, which is primarily comprised of cash transactions from the investment securities and mortgage-backed securities portfolios and the loan portfolio, was $20.74 million for the year ended June 30, 2012, and ($7.44 million) for the year ended June 30, 2011. The increase in cash provided was primarily due to loan originations being less than loan pay-off and principal payments in 2012 compared to 2011. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we use mandatory sell forward delivery commitments to sell whole loans to the secondary markets. These commitments are also used as a hedge against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans held-for-sale. Net cash provided (used) by the Company’s financing activities was ($8.92 million) for the year ended June 30, 2012, and $1.98 million for the year ended June 30, 2011. The decrease in cash was primarily a result of net decreases in FHLB advances and other borrowings, partially offset by net increases in deposits. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ITEM 7A. This item has been omitted based on Eagle’s status as a smaller reporting company. 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 Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ITEM 8. At May 31, 2012 (the most recent report available), the Bank’s measure of sensitivity to interest rate movements, as measured internally, decreased slightly from the previous quarter. The market value of the Bank’s capital position has increased modestly from the previous year due to net income offset by the payment of dividends and the repurchase of Company stock. The Bank is well within the guidelines set forth by the Board of Directors for interest rate sensitivity. Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part III of this report. At May 31, 2012 (the most recent report available), the Bank’s measure of sensitivity to interest rate movements, as measured internally, decreased slightly from the previous quarter. The market value of the Bank’s capital position has increased modestly from the previous year due to net income offset by the payment of dividends and the repurchase of Company stock. The Bank is well within the guidelines set forth by the Board of Directors for interest rate sensitivity. As of June 30, 2012, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to OCC rules. At June 30, 2012, the Bank’s tangible, core, and risk-based capital ratios amounted to 13.4%, 13.4%, and 21.91%, respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively. Impact of Inflation and Changing Prices Our consolidated financial statements and the accompanying notes, which are found in Item 8, 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. Interest Rate Risk Analysis In addition to the asset/liability committee, the board of directors reviews our asset and liability policies. The board of directors reviews interest rate risk and interest rate trends quarterly, as well as liquidity and capital ratio requirements. Management administers the policies and determinations of the board of directors with respect to our asset and liability goals and strategies. 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. The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As of June 30, 2012, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to OCC rules. At June 30, 2012, the Bank’s tangible, core, and risk-based capital ratios amounted to 13.4%, 13.4%, and 21.91%, respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively. None. ITEM 9A. Impact of Inflation and Changing Prices CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our consolidated financial statements and the accompanying notes, which are found in Item 8, 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. 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, as amended, as of June 30, 2012, 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 June 30, 2012, our disclosure controls and procedures were effective. In addition to the asset/liability committee, the board of directors reviews our asset and liability policies. The board of directors reviews interest rate risk and interest rate trends quarterly, as well as liquidity and capital ratio requirements. Management administers the policies and determinations of the board of directors with respect to our asset and liability goals and strategies. 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. Management Annual Report on Internal Control over Financial Reporting Interest Rate Risk Analysis Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. 41 42 41 42 The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in Changes in Market Interest Rates (Basis Points) Economic Value of Equity as % of PV of Assets At June 30, 2012 Projected EVE Board Policy Limit (if applicable) Must be no greater than: +300 +200 +100 0 -100 -2.7% -0.4% 0.8% 0.0% -3.7% -30.0% -20.0% -10.0% -10.0% - Off-Balance Sheet Arrangements As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we use mandatory sell forward delivery commitments to sell whole loans to the secondary markets. These commitments are also used as a hedge against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans held-for-sale. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This item has been omitted based on Eagle’s status as a smaller reporting company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. III of this report. None. ITEM 9A. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures 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, as amended, as of June 30, 2012, 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 June 30, 2012, our disclosure controls and procedures were effective. Management Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. -10.0% +300 +200 +100 0 -100 -2.7% -0.4% 0.8% 0.0% -3.7% Changes in Market Interest Rates (Basis Points) Economic Value of Equity as % of PV of Assets Board Policy Limit (if applicable) Must be no greater than: At June 30, 2012 Projected EVE 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 June 30, 2012 and June 30, 2011. The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed 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. -30.0% -20.0% -10.0% - 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 June 30, 2012 and June 30, 2011. The Bank’s primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments, funds provided from operations, advances from the FHLB of Seattle and other borrowings. Scheduled repayments of loans and mortgage-backed 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. Net cash provided (used) by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was ($1.55 million) for the year ended June 30, 2012 and $11.50 million for the year ended June 30, 2011. The change was primarily a result of an increase in the amount of loans held for sale in 2012. Net cash provided (used) in the Company’s investing activities, which is primarily comprised of cash transactions from the investment securities and mortgage-backed securities portfolios and the loan portfolio, was $20.74 million for the year ended June 30, 2012, and ($7.44 million) for the year ended June 30, 2011. The increase in cash provided was primarily due to loan originations being less than loan pay-off and principal payments in 2012 compared to 2011. Net cash provided (used) by the Company’s financing activities was ($8.92 million) for the year ended June 30, 2012, and $1.98 million for the year ended June 30, 2011. The decrease in cash was primarily a result of net decreases in FHLB advances and other borrowings, partially offset by net increases in deposits. 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 Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds. As of June 30, 2012, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to OCC rules. At June 30, 2012, the Bank’s tangible, core, and risk-based capital ratios amounted to 13.4%, 13.4%, and 21.91%, respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively. Impact of Inflation and Changing Prices Our consolidated financial statements and the accompanying notes, which are found in Item 8, 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. Interest Rate Risk Analysis In addition to the asset/liability committee, the board of directors reviews our asset and liability policies. The board of directors reviews interest rate risk and interest rate trends quarterly, as well as liquidity and capital ratio requirements. Management administers the policies and determinations of the board of directors with respect to our asset and liability goals and strategies. 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. The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. Net cash provided (used) by the Company’s operating activities, which is primarily comprised of cash transactions affecting net income, was ($1.55 million) for the year ended June 30, 2012 and $11.50 million for the year ended June 30, 2011. The change was primarily a result of an increase in the amount of loans held for sale in 2012. Off-Balance Sheet Arrangements Net cash provided (used) in the Company’s investing activities, which is primarily comprised of cash transactions from the investment securities and mortgage-backed securities portfolios and the loan portfolio, was $20.74 million for the year ended June 30, 2012, and ($7.44 million) for the year ended June 30, 2011. The increase in cash provided was primarily due to loan originations being less than loan pay-off and principal payments in 2012 compared to 2011. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we use mandatory sell forward delivery commitments to sell whole loans to the secondary markets. These commitments are also used as a hedge against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans held-for-sale. Net cash provided (used) by the Company’s financing activities was ($8.92 million) for the year ended June 30, 2012, and $1.98 million for the year ended June 30, 2011. The decrease in cash was primarily a result of net decreases in FHLB advances and other borrowings, partially offset by net increases in deposits. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ITEM 7A. At May 31, 2012 (the most recent report available), the Bank’s measure of sensitivity to interest rate movements, as measured internally, decreased slightly from the previous quarter. The market value of the Bank’s capital position has increased modestly from the previous year due to net income offset by the payment of dividends and the repurchase of Company stock. The Bank is well within the guidelines set forth by the Board of Directors for interest rate sensitivity. Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part III of this report. At May 31, 2012 (the most recent report available), the Bank’s measure of sensitivity to interest rate movements, as measured internally, decreased slightly from the previous quarter. The market value of the Bank’s capital position has increased modestly from the previous year due to net income offset by the payment of dividends and the repurchase of Company stock. The Bank is well within the guidelines set forth by the Board of Directors for interest rate sensitivity. This item has been omitted based on Eagle’s status as a smaller reporting company. 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 Eagle’s commitments to make loans and management’s assessment of Eagle’s ability to generate funds. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ITEM 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As of June 30, 2012, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the Bank is deemed “well capitalized” pursuant to OCC rules. At June 30, 2012, the Bank’s tangible, core, and risk-based capital ratios amounted to 13.4%, 13.4%, and 21.91%, respectively, compared to regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively. None. ITEM 9A. Impact of Inflation and Changing Prices CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our consolidated financial statements and the accompanying notes, which are found in Item 8, 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. 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, as amended, as of June 30, 2012, 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 June 30, 2012, our disclosure controls and procedures were effective. In addition to the asset/liability committee, the board of directors reviews our asset and liability policies. The board of directors reviews interest rate risk and interest rate trends quarterly, as well as liquidity and capital ratio requirements. Management administers the policies and determinations of the board of directors with respect to our asset and liability goals and strategies. 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. Management Annual Report on Internal Control over Financial Reporting Interest Rate Risk Analysis Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes. Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. Changes in Market Interest Rates (Basis Points) Economic Value of Equity as % of PV of Assets Board Policy Limit (if applicable) Must be no greater than: At June 30, 2012 Projected EVE +300 +200 +100 0 -100 -2.7% -0.4% 0.8% 0.0% -3.7% -30.0% -20.0% -10.0% - -10.0% Off-Balance Sheet Arrangements As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we use mandatory sell forward delivery commitments to sell whole loans to the secondary markets. These commitments are also used as a hedge against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans held-for-sale. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This item has been omitted based on Eagle’s status as a smaller reporting company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part III of this report. ITEM 9. None. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ITEM 9A. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures 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, as amended, as of June 30, 2012, 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 June 30, 2012, our disclosure controls and procedures were effective. Management Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of the effectiveness of our internal control over financial reporting. This assessment was based upon the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. 41 42 41 42 The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in The Company’s internal control over financial reporting involves a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012. Based on this assessment, management concluded that, as of June 30, 2012, the Company’s internal control over financial reporting was effective. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended June 30, 2012 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference misstatements. from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year. PART III ITEM 10. Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012. Based on this assessment, management concluded that, as of June 30, 2012, the Company’s internal control over financial reporting was effective. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Changes in Internal Control over Financial Reporting Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Shareholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Section 16 (a) Beneficial Ownership Reporting Compliance”, “Board Meetings and Committees”, “Structure of the Board of Directors”, “The Board’s Role in Risk Oversight”, and “Code of Ethics” is incorporated herein by reference. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended June 30, 2012 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. Executive Officers of the Registrant The following is a list of the names and ages of our executive officers, all positions and offices held by each person and each person’s principal occupations or employment during the past five years. There are no family relationships between any executive officers and directors. OTHER INFORMATION. ITEM 9B. None. Peter J. Johnson, President & Chief Executive Officer Age 55 Mr. Johnson has served as President of the Bank and Eagle since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors and the Federal Reserve Board’s Community Depository Institution Advisory Council. He is a past chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He is also a member of the Rotary Club of Helena. Clinton J. Morrison, Senior Vice President & Chief Financial Officer Age 42 Mr. Morrison has served as the Chief Financial Officer of the Bank and Eagle since July 2007. Prior to being named the Chief Financial Officer, he had served as the Company’s treasurer and compliance officer. He joined the Bank in 2001. Mr. Morrison maintains a certified public accountants license in the State of Montana. He currently is a member of the Montana Society of CPAs and the American Institute of CPAs. Mr. Morrison currently is a member of the Helena Downtown Kiwanis Club and previously served terms as President and Treasurer of that organization. Michael C. Mundt, Senior Vice President & Chief Lending Officer Age 58 Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the bank in 1988. He currently serves on the Montana Bankers Association’s board of directors, and also currently serves as the immediate Past-President of the Montana Business Assistance Connection, a local economic development non-profit organization. PART III Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Shareholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Section 16 (a) Beneficial Ownership Reporting Compliance”, “Board Meetings and Committees”, “Structure of the Board of Directors”, “The Board’s Role in Risk Oversight”, and “Code of Ethics” is incorporated herein by reference. Executive Officers of the Registrant any executive officers and directors. The following is a list of the names and ages of our executive officers, all positions and offices held by each person and each person’s principal occupations or employment during the past five years. There are no family relationships between Peter J. Johnson, President & Chief Executive Officer Age 55 Mr. Johnson has served as President of the Bank and Eagle since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors and the Federal Reserve Board’s Community Depository Institution Advisory Council. He is a past chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He is also a member of the Rotary Club of Helena. Clinton J. Morrison, Senior Vice President & Chief Financial Officer Age 42 Mr. Morrison has served as the Chief Financial Officer of the Bank and Eagle since July 2007. Prior to being named the Chief Financial Officer, he had served as the Company’s treasurer and compliance officer. He joined the Bank in 2001. Mr. Morrison maintains a certified public accountants license in the State of Montana. He currently is a member of the Montana Society of CPAs and the American Institute of CPAs. Mr. Morrison currently is a member of the Helena Downtown Kiwanis Club and previously served terms as President and Treasurer of that organization. Michael C. Mundt, Senior Vice President & Chief Lending Officer Age 58 Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the bank in 1988. He currently serves on the Montana Bankers Association’s board of directors, and also currently serves as the immediate Past-President of the Montana Business Assistance Connection, a local economic development non-profit organization. Robert M. Evans, Senior Vice President & Chief Information Officer Age 64 Mr. Evans has served as the Chief Information Officer of the Bank since January 2008. Prior to being named Chief Information Officer, he served as the Bank’s Vice President of Information Services. Mr. Evans also serves as the Bank’s Security Officer. He joined the Bank in 1986. Robert M. Evans, Senior Vice President & Chief Information Officer Age 64 Mr. Evans has served as the Chief Information Officer of the Bank since January 2008. Prior to being named Chief Information Officer, he served as the Bank’s Vice President of Information Services. Mr. Evans also serves as the Bank’s Security Officer. He joined the Bank in 1986. Rachel R. Amdahl, Senior Vice President/Operations Age 43 Mrs. Amdahl has served as Senior Vice President/Operations of the Bank since February 2006. Prior to being named the Senior Vice President/Operations, she served as Vice President/Operations since 2000. She joined the Bank in 1987. She currently serves on the Lewis and Clark County United Way board of directors. She also is a member of the Women’s Leadership Network. Code of Ethics Rachel R. Amdahl, Senior Vice President/Operations Age 43 Mrs. Amdahl has served as Senior Vice President/Operations of the Bank since February 2006. Prior to being named the Senior Vice President/Operations, she served as Vice President/Operations since 2000. She joined the Bank in 1987. She currently serves on the Lewis and Clark County United Way board of directors. She also is a member of the Women’s Leadership Network. Code of Ethics We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at www.americanfederalsavingsbank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or officers. We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at www.americanfederalsavingsbank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or officers. ITEM 11. EXECUTIVE COMPENSATION. ITEM 11. EXECUTIVE COMPENSATION. The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference. The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference. 43 44 43 44 accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. reporting was effective. Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012. Based on this assessment, management concluded that, as of June 30, 2012, the Company’s internal control over financial Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended June 30, 2012 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. accordance with generally accepted accounting principles. Internal control over financial reporting includes the controls themselves, as well as monitoring of the controls and internal auditing practices and actions to correct deficiencies identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference misstatements. from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year. PART III ITEM 10. Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012. Based on this assessment, management concluded that, as of June 30, 2012, the Company’s internal control over financial reporting was effective. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Changes in Internal Control over Financial Reporting Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Shareholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Section 16 (a) Beneficial Ownership Reporting Compliance”, “Board Meetings and Committees”, “Structure of the Board of Directors”, “The Board’s Role in Risk Oversight”, and “Code of Ethics” is incorporated herein by reference. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended June 30, 2012 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. Executive Officers of the Registrant The following is a list of the names and ages of our executive officers, all positions and offices held by each person and each person’s principal occupations or employment during the past five years. There are no family relationships between any executive officers and directors. OTHER INFORMATION. ITEM 9B. None. Peter J. Johnson, President & Chief Executive Officer Age 55 Mr. Johnson has served as President of the Bank and Eagle since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors and the Federal Reserve Board’s Community Depository Institution Advisory Council. He is a past chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He is also a member of the Rotary Club of Helena. Clinton J. Morrison, Senior Vice President & Chief Financial Officer Age 42 Mr. Morrison has served as the Chief Financial Officer of the Bank and Eagle since July 2007. Prior to being named the Chief Financial Officer, he had served as the Company’s treasurer and compliance officer. He joined the Bank in 2001. Mr. Morrison maintains a certified public accountants license in the State of Montana. He currently is a member of the Montana Society of CPAs and the American Institute of CPAs. Mr. Morrison currently is a member of the Helena Downtown Kiwanis Club and previously served terms as President and Treasurer of that organization. Michael C. Mundt, Senior Vice President & Chief Lending Officer Age 58 Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the bank in 1988. He currently serves on the Montana Bankers Association’s board of directors, and also currently serves as the immediate Past-President of the Montana Business Assistance Connection, a local economic development non-profit organization. PART III Except as provided below, the information required by Items 10, 11, 12, 13 and 14 is hereby incorporated by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information about our directors may be found under the caption “Proposal I – Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Shareholders (the “Proxy Statement”). The information in the Proxy Statement set forth under the captions of “Section 16 (a) Beneficial Ownership Reporting Compliance”, “Board Meetings and Committees”, “Structure of the Board of Directors”, “The Board’s Role in Risk Oversight”, and “Code of Ethics” is incorporated herein by reference. Executive Officers of the Registrant The following is a list of the names and ages of our executive officers, all positions and offices held by each person and each person’s principal occupations or employment during the past five years. There are no family relationships between any executive officers and directors. Peter J. Johnson, President & Chief Executive Officer Age 55 Mr. Johnson has served as President of the Bank and Eagle since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana Independent Bankers Association board of directors and the Federal Reserve Board’s Community Depository Institution Advisory Council. He is a past chairman of both the Helena Area Chamber of Commerce and the Diocese of Helena Finance Council. He is also a member of the Rotary Club of Helena. Clinton J. Morrison, Senior Vice President & Chief Financial Officer Age 42 Mr. Morrison has served as the Chief Financial Officer of the Bank and Eagle since July 2007. Prior to being named the Chief Financial Officer, he had served as the Company’s treasurer and compliance officer. He joined the Bank in 2001. Mr. Morrison maintains a certified public accountants license in the State of Montana. He currently is a member of the Montana Society of CPAs and the American Institute of CPAs. Mr. Morrison currently is a member of the Helena Downtown Kiwanis Club and previously served terms as President and Treasurer of that organization. Michael C. Mundt, Senior Vice President & Chief Lending Officer Age 58 Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994. Prior to being named the Chief Lending Officer, he served as Vice President of Consumer and Commercial Lending. He joined the bank in 1988. He currently serves on the Montana Bankers Association’s board of directors, and also currently serves as the immediate Past-President of the Montana Business Assistance Connection, a local economic development non-profit organization. Robert M. Evans, Senior Vice President & Chief Information Officer Age 64 Mr. Evans has served as the Chief Information Officer of the Bank since January 2008. Prior to being named Chief Information Officer, he served as the Bank’s Vice President of Information Services. Mr. Evans also serves as the Bank’s Security Officer. He joined the Bank in 1986. Robert M. Evans, Senior Vice President & Chief Information Officer Age 64 Mr. Evans has served as the Chief Information Officer of the Bank since January 2008. Prior to being named Chief Information Officer, he served as the Bank’s Vice President of Information Services. Mr. Evans also serves as the Bank’s Security Officer. He joined the Bank in 1986. Rachel R. Amdahl, Senior Vice President/Operations Age 43 Mrs. Amdahl has served as Senior Vice President/Operations of the Bank since February 2006. Prior to being named the Senior Vice President/Operations, she served as Vice President/Operations since 2000. She joined the Bank in 1987. She currently serves on the Lewis and Clark County United Way board of directors. She also is a member of the Women’s Leadership Network. Rachel R. Amdahl, Senior Vice President/Operations Age 43 Mrs. Amdahl has served as Senior Vice President/Operations of the Bank since February 2006. Prior to being named the Senior Vice President/Operations, she served as Vice President/Operations since 2000. She joined the Bank in 1987. She currently serves on the Lewis and Clark County United Way board of directors. She also is a member of the Women’s Leadership Network. Code of Ethics Code of Ethics We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at www.americanfederalsavingsbank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or officers. We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer and our Board. Our Code of Ethics and Conflict of Interest Policy is available on our website at www.americanfederalsavingsbank.com. We will disclose on our website any amendments to or waivers from any provision of our Code of Ethics and Conflict of Interest Policy that applies to any of the directors or officers. ITEM 11. EXECUTIVE COMPENSATION. ITEM 11. EXECUTIVE COMPENSATION. The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference. The information in the Proxy Statement set forth under the captions of “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference. 43 44 43 44 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information in the Proxy Statement set forth under the captions of “Proposal III – Ratification of Appointment of Independent Auditors” is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) (1) The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiary as of June 30, 2012 and June 30, 2011 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Stockholder Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditor’s reports. (2) (3) Schedules omitted as they are not applicable. Exhibits. Exhibits 10.1 through 10.21 are management contracts or compensatory plans or arrangements. ** * * 3.1 3.2 4 Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. Bylaws of Eagle Bancorp Montana, Inc. Form of Common Stock Certificate of Eagle Bancorp Montana, Inc. *** 10.1 Employee Stock Ownership Plan. **** 10.2 Eagle Bancorp 2000 Stock Incentive Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. * ITEM 12. 10.11 Salary Continuation Agreement, dated April 18, 2002, between Peter J. Johnson and American Federal Savings Bank. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 10.11 Salary Continuation Agreement, dated April 18, 2002, between Peter J. Johnson and American Federal Savings Bank. The information in the Proxy Statement set forth under the captions of “Beneficial Ownership of Common Stock” is incorporated herein by reference. * 10.12 The information in the Proxy Statement set forth under the captions of “Beneficial Ownership of Common Stock” is incorporated herein by reference. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Peter J. Johnson and American Federal Savings Bank. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. * 10.13 ITEM 13. Salary Continuation Agreement, dated November 15, 2007, between Clinton J. Morrison and American Federal Savings Bank. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and “Board Independence” is incorporated herein by reference. * 10.14 The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and “Board Independence” is incorporated herein by reference. Salary Continuation Agreement, dated April 18, 2002, between Michael C. Mundt and American Federal Savings Bank. * 10.15 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Michael C. Mundt and American Federal Savings Bank. 10.15 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Michael C. Mundt and American Federal Savings Bank. * * * * * The information in the Proxy Statement set forth under the captions of “Proposal III – Ratification of Appointment of Independent Auditors” is incorporated herein by reference. Salary Continuation Agreement, dated April 18, 2002, between Robert M. Evans and American Federal Savings Bank. 10.16 ITEM 15. 10.17 (a) (1) 10.18 10.19 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Robert M. Evans and American Federal Savings Bank. The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiary as of June 30, 2012 and June 30, 2011 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Stockholder Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditor’s reports. Salary Continuation Agreement, dated November 16, 2006, between Rachel R. Amdahl and American Federal Savings Bank. American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004. (2) 10.20 Schedules omitted as they are not applicable. Summary of American Federal Savings Bank Bonus Plan. (3) Exhibits. 10.21 Exhibits 10.1 through 10.21 are management contracts or compensatory plans or arrangements. 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-8 (File No. 333-182360) filed with the SEC on June 27, 2012) Purchase and Assumption Agreement, dated June 29, 2012, by and among Sterling Savings Bank, Eagle Bancorp Montana, Inc. and American Federal Savings Bank (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 2, 2012) Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. Bylaws of Eagle Bancorp Montana, Inc. ** 3.1 10.22 * * * 3.2 4 21.1 23.1 10.1 *** **** 31.1 10.2 Form of Common Stock Certificate of Eagle Bancorp Montana, Inc. Subsidiaries of Registrant. Consent of Davis Kinard & Co., PC Employee Stock Ownership Plan. * 21.1 23.1 Subsidiaries of Registrant. Consent of Davis Kinard & Co., PC Eagle Bancorp 2000 Stock Incentive Plan. 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 of the Sarbanes-Oxley Act of 2002. Employment Contract, effective as of October 1, 2009, between Peter J. Johnson and American Federal Savings Bank. Certification by Clinton J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Form of Change in Control Agreement between Clinton J. Morrison and American Federal Savings Bank. Certification by Peter J. Johnson, Chief Executive Officer and Clinton J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Form of Change in Control Agreement between Michael C. Mundt and American Federal Savings Bank. * * * * * * * * * * 10.12 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Peter J. Johnson and American Federal Savings Bank. 10.13 Salary Continuation Agreement, dated November 15, 2007, between Clinton J. Morrison and American 10.14 Salary Continuation Agreement, dated April 18, 2002, between Michael C. Mundt and American Federal Federal Savings Bank. Savings Bank. 10.16 Salary Continuation Agreement, dated April 18, 2002, between Robert M. Evans and American Federal Savings Bank. 10.17 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Robert M. Evans and American Federal Savings Bank. 10.18 Salary Continuation Agreement, dated November 16, 2006, between Rachel R. Amdahl and American Federal Savings Bank. 10.19 American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004. 10.20 Summary of American Federal Savings Bank Bonus Plan. 10.21 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-8 (File No. 333-182360) filed with the SEC on June 27, 2012) 10.22 Purchase and Assumption Agreement, dated June 29, 2012, by and among Sterling Savings Bank, Eagle Bancorp Montana, Inc. and American Federal Savings Bank (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 2, 2012) 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 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Clinton J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Peter J. Johnson, Chief Executive Officer and Clinton J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * ** Incorporated by reference to the identically numbered exhibit of the Registration Statement on Form S-1 (File No. 333-163790) filed with the SEC on December 17, 2009. Incorporated by reference to the identically numbered exhibit of the Current Report on Form 8-K filed with the SEC on February 23, 2010. *** Incorporated by reference to the Registration Statement on Form SB-2 filed with the SEC on **** Incorporated by reference to the proxy statement for the 2000 Annual Meeting filed with the SEC on December 20, 1999. September 19, 2000. ___________________ (b) See item 15(a)(3) above. (c) See Item 15(a)(1) and 15(a)(2) above. * * * * * * * * 10.3 10.4 Employment Contract, effective as of October 1, 2009, between Peter J. Johnson and American Federal Savings Bank. Form of Change in Control Agreement between Clinton J. Morrison and American Federal Savings Bank. 10.5 Form of Change in Control Agreement between Michael C. Mundt and American Federal Savings Bank. 10.6 Form of Change in Control Agreement between Robert M. Evans and American Federal Savings Bank. 10.7 Form of Change in Control Agreement between Rachel R. Amdahl and American Federal Savings Bank. 10.8 10.9 Amendment No. 1 to Employment Contract, effective as of January 22, 2010, between Peter J. Johnson and American Federal Savings Bank. Salary Continuation Agreement, dated April 18, 2002, between Larry A. Dreyer and American Federal Savings Bank. * * * * * * * 10.10 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A. Dreyer and American Federal Savings Bank. (b) * 10.3 31.2 10.4 32.1 10.5 * 10.6 ** 10.7 *** 10.8 **** 10.9 Form of Change in Control Agreement between Robert M. Evans and American Federal Savings Bank. Form of Change in Control Agreement between Rachel R. Amdahl and American Federal Savings Bank. Incorporated by reference to the identically numbered exhibit of the Registration Statement on Form S-1 (File No. 333-163790) filed with the SEC on December 17, 2009. Incorporated by reference to the identically numbered exhibit of the Current Report on Form 8-K filed with the SEC on February 23, 2010. Incorporated by reference to the Registration Statement on Form SB-2 filed with the SEC on December 20, 1999. Incorporated by reference to the proxy statement for the 2000 Annual Meeting filed with the SEC on Salary Continuation Agreement, dated April 18, 2002, between Larry A. Dreyer and American Federal September 19, 2000. Savings Bank. Amendment No. 1 to Employment Contract, effective as of January 22, 2010, between Peter J. Johnson and American Federal Savings Bank. ___________________ See item 15(a)(3) above. 10.10 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A. Dreyer and American Federal Savings Bank. 45 46 45 46 (c) See Item 15(a)(1) and 15(a)(2) above. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. * ITEM 12. 10.11 Salary Continuation Agreement, dated April 18, 2002, between Peter J. Johnson and American Federal Savings Bank. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information in the Proxy Statement set forth under the captions of “Beneficial Ownership of Common Stock” is * incorporated herein by reference. 10.12 The information in the Proxy Statement set forth under the captions of “Beneficial Ownership of Common Stock” is incorporated herein by reference. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Peter J. Johnson and American Federal Savings Bank. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. * 10.13 ITEM 13. Salary Continuation Agreement, dated November 15, 2007, between Clinton J. Morrison and American Federal Savings Bank. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and * “Board Independence” is incorporated herein by reference. 10.14 The information in the Proxy Statement set forth under the captions of “Transactions with Certain Related Persons” and “Board Independence” is incorporated herein by reference. Salary Continuation Agreement, dated April 18, 2002, between Michael C. Mundt and American Federal Savings Bank. * * * * * ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information in the Proxy Statement set forth under the captions of “Proposal III – Ratification of Appointment of Independent Auditors” is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) (1) The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiary as of June 30, 2012 and June 30, 2011 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Stockholder Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditor’s reports. (2) (3) 3.1 3.2 4 Schedules omitted as they are not applicable. Exhibits. Exhibits 10.1 through 10.21 are management contracts or compensatory plans or arrangements. Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. Bylaws of Eagle Bancorp Montana, Inc. Form of Common Stock Certificate of Eagle Bancorp Montana, Inc. *** 10.1 Employee Stock Ownership Plan. **** 10.2 Eagle Bancorp 2000 Stock Incentive Plan. 10.3 Employment Contract, effective as of October 1, 2009, between Peter J. Johnson and American Federal 10.4 Form of Change in Control Agreement between Clinton J. Morrison and American Federal Savings Savings Bank. Bank. 10.5 Form of Change in Control Agreement between Michael C. Mundt and American Federal Savings Bank. 10.6 Form of Change in Control Agreement between Robert M. Evans and American Federal Savings Bank. 10.7 Form of Change in Control Agreement between Rachel R. Amdahl and American Federal Savings Bank. 10.8 Amendment No. 1 to Employment Contract, effective as of January 22, 2010, between Peter J. Johnson and American Federal Savings Bank. 10.9 Salary Continuation Agreement, dated April 18, 2002, between Larry A. Dreyer and American Federal Savings Bank. ** * * * * * * * * * * * * * * * * * 10.10 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A. (b) * Dreyer and American Federal Savings Bank. * * * * 10.15 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Michael C. Mundt and American Federal Savings Bank. The information in the Proxy Statement set forth under the captions of “Proposal III – Ratification of Appointment of Independent Auditors” is incorporated herein by reference. Salary Continuation Agreement, dated April 18, 2002, between Robert M. Evans and American Federal Savings Bank. 10.16 ITEM 15. 10.17 (a) (1) 10.18 10.19 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Robert M. Evans and American Federal Savings Bank. The following documents are filed as part of this report: The audited Consolidated Statements of Financial Condition of Eagle Bancorp Montana, Inc. and subsidiary as of June 30, 2012 and June 30, 2011 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Stockholder Equity and Consolidated Statements of Cash Flows for the years then ended, together with the related notes and independent auditor’s reports. Salary Continuation Agreement, dated November 16, 2006, between Rachel R. Amdahl and American Federal Savings Bank. American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004. (2) 10.20 Schedules omitted as they are not applicable. Summary of American Federal Savings Bank Bonus Plan. (3) Exhibits. 10.21 Exhibits 10.1 through 10.21 are management contracts or compensatory plans or arrangements. 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-8 (File No. 333-182360) filed with the SEC on June 27, 2012) Purchase and Assumption Agreement, dated June 29, 2012, by and among Sterling Savings Bank, Eagle Bancorp Montana, Inc. and American Federal Savings Bank (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 2, 2012) Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc. Bylaws of Eagle Bancorp Montana, Inc. ** 3.1 10.22 3.2 4 21.1 23.1 10.1 *** **** 31.1 10.2 10.3 31.2 10.4 32.1 10.5 * 10.6 ** 10.7 *** 10.8 **** 10.9 Form of Common Stock Certificate of Eagle Bancorp Montana, Inc. Subsidiaries of Registrant. Consent of Davis Kinard & Co., PC Employee Stock Ownership Plan. Eagle Bancorp 2000 Stock Incentive Plan. 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 of the Sarbanes-Oxley Act of 2002. Employment Contract, effective as of October 1, 2009, between Peter J. Johnson and American Federal Savings Bank. Certification by Clinton J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Form of Change in Control Agreement between Clinton J. Morrison and American Federal Savings Bank. Certification by Peter J. Johnson, Chief Executive Officer and Clinton J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Form of Change in Control Agreement between Michael C. Mundt and American Federal Savings Bank. Form of Change in Control Agreement between Robert M. Evans and American Federal Savings Bank. Form of Change in Control Agreement between Rachel R. Amdahl and American Federal Savings Bank. Incorporated by reference to the identically numbered exhibit of the Registration Statement on Form S-1 (File No. 333-163790) filed with the SEC on December 17, 2009. Incorporated by reference to the identically numbered exhibit of the Current Report on Form 8-K filed with the SEC on February 23, 2010. Incorporated by reference to the Registration Statement on Form SB-2 filed with the SEC on December 20, 1999. Incorporated by reference to the proxy statement for the 2000 Annual Meeting filed with the SEC on Salary Continuation Agreement, dated April 18, 2002, between Larry A. Dreyer and American Federal September 19, 2000. Savings Bank. Amendment No. 1 to Employment Contract, effective as of January 22, 2010, between Peter J. Johnson and American Federal Savings Bank. ___________________ See item 15(a)(3) above. 10.10 First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A. Dreyer and American Federal Savings Bank. (c) See Item 15(a)(1) and 15(a)(2) above. * * * * * * * * * * * 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 Salary Continuation Agreement, dated April 18, 2002, between Peter J. Johnson and American Federal Savings Bank. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Peter J. Johnson and American Federal Savings Bank. Salary Continuation Agreement, dated November 15, 2007, between Clinton J. Morrison and American Federal Savings Bank. Salary Continuation Agreement, dated April 18, 2002, between Michael C. Mundt and American Federal Savings Bank. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Michael C. Mundt and American Federal Savings Bank. Salary Continuation Agreement, dated April 18, 2002, between Robert M. Evans and American Federal Savings Bank. First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Robert M. Evans and American Federal Savings Bank. Salary Continuation Agreement, dated November 16, 2006, between Rachel R. Amdahl and American Federal Savings Bank. 10.19 American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004. 10.20 Summary of American Federal Savings Bank Bonus Plan. 10.21 10.22 21.1 23.1 31.1 31.2 32.1 2011 Stock Incentive Plan for Directors, Officers and Employees (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-8 (File No. 333-182360) filed with the SEC on June 27, 2012) Purchase and Assumption Agreement, dated June 29, 2012, by and among Sterling Savings Bank, Eagle Bancorp Montana, Inc. and American Federal Savings Bank (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 2, 2012) Subsidiaries of Registrant. Consent of Davis Kinard & Co., PC 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 of the Sarbanes-Oxley Act of 2002. Certification by Clinton J. Morrison, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification by Peter J. Johnson, Chief Executive Officer and Clinton J. Morrison, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * ** *** **** Incorporated by reference to the identically numbered exhibit of the Registration Statement on Form S-1 (File No. 333-163790) filed with the SEC on December 17, 2009. Incorporated by reference to the identically numbered exhibit of the Current Report on Form 8-K filed with the SEC on February 23, 2010. Incorporated by reference to the Registration Statement on Form SB-2 filed with the SEC on December 20, 1999. Incorporated by reference to the proxy statement for the 2000 Annual Meeting filed with the SEC on September 19, 2000. ___________________ (b) See item 15(a)(3) above. (c) See Item 15(a)(1) and 15(a)(2) above. 45 46 45 46 SIGNATURES SIGNATURES Exhibit 31.1 Exhibit 31.1 Pursuant to the requirements of Section 13 or 15(d) 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. /s/ Peter J. Johnson Peter J. Johnson President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Peter J. Johnson Peter J. Johnson /s/ Clinton J. Morrison Clinton J. Morrison President & Chief Executive Officer Director (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Larry A. Dreyer Chairman Larry A. Dreyer /s/ James A. Maierle Vice Chairman James A. Maierle /s/ Rick F. Hays Director Rick F. Hays /s/ Lynn E. Dickey Director Lynn E. Dickey /s/ Maureen J. Rude Director Maureen J. Rude /s/ Thomas J. McCarvel Director Thomas J. McCarvel 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 1. 2. 3. 4. 5. I, Peter J. Johnson, Chief Executive Officer of Eagle Bancorp Montana, Inc., certify that: Pursuant to the requirements of Section 13 or 15(d) 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. CERTIFICATION 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 EAGLE BANCORP MONTANA, INC. I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; /s/ Peter J. Johnson Peter J. Johnson President & Chief Executive Officer Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following material fact necessary to make the statements made, in light of the circumstances under which such statements persons on behalf of the registrant and in the capacities and on the dates indicated. were made, not misleading with respect to the period covered by this report; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Title Signatures Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; /s/ Peter J. Johnson Peter J. Johnson The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: 9/19/2012 President & Chief Executive Officer Director (Principal Executive Officer) Date Clinton J. Morrison /s/ Clinton J. Morrison (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Designed such internal control over financial reporting, or caused such internal control over financial (b) reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; /s/ Larry A. Dreyer Larry A. Dreyer 9/19/2012 9/19/2012 Chairman James A. Maierle /s/ James A. Maierle Vice Chairman (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Director (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and /s/ Lynn E. Dickey /s/ Rick F. Hays Rick F. Hays 9/19/2012 9/19/2012 9/19/2012 Director Lynn E. Dickey The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal Director control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): /s/ Maureen J. Rude Maureen J. Rude 9/19/2012 all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and /s/ Thomas J. McCarvel Thomas J. McCarvel 9/19/2012 Director CERTIFICATION 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 I, Peter J. Johnson, Chief Executive Officer of Eagle Bancorp Montana, Inc., certify that: I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; 1. 2. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant Date: September 19, 2012 Date: September 19, 2012 /s/Peter J. Johnson Peter J. Johnson Chief Executive Officer /s/Peter J. Johnson Peter J. Johnson Chief Executive Officer 47 47 SIGNATURES SIGNATURES Exhibit 31.1 Exhibit 31.1 Pursuant to the requirements of Section 13 or 15(d) 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. /s/ Peter J. Johnson Peter J. Johnson President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Peter J. Johnson Peter J. Johnson /s/ Clinton J. Morrison Clinton J. Morrison President & Chief Executive Director (Principal Executive Officer Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Larry A. Dreyer Chairman /s/ James A. Maierle Vice Chairman /s/ Rick F. Hays Director /s/ Lynn E. Dickey Director /s/ Maureen J. Rude Director Larry A. Dreyer James A. Maierle Rick F. Hays Lynn E. Dickey Maureen J. Rude /s/ Thomas J. McCarvel Director Thomas J. McCarvel 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 9/19/2012 1. 2. 3. 4. 5. Pursuant to the requirements of Section 13 or 15(d) 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. CERTIFICATION 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 EAGLE BANCORP MONTANA, INC. I, Peter J. Johnson, Chief Executive Officer of Eagle Bancorp Montana, Inc., certify that: I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; /s/ Peter J. Johnson Peter J. Johnson President & Chief Executive Officer Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following material fact necessary to make the statements made, in light of the circumstances under which such statements persons on behalf of the registrant and in the capacities and on the dates indicated. were made, not misleading with respect to the period covered by this report; Title Signatures Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; /s/ Peter J. Johnson Peter J. Johnson The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: 9/19/2012 President & Chief Executive Officer Director (Principal Executive Officer) Date Clinton J. Morrison /s/ Clinton J. Morrison (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Designed such internal control over financial reporting, or caused such internal control over financial (b) reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; /s/ Larry A. Dreyer Larry A. Dreyer 9/19/2012 9/19/2012 Chairman James A. Maierle /s/ James A. Maierle Vice Chairman (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Director (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and /s/ Lynn E. Dickey /s/ Rick F. Hays Rick F. Hays 9/19/2012 9/19/2012 9/19/2012 Director Lynn E. Dickey The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal Director control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): /s/ Maureen J. Rude Maureen J. Rude 9/19/2012 all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and /s/ Thomas J. McCarvel Thomas J. McCarvel 9/19/2012 Director (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant CERTIFICATION 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 I, Peter J. Johnson, Chief Executive Officer of Eagle Bancorp Montana, Inc., certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant Date: September 19, 2012 Date: September 19, 2012 /s/Peter J. Johnson Peter J. Johnson Chief Executive Officer /s/Peter J. Johnson Peter J. Johnson Chief Executive Officer 47 47 Exhibit 31.2 Exhibit 32.1 Exhibit 31.2 Exhibit 32.1 CERTIFICATION 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 I, Clinton J. Morrison, Chief Financial Officer of Eagle Bancorp Montana, Inc., certify that: CERTIFICATION 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 I, Clinton J. Morrison, Chief Financial Officer of Eagle Bancorp Montana, Inc., certify that: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; 1. I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 2. 3. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; In connection with the Annual Report of Eagle Bancorp Montana, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Peter J. Johnson, Chief Executive Officer of the Company, and Clinton J. Morrison, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s knowledge: Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; A signed original of this written statement required by Section 906 will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 4. /s/ Peter J. Johnson Peter J. Johnson Chief Executive Officer (Principal Executive Officer) September 19, 2012 (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; /s/ Clinton J. Morrison Clinton J. Morrison Senior VP and Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) September 19, 2012 (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant Date: September 19, 2012 Date: September 19, 2012 /s/ Clinton J. Morrison Clinton J. Morrison Chief Financial Officer Principal Accounting Officer /s/ Clinton J. Morrison Clinton J. Morrison Chief Financial Officer Principal Accounting Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Eagle Bancorp Montana, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Peter J. Johnson, Chief Executive Officer of the Company, and Clinton J. Morrison, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s knowledge: amended; and operations of the Company. (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of A signed original of this written statement required by Section 906 will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Peter J. Johnson Peter J. Johnson Chief Executive Officer (Principal Executive Officer) September 19, 2012 /s/ Clinton J. Morrison Clinton J. Morrison (Principal Financial Officer) September 19, 2012 Senior VP and Chief Financial Officer and Principal Accounting Officer Exhibit 31.2 Exhibit 32.1 Exhibit 31.2 Exhibit 32.1 I, Clinton J. Morrison, Chief Financial Officer of Eagle Bancorp Montana, Inc., certify that: CERTIFICATION 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 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION 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 I, Clinton J. Morrison, Chief Financial Officer of Eagle Bancorp Montana, Inc., certify that: 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; 1. I have reviewed this annual report on Form 10-K of Eagle Bancorp Montana, Inc.; 2. 3. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; In connection with the Annual Report of Eagle Bancorp Montana, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Peter J. Johnson, Chief Executive Officer of the Company, and Clinton J. Morrison, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s knowledge: Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; A signed original of this written statement required by Section 906 will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 4. /s/ Peter J. Johnson Peter J. Johnson Chief Executive Officer (Principal Executive Officer) September 19, 2012 (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; /s/ Clinton J. Morrison Clinton J. Morrison Senior VP and Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) September 19, 2012 (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. all significant deficiencies and material weaknesses in the design or operation of internal control over (a) financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) role in the registrant’s internal control over financial reporting. any fraud, whether or not material, that involves management or other employees who have a significant Date: September 19, 2012 Date: September 19, 2012 (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and /s/ Clinton J. Morrison Clinton J. Morrison Chief Financial Officer Principal Accounting Officer /s/ Clinton J. Morrison Clinton J. Morrison Chief Financial Officer Principal Accounting Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Eagle Bancorp Montana, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Peter J. Johnson, Chief Executive Officer of the Company, and Clinton J. Morrison, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Peter J. Johnson Peter J. Johnson Chief Executive Officer (Principal Executive Officer) September 19, 2012 /s/ Clinton J. Morrison Clinton J. Morrison Senior VP and Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) September 19, 2012 [ This Page Intentionally Left Blank ] [ This Page Intentionally Left Blank ] and subsidiary and subsidiary Consolidated FinanCial statements and report oF independent registered publiC a CCounting Firm Consolidated FinanCial statements and report oF independent registered publiC a CCounting Firm june 30, 2012 and 2011 june 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Contents Contents Page Page Report of Independent Registered Public Accounting Firm ........................................................................... 1 Report of Independent Registered Public Accounting Firm ........................................................................... 1 Financial Statements Financial Statements Consolidated Statements of Financial Condition .................................................................................... 2 Consolidated Statements of Financial Condition .................................................................................... 2 Consolidated Statements of Income ....................................................................................................... 3 Consolidated Statements of Income ....................................................................................................... 3 Consolidated Statements of Comprehensive Income ............................................................................. 4 Consolidated Statements of Comprehensive Income ............................................................................. 4 Consolidated Statements of Changes in Stockholders’ Equity ............................................................... 5 Consolidated Statements of Changes in Stockholders’ Equity ............................................................... 5 Consolidated Statements of Cash Flows ................................................................................................. 6 Consolidated Statements of Cash Flows ................................................................................................. 6 Notes to Consolidated Financial Statements .......................................................................................... 7 Notes to Consolidated Financial Statements .......................................................................................... 7 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Contents Contents Page Page Report of Independent Registered Public Accounting Firm ........................................................................... 1 Report of Independent Registered Public Accounting Firm ........................................................................... 1 Financial Statements Financial Statements Consolidated Statements of Financial Condition .................................................................................... 2 Consolidated Statements of Financial Condition .................................................................................... 2 Consolidated Statements of Income ....................................................................................................... 3 Consolidated Statements of Income ....................................................................................................... 3 Consolidated Statements of Comprehensive Income ............................................................................. 4 Consolidated Statements of Comprehensive Income ............................................................................. 4 Consolidated Statements of Changes in Stockholders’ Equity ............................................................... 5 Consolidated Statements of Changes in Stockholders’ Equity ............................................................... 5 Consolidated Statements of Cash Flows ................................................................................................. 6 Consolidated Statements of Cash Flows ................................................................................................. 6 Notes to Consolidated Financial Statements .......................................................................................... 7 Notes to Consolidated Financial Statements .......................................................................................... 7 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Income Consolidated Statements of Financial Condition June 30, 2012 and 2011 Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) Assets Cash and due from banks Interest bearing deposits in banks Federal funds sold Cash and cash equivalents Securities available-for-sale FHLB stock restricted, at cost Investment in Eagle Bancorp Statutory Trust I Mortgage loans held for sale Loans receivable, net of deferred loan fees and allowance for loan losses of $1,625 in 2012 and $1,800 in 2011 Accrued interest and dividend receivable Mortgage servicing rights, net Premises and equipment, net Cash surrender value of life insurance Real estate and other assets aquired in settlement of loans, net Other assets Liabilities and Shareholders' Equity Noninterest bearing Interest bearing Total deposits Accrued expenses and other liabilities FHLB advances and other borrowings Subordinated debentures Total liabilities Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, no shares issued or outstanding Common stock, $0.01 par value; 8,000,000 shares authorized; 4,083,127 shares issued; 3,878,971 and 3,918,687 shares outstanding at June 30, 2012 and 2011, respectively Capital surplus Unallocated common stock held by ESOP Treasury stock, at cost Retained earnings Net accumulated other comprehensive gain Total shareholders' equity $ $ $ 2012 2011 3,534 $ 16,280 - 19,814 89,277 2,003 155 10,613 173,839 1,371 2,218 15,561 9,172 2,361 915 2,703 1,837 5,000 9,540 102,700 2,003 155 1,784 185,471 1,558 2,142 16,151 6,900 1,181 1,508 327,299 $ 331,093 $ 23,425 196,564 219,989 5,809 42,696 5,155 273,649 19,052 190,134 209,186 3,371 60,896 5,155 278,608 - - 41 22,112 (1,556) (2,210) 32,990 2,273 53,650 41 22,110 (1,722) (1,796) 31,918 1,934 52,485 The accompanying notes are an integral part of these consolidated financial statements. $ 327,299 $ 331,093 Interest and dividend income Assets Loans, including fees Securities available-for-sale Cash and due from banks Trust preferred securities Interest bearing deposits in banks Deposits with banks Federal funds sold Total interest income Cash and cash equivalents $ 2012 2011 $ 2012 $ 10,884 3,192 3,534 $ 3 16,280 17 - 14,096 19,814 2011 11,279 3,653 2,703 6 1,837 21 5,000 14,959 9,540 Interest expense Securities available-for-sale Deposits FHLB stock restricted, at cost FHLB advances and other borrowings Investment in Eagle Bancorp Statutory Trust I Mortgage loans held for sale Subordinated debentures Loans receivable, net of deferred loan fees and Total interest expense allowance for loan losses of $1,625 in 2012 and $1,800 in 2011 Net interest income Provision for loan losses Accrued interest and dividend receivable Mortgage servicing rights, net Premises and equipment, net Cash surrender value of life insurance Net interest income after provision for loan losses Real estate and other assets aquired in settlement of loans, net Other assets Noninterest income Service charges on deposit accounts Net gain on sale of loans Mortgage loan service fees Liabilities and Shareholders' Equity Net realized gain on sales of available for sale securities Noninterest bearing Net (loss) gain on fair value hedge FASB ASC 815 Interest bearing Net loss on sale of OREO Other income Total deposits $ $ Noninterest expenses Total noninterest income Accrued expenses and other liabilities FHLB advances and other borrowings Subordinated debentures Salaries and employee benefits Total liabilities Occupancy and equipment expense Data processing Shareholders' equity Advertising Preferred stock, no par value; 1,000,000 Amortization of mortgage servicing rights Federal insurance premiums Postage authorized; 4,083,127 shares issued; Legal, accounting, and examination fees 3,878,971 and 3,918,687 shares outstanding at Consulting fees June 30, 2012 and 2011, respectively Provision for valuation loss on OREO Other expense Common stock, $0.01 par value; 8,000,000 shares shares authorized, no shares issued or outstanding Capital surplus Unallocated common stock held by ESOP Total noninterest expenses Treasury stock, at cost Retained earnings Income before income taxes Net accumulated other comprehensive gain Income tax expense Total shareholders' equity Net income 1,074 1,994 97 3,165 10,931 1,101 9,830 89,277 2,003 155 10,613 173,839 1,371 2,218 15,561 9,172 2,361 915 327,299 672 1,695 891 490 (417) (6) 849 4,174 23,425 196,564 219,989 5,809 42,696 5,155 273,649 5,072 1,380 611 568 629 187 123 342 528 169 1,425 11,034 2,970 792 - 41 22,112 (1,556) (2,210) 32,990 2,273 53,650 $ $ 102,700 2,003 155 1,784 1,392 2,502 192 4,086 948 185,471 1,558 2,142 16,151 6,900 1,181 1,508 9,925 10,873 331,093 733 2,187 830 19 19,052 198 190,134 (2) 209,186 658 4,623 3,371 60,896 5,155 278,608 4,948 1,346 568 524 1,158 257 123 363 180 201 1,414 11,082 3,466 1,056 - 41 22,110 (1,722) (1,796) 31,918 1,934 52,485 The accompanying notes are an integral part of these consolidated financial statements. Basic earnings per share $ 0.59 $ Diluted earnings per share $ 0.56 $ 0.62 0.62 $ $ 327,299 2,178 $ $ 331,093 2,410 Interest and dividend income Loans, including fees Securities available-for-sale Trust preferred securities Deposits with banks Total interest income Interest expense Deposits FHLB advances and other borrowings Subordinated debentures Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Service charges on deposit accounts Net gain on sale of loans Mortgage loan service fees Net realized gain on sales of available for sale securities Net (loss) gain on fair value hedge FASB ASC 815 Net loss on sale of OREO Other income Total noninterest income Noninterest expenses Salaries and employee benefits Occupancy and equipment expense Data processing Advertising Postage Consulting fees Other expense Amortization of mortgage servicing rights Federal insurance premiums Legal, accounting, and examination fees Provision for valuation loss on OREO Total noninterest expenses Income before income taxes Income tax expense Net income Basic earnings per share Diluted earnings per share 2012 2011 $ 10,884 $ 3,192 3 17 14,096 1,074 1,994 97 3,165 10,931 1,101 9,830 672 1,695 891 490 (417) (6) 849 4,174 5,072 1,380 611 568 629 187 123 342 528 169 1,425 11,034 2,970 792 $ $ $ 2,178 $ 0.59 $ 0.56 $ 11,279 3,653 6 21 14,959 1,392 2,502 192 4,086 10,873 948 9,925 733 2,187 830 19 198 (2) 658 4,623 4,948 1,346 568 524 1,158 257 123 363 180 201 1,414 11,082 3,466 1,056 2,410 0.62 0.62 -2- -3- -2- -3- The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Income Consolidated Statements of Financial Condition June 30, 2012 and 2011 Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) (Dollars in Thousands, Except for Per Share Data) Interest and dividend income Assets Loans, including fees Securities available-for-sale Cash and due from banks Trust preferred securities Interest bearing deposits in banks Deposits with banks Federal funds sold Total interest income Cash and cash equivalents $ 2012 2011 $ 2012 $ 10,884 3,192 3,534 $ 3 16,280 17 - 14,096 19,814 2011 11,279 3,653 2,703 6 1,837 21 5,000 14,959 9,540 Interest expense Securities available-for-sale Deposits FHLB stock restricted, at cost FHLB advances and other borrowings Investment in Eagle Bancorp Statutory Trust I Mortgage loans held for sale Subordinated debentures Loans receivable, net of deferred loan fees and Total interest expense allowance for loan losses of $1,625 in 2012 and $1,800 in 2011 Net interest income Provision for loan losses Accrued interest and dividend receivable Mortgage servicing rights, net Premises and equipment, net Cash surrender value of life insurance Net interest income after provision for loan losses Real estate and other assets aquired in settlement of loans, net Other assets Noninterest income Service charges on deposit accounts Net gain on sale of loans Mortgage loan service fees Liabilities and Shareholders' Equity Net realized gain on sales of available for sale securities Noninterest bearing Net (loss) gain on fair value hedge FASB ASC 815 Interest bearing Net loss on sale of OREO Other income Total deposits $ $ Noninterest expenses Total noninterest income Accrued expenses and other liabilities FHLB advances and other borrowings Subordinated debentures Salaries and employee benefits Total liabilities Occupancy and equipment expense Data processing Shareholders' equity Advertising Preferred stock, no par value; 1,000,000 Amortization of mortgage servicing rights Federal insurance premiums Postage authorized; 4,083,127 shares issued; Legal, accounting, and examination fees 3,878,971 and 3,918,687 shares outstanding at Consulting fees June 30, 2012 and 2011, respectively Provision for valuation loss on OREO Other expense Common stock, $0.01 par value; 8,000,000 shares shares authorized, no shares issued or outstanding Capital surplus Unallocated common stock held by ESOP Total noninterest expenses Treasury stock, at cost Retained earnings Income before income taxes Net accumulated other comprehensive gain Income tax expense Total shareholders' equity Net income 1,074 1,994 97 3,165 10,931 1,101 9,830 89,277 2,003 155 10,613 173,839 1,371 2,218 15,561 9,172 2,361 915 327,299 672 1,695 891 490 (417) (6) 849 4,174 23,425 196,564 219,989 5,809 42,696 5,155 273,649 5,072 1,380 611 568 629 187 123 342 528 169 1,425 11,034 2,970 792 - 41 22,112 (1,556) (2,210) 32,990 2,273 53,650 $ $ 102,700 2,003 155 1,784 1,392 2,502 192 4,086 948 185,471 1,558 2,142 16,151 6,900 1,181 1,508 9,925 10,873 331,093 733 2,187 830 19 19,052 198 190,134 (2) 209,186 658 4,623 3,371 60,896 5,155 278,608 4,948 1,346 568 524 1,158 257 123 363 180 201 1,414 11,082 3,466 1,056 - 41 22,110 (1,722) (1,796) 31,918 1,934 52,485 The accompanying notes are an integral part of these consolidated financial statements. Basic earnings per share $ 0.59 $ Diluted earnings per share $ 0.56 $ 0.62 0.62 $ $ 327,299 2,178 $ $ 331,093 2,410 Assets Cash and due from banks Interest bearing deposits in banks Federal funds sold Cash and cash equivalents Securities available-for-sale FHLB stock restricted, at cost Investment in Eagle Bancorp Statutory Trust I Mortgage loans held for sale Loans receivable, net of deferred loan fees and allowance for loan losses of $1,625 in 2012 and $1,800 in 2011 Accrued interest and dividend receivable Mortgage servicing rights, net Premises and equipment, net Cash surrender value of life insurance Real estate and other assets aquired in settlement of loans, net Other assets Liabilities and Shareholders' Equity Noninterest bearing Interest bearing Total deposits Accrued expenses and other liabilities FHLB advances and other borrowings Subordinated debentures Total liabilities Shareholders' equity Preferred stock, no par value; 1,000,000 shares authorized, no shares issued or outstanding Common stock, $0.01 par value; 8,000,000 shares authorized; 4,083,127 shares issued; 3,878,971 and 3,918,687 shares outstanding at June 30, 2012 and 2011, respectively Capital surplus Unallocated common stock held by ESOP Treasury stock, at cost Retained earnings Net accumulated other comprehensive gain Total shareholders' equity 2012 2011 $ 3,534 $ 16,280 - 19,814 89,277 2,003 155 10,613 173,839 1,371 2,218 15,561 9,172 2,361 915 23,425 $ 196,564 219,989 5,809 42,696 5,155 273,649 2,703 1,837 5,000 9,540 102,700 2,003 155 1,784 185,471 1,558 2,142 16,151 6,900 1,181 1,508 19,052 190,134 209,186 3,371 60,896 5,155 278,608 327,299 $ 331,093 $ $ - - 41 22,112 (1,556) (2,210) 32,990 2,273 53,650 41 22,110 (1,722) (1,796) 31,918 1,934 52,485 $ 327,299 $ 331,093 The accompanying notes are an integral part of these consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) 2012 2011 $ Interest and dividend income Loans, including fees Securities available-for-sale Trust preferred securities Deposits with banks Total interest income Interest expense Deposits FHLB advances and other borrowings Subordinated debentures Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Service charges on deposit accounts Net gain on sale of loans Mortgage loan service fees Net realized gain on sales of available for sale securities Net (loss) gain on fair value hedge FASB ASC 815 Net loss on sale of OREO Other income Total noninterest income Noninterest expenses Salaries and employee benefits Occupancy and equipment expense Data processing Advertising Amortization of mortgage servicing rights Federal insurance premiums Postage Legal, accounting, and examination fees Consulting fees Provision for valuation loss on OREO Other expense Total noninterest expenses Income before income taxes Income tax expense Net income Basic earnings per share Diluted earnings per share $ 10,884 3,192 3 17 14,096 1,074 1,994 97 3,165 10,931 1,101 9,830 672 1,695 891 490 (417) (6) 849 4,174 5,072 1,380 611 568 629 187 123 342 528 169 1,425 11,034 2,970 792 $ $ $ 2,178 $ 0.59 $ 0.56 $ 11,279 3,653 6 21 14,959 1,392 2,502 192 4,086 10,873 948 9,925 733 2,187 830 19 198 (2) 658 4,623 4,948 1,346 568 524 1,158 257 123 363 180 201 1,414 11,082 3,466 1,056 2,410 0.62 0.62 -2- -3- -2- -3- The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) NET INCOME $ 2,178 $ 2,410 NET INCOME $ 2,178 $ 2,410 2012 2011 2012 2011 OTHER ITEMS OF COMPREHENSIVE INCOME: Change in unrealized gain(loss) on investment securities available for sale, before income taxes Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax Change in fair value of derivatives designated as cash flow hedges, before income taxes Reclassification adjustment for realized gains on derivatives designated as cashflow hedges, before income tax Total other items of comprehensive income Income tax expense related to other items of comprehensive income 1,201 1,008 (303) 193 (18) 1,073 (101) 18 (341) 584 (734) (174) OTHER ITEMS OF COMPREHENSIVE INCOME: Change in unrealized gain(loss) on investment securities available for sale, before income taxes Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax Change in fair value of derivatives designated as cash flow hedges, before income taxes Reclassification adjustment for realized gains on derivatives designated as cashflow hedges, before income tax Total other items of comprehensive income Income tax expense related to other items of comprehensive income 1,201 1,008 (303) 193 (18) 1,073 (101) 18 (341) 584 (734) (174) COMPREHENSIVE INCOME $ 2,517 $ 2,820 COMPREHENSIVE INCOME $ 2,517 $ 2,820 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. -4- -4- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) NET INCOME $ 2,178 $ 2,410 NET INCOME $ 2,178 $ 2,410 2012 2011 2012 2011 OTHER ITEMS OF COMPREHENSIVE INCOME: Change in unrealized gain(loss) on investment securities available for sale, before income taxes Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax Change in fair value of derivatives designated as cash flow hedges, before income taxes Reclassification adjustment for realized gains on derivatives designated as cashflow hedges, before income tax Total other items of comprehensive income Income tax expense related to other items of comprehensive income 1,201 1,008 (303) 193 (18) 1,073 (101) 18 (341) 584 (734) (174) OTHER ITEMS OF COMPREHENSIVE INCOME: Change in unrealized gain(loss) on investment securities available for sale, before income taxes Reclassification adjustment for realized gains on investment securities included in net earnings, before income tax Change in fair value of derivatives designated as cash flow hedges, before income taxes Reclassification adjustment for realized gains on derivatives designated as cashflow hedges, before income tax Total other items of comprehensive income Income tax expense related to [ This Page Intentionally Left Blank ] other items of comprehensive income 1,201 1,008 (303) 193 (18) 1,073 (101) 18 (341) 584 (734) (174) [ This Page Intentionally Left Blank ] COMPREHENSIVE INCOME $ 2,517 $ 2,820 COMPREHENSIVE INCOME $ 2,517 $ 2,820 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. -4- -4- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) Preferred Stock Common Stock $ - $ 41 Balance at July 1, 2010 Net income Change in net unrealized appreciation on available for sale securities and cash flow hedges, net Total comprehensive income Dividends paid Treasury stock purchased (164,440 shares @ $10.92 average cost per share ) ESOP shares allocated or committed to be released for allocation (16,616) shares Balance at June 30, 2011 $ - $ 41 Net income Change in net unrealized appreciation on available for sale securities and cash flow hedges, net Total comprehensive income Dividends paid Treasury stock purchased (39,716 shares @ $10.43 average cost per share ) ESOP shares allocated or committed to be released for allocation (16,616) shares Balance at June 30, 2012 $ - $ 41 $ $ $ Capital Surplus Unallocated ESOP Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Preferred Gain/(Loss) Stock Common Stock Total Capital Surplus Unallocated ESOP Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Gain/(Loss) Total Balance at July 1, 2010 22,104 $ (1,889) $ - $ 30,652 $ $ 1,524 - $ $ 52,432 41 $ 22,104 $ (1,889) $ - $ 30,652 $ 1,524 $ 52,432 Net income 2,410 Change in net unrealized appreciation on available for sale securities and cash flow hedges, net 410 Total comprehensive income Dividends paid (1,144) Treasury stock purchased (164,440 shares @ $10.92 average cost per share ) (1,796) ESOP shares allocated or committed to be released for allocation (16,616) shares 167 6 2,410 410 2,820 (1,144) (1,796) 173 Balance at June 30, 2011 22,110 $ (1,722) $ (1,796) $ 31,918 $ $ 1,934 $ - $ 52,485 41 $ 22,110 $ (1,722) $ (1,796) $ 31,918 $ 1,934 $ 52,485 Net income 2,178 Change in net unrealized appreciation on available for sale securities and cash flow hedges, net 339 Total comprehensive income Dividends paid (1,106) Treasury stock purchased (39,716 shares @ $10.43 average cost per share ) (414) ESOP shares allocated or committed to be released for allocation (16,616) shares 166 2 2,178 339 2,517 (1,106) (414) 168 Balance at June 30, 2012 22,112 $ (1,556) $ (2,210) $ 32,990 $ $ 2,273 $ - $ 53,650 41 $ 22,112 $ (1,556) $ (2,210) $ 32,990 $ 2,273 $ 53,650 2,410 (1,144) 2,178 (1,106) 410 339 2,410 410 2,820 (1,144) (1,796) 173 2,178 339 2,517 (1,106) (414) 168 (1,796) (414) 6 167 2 166 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. -5- -5- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) Preferred Stock Common Stock $ - $ 41 Balance at July 1, 2010 Net income Change in net unrealized appreciation on available for sale securities and cash flow hedges, net Total comprehensive income Dividends paid Treasury stock purchased (164,440 shares @ $10.92 average cost per share ) ESOP shares allocated or committed to be released for allocation (16,616) shares Net income Change in net unrealized appreciation on available for sale securities and cash flow hedges, net Total comprehensive income Dividends paid Treasury stock purchased (39,716 shares @ $10.43 average cost per share ) ESOP shares allocated or committed to be released for allocation (16,616) shares Balance at June 30, 2011 $ - $ 41 Balance at June 30, 2012 $ - $ 41 $ $ $ Capital Surplus Unallocated ESOP Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Preferred Gain/(Loss) Stock Common Stock Total Capital Surplus Unallocated ESOP Shares Treasury Stock Retained Earnings Accumulated Other Comprehensive Gain/(Loss) Total Balance at July 1, 2010 22,104 $ (1,889) $ - $ 30,652 $ $ 1,524 - $ $ 52,432 41 $ 22,104 $ (1,889) $ - $ 30,652 $ 1,524 $ 52,432 Net income 2,410 Change in net unrealized appreciation on available for sale securities and cash flow hedges, net 410 Total comprehensive income Dividends paid (1,144) Treasury stock purchased (164,440 shares @ $10.92 average cost per share ) (1,796) ESOP shares allocated or committed to be released for allocation (16,616) shares 167 6 2,410 410 2,820 (1,144) (1,796) 173 2,410 (1,144) 410 2,410 410 2,820 (1,144) (1,796) 173 (1,796) 6 167 Balance at June 30, 2011 22,110 $ (1,722) $ (1,796) $ 31,918 $ $ 1,934 $ - $ 52,485 41 $ 22,110 $ (1,722) $ (1,796) $ 31,918 $ 1,934 $ 52,485 Net income 2,178 Change in net unrealized appreciation on available for sale securities and cash flow hedges, net 339 Total comprehensive income Dividends paid (1,106) Treasury stock purchased (39,716 shares @ $10.43 average cost per share ) (414) ESOP shares allocated or committed to be released for allocation (16,616) shares 166 2 2,178 339 2,517 (1,106) (414) 168 2,178 (1,106) 339 2,178 339 2,517 (1,106) (414) 168 (414) 2 166 Balance at June 30, 2012 22,112 $ (1,556) $ (2,210) $ 32,990 $ $ 2,273 $ - $ 53,650 41 $ 22,112 $ (1,556) $ (2,210) $ 32,990 $ 2,273 $ 53,650 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. -5- -5- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Years Ended June 30, 2012 and 2011 June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies NOTE 1: Summary of Significant Accounting Policies Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for other real estate owned valuation losses Provision for loan losses Depreciation Net amortization of securities premium & discounts Amortization of capitalized mortgage servicing rights Net gain on sale of loans held for sale Net realized gain on sales of available-for-sale securities Net loss on sale of foreclosed real estate Net loss/(gain) on fair value hedge, FASB ASC 815 Net loss on sale/disposal of fixed assets Appreciation in cash surrender value of life insurance, net Net change in Loans held for sale Accrued interest receivable Other assets Accrued expenses and other liabilities Net cash (used in) provided by operating activities Cash flows from investing activities Activity in available-for-sale securities Sales Maturities, prepayments and calls Purchases Activity in held to maturity securities Maturities, prepayments and calls Loan originations and principal collections, net Purchase of bank owned life insurance Proceeds from sale of foreclosed real estate Additions to premises and equipment Net cash provided by (used in) investing activities Cash flows from financing activities Net increase in deposits Net change in advances from the FHLB and other borrowings Purchase of treasury stock, at cost Dividends paid Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year 2012 2011 $ 2,178 $ 2,410 169 1,101 760 374 629 (1,695) (490) 6 417 - (272) (6,958) 187 593 1,454 (1,547) 9,000 20,961 (15,526) - 8,087 (2,000) 386 (170) 20,738 10,803 (18,200) (414) (1,106) (8,917) 10,274 9,540 201 948 739 553 1,158 (2,187) (19) 2 (198) 84 (209) 7,775 52 (342) 529 11,496 5,544 25,093 (18,434) 125 (18,810) - 166 (1,128) (7,444) 11,247 (6,328) (1,796) (1,144) 1,979 6,031 3,509 9,540 Cash and cash equivalents at end of year $ 19,814 $ The accompanying notes are an integral part of these consolidated financial statements. -6- 2012 2011 $ 2,178 $ 2,410 Nature of Operations Cash flows from operating activities Nature of Operations Net income Adjustments to reconcile net income to net cash provided by operating activities On April 5, 2010, Eagle Bancorp completed its second-step conversion from the partially-public mutual holding company structure to the fully publicly-owned stock holding company structure. Provision for other real estate owned valuation losses As part of that transaction it also completed a related stock offering. As a result of the Provision for loan losses conversion and offering, Eagle Bancorp Montana, Inc. (“the Company”, or “Eagle”) became the Depreciation stock holding company for American Federal Savings Bank (“the Bank”), and Eagle Financial Net amortization of securities premium & discounts MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of Amortization of capitalized mortgage servicing rights common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 Net gain on sale of loans held for sale million. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock Net realized gain on sales of available-for-sale securities owned by the public were exchanged. Stockholders of Eagle Bancorp received 3.800 shares of Net loss on sale of foreclosed real estate the Company's common stock for each share of Eagle Bancorp common stock that they owned Net loss/(gain) on fair value hedge, FASB ASC 815 immediately prior to completion of the transaction. Net loss on sale/disposal of fixed assets Appreciation in cash surrender value of life insurance, net Net change in The Company’s Employee Stock Ownership Plan (“ESOP”), which purchased shares in the Offering, was authorized to purchase up to 8% of the shares sold in the Offering, or 197,142 Loans held for sale shares. The ESOP completed its purchase of all such authorized shares in the Offering, at a total Accrued interest receivable cost of $1,971,420. Other assets Accrued expenses and other liabilities Net cash (used in) provided by operating activities The Bank is a federally chartered savings bank subject to the regulations of the Office of Thrift Supervision (“OTS”). These regulations have been transferred to the Office of the Comptroller of the Currency (“OCC”) effective July 21, 2011. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). 169 1,101 760 374 629 (1,695) (490) 6 417 - (272) (6,958) 187 593 1,454 (1,547) 201 948 739 553 1,158 (2,187) (19) 2 (198) 84 (209) 7,775 52 (342) 529 11,496 Cash flows from investing activities Activity in available-for-sale securities Sales Maturities, prepayments and calls Purchases 9,000 20,961 (15,526) - 8,087 (2,000) 386 (170) 20,738 10,803 (18,200) (414) (1,106) (8,917) The Bank is headquartered in Helena, Montana, and operates additional branches in Butte, Bozeman, and Townsend, Montana. The Bank’s market area is concentrated in south central Activity in held to maturity securities Montana, to which it primarily offers commercial, residential, and consumer loans. The Bank’s Maturities, prepayments and calls principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. Collectively, Eagle Bancorp Montana Inc., and the Bank are referred to herein as “the Company.” Loan originations and principal collections, net Purchase of bank owned life insurance Proceeds from sale of foreclosed real estate Additions to premises and equipment Net cash provided by (used in) investing activities Principles of Consolidation Cash flows from financing activities The consolidated financial statements include the accounts of Eagle Bancorp Montana Inc. and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation. Net increase in deposits Net change in advances from the FHLB and other borrowings Purchase of treasury stock, at cost Dividends paid Use of Estimates Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the valuation of financial instruments, deferred tax assets and liabilities, and the valuation of foreclosed assets. In connection with the determination of the estimated losses on loans, foreclosed assets, and valuation of mortgage servicing rights, management obtains independent appraisals and valuations. The accompanying notes are an integral part of these consolidated financial statements. Cash and cash equivalents at end of year 10,274 19,814 9,540 $ $ 5,544 25,093 (18,434) 125 (18,810) - 166 (1,128) (7,444) 11,247 (6,328) (1,796) (1,144) 1,979 6,031 3,509 9,540 -6- -7- On April 5, 2010, Eagle Bancorp completed its second-step conversion from the partially-public mutual holding company structure to the fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, Eagle Bancorp Montana, Inc. (“the Company”, or “Eagle”) became the stock holding company for American Federal Savings Bank (“the Bank”), and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock owned by the public were exchanged. Stockholders of Eagle Bancorp received 3.800 shares of the Company's common stock for each share of Eagle Bancorp common stock that they owned immediately prior to completion of the transaction. The Company’s Employee Stock Ownership Plan (“ESOP”), which purchased shares in the Offering, was authorized to purchase up to 8% of the shares sold in the Offering, or 197,142 shares. The ESOP completed its purchase of all such authorized shares in the Offering, at a total cost of $1,971,420. The Bank is a federally chartered savings bank subject to the regulations of the Office of Thrift Supervision (“OTS”). These regulations have been transferred to the Office of the Comptroller of the Currency (“OCC”) effective July 21, 2011. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is headquartered in Helena, Montana, and operates additional branches in Butte, Bozeman, and Townsend, Montana. The Bank’s market area is concentrated in south central Montana, to which it primarily offers commercial, residential, and consumer loans. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. Collectively, Eagle Bancorp Montana Inc., and the Bank are referred to herein as “the Company.” The consolidated financial statements include the accounts of Eagle Bancorp Montana Inc. and the Bank. All significant intercompany transactions and balances have been eliminated in Principles of Consolidation consolidation. Use of Estimates In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the valuation of financial instruments, deferred tax assets and liabilities, and the valuation of foreclosed assets. In connection with the determination of the estimated losses on loans, foreclosed assets, and valuation of mortgage servicing rights, management obtains independent appraisals and valuations. -7- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Years Ended June 30, 2012 and 2011 June 30, 2012 and 2011 (Dollars in Thousands, Except for Per Share Data) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies NOTE 1: Summary of Significant Accounting Policies 2012 2011 $ 2,178 $ 2,410 Nature of Operations Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for other real estate owned valuation losses Provision for loan losses Depreciation Net amortization of securities premium & discounts Amortization of capitalized mortgage servicing rights Net gain on sale of loans held for sale Net realized gain on sales of available-for-sale securities Net loss on sale of foreclosed real estate Net loss/(gain) on fair value hedge, FASB ASC 815 Net loss on sale/disposal of fixed assets Appreciation in cash surrender value of life insurance, net Net change in Loans held for sale Accrued interest receivable Other assets Accrued expenses and other liabilities Net cash (used in) provided by operating activities Cash flows from investing activities Activity in available-for-sale securities Sales Purchases Maturities, prepayments and calls Activity in held to maturity securities Maturities, prepayments and calls Loan originations and principal collections, net Purchase of bank owned life insurance Proceeds from sale of foreclosed real estate Additions to premises and equipment Net cash provided by (used in) investing activities Cash flows from financing activities Net increase in deposits Net change in advances from the FHLB and other borrowings Purchase of treasury stock, at cost Dividends paid Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year 2012 2011 $ 2,178 $ 2,410 169 1,101 760 374 629 (1,695) (490) 6 417 - (272) (6,958) 187 593 1,454 (1,547) 9,000 20,961 (15,526) - 8,087 (2,000) 386 (170) 20,738 10,803 (18,200) (414) (1,106) (8,917) 10,274 9,540 201 948 739 553 1,158 (2,187) (19) 2 (198) 84 (209) 7,775 52 (342) 529 11,496 5,544 25,093 (18,434) (18,810) 125 - 166 (1,128) (7,444) 11,247 (6,328) (1,796) (1,144) 1,979 6,031 3,509 9,540 Cash and cash equivalents at end of year $ 19,814 $ The accompanying notes are an integral part of these consolidated financial statements. -6- Cash flows from operating activities Nature of Operations Net income Adjustments to reconcile net income to net cash provided by operating activities On April 5, 2010, Eagle Bancorp completed its second-step conversion from the partially-public mutual holding company structure to the fully publicly-owned stock holding company structure. Provision for other real estate owned valuation losses As part of that transaction it also completed a related stock offering. As a result of the Provision for loan losses conversion and offering, Eagle Bancorp Montana, Inc. (“the Company”, or “Eagle”) became the Depreciation stock holding company for American Federal Savings Bank (“the Bank”), and Eagle Financial Net amortization of securities premium & discounts MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of Amortization of capitalized mortgage servicing rights common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 Net gain on sale of loans held for sale million. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock Net realized gain on sales of available-for-sale securities owned by the public were exchanged. Stockholders of Eagle Bancorp received 3.800 shares of Net loss on sale of foreclosed real estate the Company's common stock for each share of Eagle Bancorp common stock that they owned Net loss/(gain) on fair value hedge, FASB ASC 815 immediately prior to completion of the transaction. Net loss on sale/disposal of fixed assets Appreciation in cash surrender value of life insurance, net Net change in The Company’s Employee Stock Ownership Plan (“ESOP”), which purchased shares in the Offering, was authorized to purchase up to 8% of the shares sold in the Offering, or 197,142 Loans held for sale shares. The ESOP completed its purchase of all such authorized shares in the Offering, at a total Accrued interest receivable cost of $1,971,420. Other assets Accrued expenses and other liabilities Net cash (used in) provided by operating activities The Bank is a federally chartered savings bank subject to the regulations of the Office of Thrift Supervision (“OTS”). These regulations have been transferred to the Office of the Comptroller of the Currency (“OCC”) effective July 21, 2011. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). 169 1,101 760 374 629 (1,695) (490) 6 417 - (272) (6,958) 187 593 1,454 (1,547) 201 948 739 553 1,158 (2,187) (19) 2 (198) 84 (209) 7,775 52 (342) 529 11,496 Cash flows from investing activities Activity in available-for-sale securities Sales Maturities, prepayments and calls Purchases 9,000 20,961 (15,526) - 8,087 (2,000) 386 (170) 20,738 10,803 (18,200) (414) (1,106) (8,917) The Bank is headquartered in Helena, Montana, and operates additional branches in Butte, Bozeman, and Townsend, Montana. The Bank’s market area is concentrated in south central Activity in held to maturity securities Montana, to which it primarily offers commercial, residential, and consumer loans. The Bank’s Maturities, prepayments and calls principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. Collectively, Eagle Bancorp Montana Inc., and the Bank are referred to herein as “the Company.” Loan originations and principal collections, net Purchase of bank owned life insurance Proceeds from sale of foreclosed real estate Additions to premises and equipment Net cash provided by (used in) investing activities Principles of Consolidation Cash flows from financing activities The consolidated financial statements include the accounts of Eagle Bancorp Montana Inc. and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation. Net increase in deposits Net change in advances from the FHLB and other borrowings Purchase of treasury stock, at cost Dividends paid Use of Estimates Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the valuation of financial instruments, deferred tax assets and liabilities, and the valuation of foreclosed assets. In connection with the determination of the estimated losses on loans, foreclosed assets, and valuation of mortgage servicing rights, management obtains independent appraisals and valuations. The accompanying notes are an integral part of these consolidated financial statements. Cash and cash equivalents at end of year 10,274 19,814 9,540 $ $ 5,544 25,093 (18,434) 125 (18,810) - 166 (1,128) (7,444) 11,247 (6,328) (1,796) (1,144) 1,979 6,031 3,509 9,540 -6- -7- On April 5, 2010, Eagle Bancorp completed its second-step conversion from the partially-public mutual holding company structure to the fully publicly-owned stock holding company structure. As part of that transaction it also completed a related stock offering. As a result of the conversion and offering, Eagle Bancorp Montana, Inc. (“the Company”, or “Eagle”) became the stock holding company for American Federal Savings Bank (“the Bank”), and Eagle Financial MHC and Eagle Bancorp ceased to exist. The Company sold a total of 2,464,274 shares of common stock at a purchase price of $10.00 per share in the offering for gross proceeds of $24.6 million. Concurrent with the completion of the offering, shares of Eagle Bancorp common stock owned by the public were exchanged. Stockholders of Eagle Bancorp received 3.800 shares of the Company's common stock for each share of Eagle Bancorp common stock that they owned immediately prior to completion of the transaction. The Company’s Employee Stock Ownership Plan (“ESOP”), which purchased shares in the Offering, was authorized to purchase up to 8% of the shares sold in the Offering, or 197,142 shares. The ESOP completed its purchase of all such authorized shares in the Offering, at a total cost of $1,971,420. The Bank is a federally chartered savings bank subject to the regulations of the Office of Thrift Supervision (“OTS”). These regulations have been transferred to the Office of the Comptroller of the Currency (“OCC”) effective July 21, 2011. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is headquartered in Helena, Montana, and operates additional branches in Butte, Bozeman, and Townsend, Montana. The Bank’s market area is concentrated in south central Montana, to which it primarily offers commercial, residential, and consumer loans. The Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. Collectively, Eagle Bancorp Montana Inc., and the Bank are referred to herein as “the Company.” Principles of Consolidation The consolidated financial statements include the accounts of Eagle Bancorp Montana Inc. and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, mortgage servicing rights, the valuation of financial instruments, deferred tax assets and liabilities, and the valuation of foreclosed assets. In connection with the determination of the estimated losses on loans, foreclosed assets, and valuation of mortgage servicing rights, management obtains independent appraisals and valuations. -7- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Significant Group Concentrations of Credit Risk Trading – No investment securities were designated as trading at June 30, 2012 and 2011. Significant Group Concentrations of Credit Risk Trading – No investment securities were designated as trading at June 30, 2012 and 2011. Most of the Company’s business activity is with customers located within the south-central Montana area. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At June 30, 2012 and June 30, 2011, no account balances were held with correspondent banks that were in excess of FDIC insured levels, except for federal funds sold. Also, from time to time, the Company is due amounts in excess of FDIC insurance limits for checks and transit items. Management monitors the financial stability of correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company. Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks,” “interest bearing deposits in banks,” and “federal funds sold” all of which mature within ninety days. The Bank is required to maintain a reserve balance with the Federal Reserve Bank. The Bank properly maintained amounts in excess of required reserves of $50,000 as of June 30, 2012 and 2011. Investment Securities The Company designates debt and equity securities as held-to-maturity, available-for-sale, or trading. Held-to-maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the period remaining until maturity. Available-for-sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Federal Home Loan Bank Stock Most of the Company’s business activity is with customers located within the south-central Montana area. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at the discretion of the FHLB. The Bank redeemed no FHLB shares during the years ended June 30, 2012 and 2011. The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At June 30, 2012 and June 30, 2011, no account balances were held with correspondent banks that were in excess of FDIC insured levels, except for federal funds sold. Also, from time to time, the Company is due amounts in excess of FDIC insurance limits for checks and transit items. Management monitors the financial stability of correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company. Mortgage Loans Held-for-Sale Cash and Cash Equivalents Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value, determined in aggregate, plus the fair value of associated derivative financial instruments. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks,” “interest bearing deposits in banks,” and “federal funds sold” all of which mature within ninety days. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in south central Montana. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions in this area. The Bank is required to maintain a reserve balance with the Federal Reserve Bank. The Bank properly maintained amounts in excess of required reserves of $50,000 as of June 30, 2012 and 2011. Investment Securities Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for loan losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method. The Company designates debt and equity securities as held-to-maturity, available-for-sale, or trading. Held-to-maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the period remaining until maturity. Available-for-sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Federal Home Loan Bank Stock The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at the discretion of the FHLB. The Bank redeemed no FHLB shares during the years ended June 30, 2012 and 2011. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value, determined in aggregate, plus the fair value of associated derivative financial instruments. Net unrealized losses, if any, are recognized in a valuation Mortgage Loans Held-for-Sale allowance by a charge to income. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in south central Montana. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions in this area. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for loan losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method. -8- -9- -8- -9- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Significant Group Concentrations of Credit Risk Trading – No investment securities were designated as trading at June 30, 2012 and 2011. Significant Group Concentrations of Credit Risk Trading – No investment securities were designated as trading at June 30, 2012 and 2011. Most of the Company’s business activity is with customers located within the south-central Montana area. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At June 30, 2012 and June 30, 2011, no account balances were held with correspondent banks that were in excess of FDIC insured levels, except for federal funds sold. Also, from time to time, the Company is due amounts in excess of FDIC insurance limits for checks and transit items. Management monitors the financial stability of correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company. Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks,” “interest bearing deposits in banks,” and “federal funds sold” all of which mature within ninety days. The Bank is required to maintain a reserve balance with the Federal Reserve Bank. The Bank properly maintained amounts in excess of required reserves of $50,000 as of June 30, 2012 and Investment Securities 2011. trading. maturity. The Company designates debt and equity securities as held-to-maturity, available-for-sale, or Held-to-maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the period remaining until Available-for-sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Federal Home Loan Bank Stock Most of the Company’s business activity is with customers located within the south-central Montana area. Note 3 discusses the types of securities that the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at the discretion of the FHLB. The Bank redeemed no FHLB shares during the years ended June 30, 2012 and 2011. The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At June 30, 2012 and June 30, 2011, no account balances were held with correspondent banks that were in excess of FDIC insured levels, except for federal funds sold. Also, from time to time, the Company is due amounts in excess of FDIC insurance limits for checks and transit items. Management monitors the financial stability of correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company. Mortgage Loans Held-for-Sale Cash and Cash Equivalents Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value, determined in aggregate, plus the fair value of associated derivative financial instruments. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income. For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks,” “interest bearing deposits in banks,” and “federal funds sold” all of which mature within ninety days. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in south central Montana. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions in this area. The Bank is required to maintain a reserve balance with the Federal Reserve Bank. The Bank properly maintained amounts in excess of required reserves of $50,000 as of June 30, 2012 and 2011. Investment Securities Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for loan losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method. The Company designates debt and equity securities as held-to-maturity, available-for-sale, or trading. Held-to-maturity – Debt investment securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the period remaining until maturity. Federal Home Loan Bank Stock The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is a restricted investment carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at the discretion of the FHLB. The Bank redeemed no FHLB shares during the years ended June 30, 2012 and 2011. Mortgage Loans Held-for-Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value, determined in aggregate, plus the fair value of associated derivative financial instruments. Net unrealized losses, if any, are recognized in a valuation allowance by a charge to income. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in south central Montana. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions in this area. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any unearned income, allowance for loan losses, and unamortized deferred fees or costs on originated loans and unamortized premiums or unaccreted discounts on purchased loans. Loan origination fees, net of certain direct origination costs are deferred and amortized over the contractual life of the loan, and recorded as an adjustment to the yield, using the interest method. Available-for-sale – Investment securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, need for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses, net of tax, are reported as other comprehensive income. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary are recognized by write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. -8- -9- -8- -9- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Loans – continued Loans – continued Loans – continued Loans – continued Loan Origination/Risk Management. The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced. A reporting system supplements the loan review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The company regularly contracts for independent loan reviews that validate the credit risk program. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. 1-4 Family Residential Mortgages. The Company’s primary lending activity consists of the origination of 1-4 family residential mortgage loans collateralized by owner-occupied and non- owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market. Commercial Real Estate Mortgages and Land Loans. The Company makes commercial real estate loans and land loans collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. Loan Origination/Risk Management. The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced. Construction. The Company makes loans to finance the construction of residential and non- residential properties. The majority of the Company’s residential construction loans are made to both individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above. A reporting system supplements the loan review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The company regularly contracts for independent loan reviews that validate the credit risk program. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. Home Equity Loans. The Company originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Company. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Company attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. 1-4 Family Residential Mortgages. The Company’s primary lending activity consists of the origination of 1-4 family residential mortgage loans collateralized by owner-occupied and non- owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market. Consumer Loans. Consumer loans made by the Company include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers. Commercial Real Estate Mortgages and Land Loans. The Company makes commercial real estate loans and land loans collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. Commercial and Industrial Loans. A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. Construction. The Company makes loans to finance the construction of residential and non- residential properties. The majority of the Company’s residential construction loans are made to both individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above. Home Equity Loans. The Company originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Company. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Company attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Consumer Loans. Consumer loans made by the Company include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers. Commercial and Industrial Loans. A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. -10- -11- -10- -11- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Loans – continued Loans – continued Loans – continued Loans – continued Loan Origination/Risk Management. The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced. A reporting system supplements the loan review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The company regularly contracts for independent loan reviews that validate the credit risk program. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. 1-4 Family Residential Mortgages. The Company’s primary lending activity consists of the origination of 1-4 family residential mortgage loans collateralized by owner-occupied and non- owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market. Commercial Real Estate Mortgages and Land Loans. The Company makes commercial real estate loans and land loans collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. Loan Origination/Risk Management. The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced. Construction. The Company makes loans to finance the construction of residential and non- residential properties. The majority of the Company’s residential construction loans are made to both individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above. A reporting system supplements the loan review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The company regularly contracts for independent loan reviews that validate the credit risk program. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. Home Equity Loans. The Company originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Company. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Company attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. 1-4 Family Residential Mortgages. The Company’s primary lending activity consists of the origination of 1-4 family residential mortgage loans collateralized by owner-occupied and non- owner-occupied real estate. Repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts up to 80% of appraised values before requiring private mortgage insurance. The underwriting analysis includes credit verification, appraisals and a review of the financial condition of the borrower. The Company will either hold these loans in its portfolio or sell them on the secondary market, depending upon market conditions and the type and term of the loan originations. Generally, all 30-year fixed rate loans are sold in the secondary market. Consumer Loans. Consumer loans made by the Company include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers. Commercial Real Estate Mortgages and Land Loans. The Company makes commercial real estate loans and land loans collateralized by owner-occupied and non-owner-occupied real estate. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. When underwriting these loans, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of the financial condition of the borrower. Commercial and Industrial Loans. A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. Construction. The Company makes loans to finance the construction of residential and non- residential properties. The majority of the Company’s residential construction loans are made to both individual homeowners for the construction of their primary residence and, to a lesser extent, to local builders for the construction of pre-sold houses or houses that are being built for sale in the future. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above. Home Equity Loans. The Company originates home equity loans that are secured by the borrowers’ primary residence. These loans are typically subject to a prior lien, which may or may not be held by the Company. Although these loans are secured by real estate, they carry a greater risk than first lien 1-4 family residential mortgages because of the existence of a prior lien on the property as well as the flexibility the borrower has with respect to the proceeds. The Company attempts to minimize this risk by maintaining conservative underwriting policies on these types of loans. Generally, home equity loans are made for up to 85% of the appraised value of the underlying real estate collateral, less the amount of any existing prior liens on the property securing the loan. Consumer Loans. Consumer loans made by the Company include automobile loans, recreational vehicle loans, boat loans, personal loans, credit lines, loans secured by deposit accounts and other personal loans. Risk is minimized due to relatively small loan amounts that are spread across many individual borrowers. Commercial and Industrial Loans. A broad array of commercial lending products are made available to businesses for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. -10- -11- -10- -11- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Loans – continued Loans – continued Loans – continued Loans – continued Non-Accrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by- case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Non-Accrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject of a restructuring agreement. Allowance for Loan Losses Troubled Debt Restructured Loans The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. A troubled debt restructured loan is a loan in which the Company grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods. A troubled debt restructured loan would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. Mortgage Servicing Rights The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by- case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject of a restructuring agreement. Troubled Debt Restructured Loans A troubled debt restructured loan is a loan in which the Company grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods. A troubled debt restructured loan would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment. Mortgage Servicing Rights Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. -12- -13- -12- -13- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Loans – continued Loans – continued Loans – continued Loans – continued Non-Accrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by- case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Non-Accrual and Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower's debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company's collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject of a restructuring agreement. Allowance for Loan Losses Troubled Debt Restructured Loans The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. A troubled debt restructured loan is a loan in which the Company grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods. A troubled debt restructured loan would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. Mortgage Servicing Rights The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by- case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject of a restructuring agreement. Troubled Debt Restructured Loans A troubled debt restructured loan is a loan in which the Company grants a concession to the borrower that it would not otherwise consider, for reasons related to a borrower's financial difficulties. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are not limited to a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites or a combination of these modification methods. A troubled debt restructured loan would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment. Mortgage Servicing Rights Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on a market price valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. -12- -13- -12- -13- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Mortgage Servicing Rights – continued Income Taxes – continued Mortgage Servicing Rights – continued Income Taxes – continued Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Cash Surrender Value of Life Insurance Life insurance policies are initially recorded at cost at the date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended June 30, 2012 and 2011 there were no adjustments to fair value that were outside the normal appreciation in cash surrender value. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Premises and Equipment Land is carried at cost. Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets, ranging from 3 to 35 years. The costs of maintenance and repairs are expensed as incurred, while major expenditures for renewals and betterments are capitalized. The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a likely than not means a likelihood of more than 50 percent; the terms examined and upon contractual percentage of the outstanding principal and are recorded as income when earned. examination also include resolution of the related appeals or litigation processes, if any. A tax The amortization of mortgage servicing rights is netted against loan servicing fee income. position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Life insurance policies are initially recorded at cost at the date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended June 30, 2012 and 2011 there were no adjustments to fair value that were outside the normal appreciation in cash surrender value. Cash Surrender Value of Life Insurance The Company recognizes interest and penalties on income taxes as a component of income tax expense. Foreclosed Assets Treasury Stock Treasury stock is accounted for on the cost method and consists of 204,156 shares in 2012 and 164,440 shares in 2011. Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The Company expenses advertising costs as they are incurred. Advertising costs were approximately $568,000 and $524,000 for the years ended June 30, 2012 and 2011, respectively. Advertising Costs Employee Stock Ownership Plan Premises and Equipment Compensation expense recognized for the Company’s ESOP equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference Land is carried at cost. Property and equipment is recorded at cost less accumulated between the fair value of the shares at the time and the ESOP’s original acquisition cost is depreciation. Depreciation is computed using the straight-line method over the expected useful charged or credited to stockholders’ equity (capital surplus). The cost of ESOP shares that have lives of the assets, ranging from 3 to 35 years. The costs of maintenance and repairs are not yet been allocated or committed to be released is deducted from stockholders’ equity. expensed as incurred, while major expenditures for renewals and betterments are capitalized. The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Treasury Stock 164,440 shares in 2011. Advertising Costs Treasury stock is accounted for on the cost method and consists of 204,156 shares in 2012 and The Company expenses advertising costs as they are incurred. Advertising costs were approximately $568,000 and $524,000 for the years ended June 30, 2012 and 2011, respectively. Employee Stock Ownership Plan Compensation expense recognized for the Company’s ESOP equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value of the shares at the time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (capital surplus). The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from stockholders’ equity. Income Taxes Income Taxes The Company adopted recent accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The Company adopted recent accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. -14- -15- -14- -15- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Mortgage Servicing Rights – continued Income Taxes – continued Mortgage Servicing Rights – continued Income Taxes – continued The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a likely than not means a likelihood of more than 50 percent; the terms examined and upon contractual percentage of the outstanding principal and are recorded as income when earned. examination also include resolution of the related appeals or litigation processes, if any. A tax The amortization of mortgage servicing rights is netted against loan servicing fee income. position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Life insurance policies are initially recorded at cost at the date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended June 30, 2012 and 2011 there were no adjustments to fair value that were outside the normal appreciation in cash surrender value. Cash Surrender Value of Life Insurance The Company’s income tax expense consists of the following components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Foreclosed Assets The Company recognizes interest and penalties on income taxes as a component of income tax expense. Treasury Stock Treasury stock is accounted for on the cost method and consists of 204,156 shares in 2012 and 164,440 shares in 2011. Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The Company expenses advertising costs as they are incurred. Advertising costs were approximately $568,000 and $524,000 for the years ended June 30, 2012 and 2011, respectively. Advertising Costs Employee Stock Ownership Plan Premises and Equipment Compensation expense recognized for the Company’s ESOP equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference Land is carried at cost. Property and equipment is recorded at cost less accumulated between the fair value of the shares at the time and the ESOP’s original acquisition cost is depreciation. Depreciation is computed using the straight-line method over the expected useful charged or credited to stockholders’ equity (capital surplus). The cost of ESOP shares that have lives of the assets, ranging from 3 to 35 years. The costs of maintenance and repairs are not yet been allocated or committed to be released is deducted from stockholders’ equity. expensed as incurred, while major expenditures for renewals and betterments are capitalized. Treasury Stock Treasury stock is accounted for on the cost method and consists of 204,156 shares in 2012 and 164,440 shares in 2011. Advertising Costs The Company expenses advertising costs as they are incurred. Advertising costs were approximately $568,000 and $524,000 for the years ended June 30, 2012 and 2011, respectively. Employee Stock Ownership Plan Compensation expense recognized for the Company’s ESOP equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value of the shares at the time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (capital surplus). The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from stockholders’ equity. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that the fair value is less than the capitalized amount for the tranches. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are reported as assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Cash Surrender Value of Life Insurance Life insurance policies are initially recorded at cost at the date of purchase. Subsequent to purchase, the policies are periodically adjusted for fair value. The adjustment to fair value increases or decreases the carrying value of the policies and is recorded as an income or expense on the consolidated statement of income. For the years ended June 30, 2012 and 2011 there were no adjustments to fair value that were outside the normal appreciation in cash surrender value. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. All write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Premises and Equipment Land is carried at cost. Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets, ranging from 3 to 35 years. The costs of maintenance and repairs are expensed as incurred, while major expenditures for renewals and betterments are capitalized. Income Taxes Income Taxes The Company adopted recent accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The Company adopted recent accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. -14- -15- -14- -15- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Earnings Per Share Derivatives – continued Earnings Per Share Derivatives – continued Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. For purposes of computing EPS, the Company excludes ESOP shares that have not been allocated or committed to be released for allocation to participants. Derivatives Derivatives are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Interest Rate Swap Agreements For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans to a variable rate (fair value hedge). The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings. For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterest income. Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. For purposes of computing EPS, the Company excludes ESOP shares that have not been allocated or committed to be released for allocation to participants. Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value with changes in fair value recorded in income. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity. Derivatives Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged. Derivatives are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Derivative Loan Commitments Interest Rate Swap Agreements Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income. For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans to a variable rate (fair value hedge). The Company adopted the SEC’s Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” and began including the value associated with servicing of loans in the measurement of all written loan commitments issued after that date. SAB No. 109 requires that the expected net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded. The adoption of SAB No. 109 generally has resulted in higher fair values being recorded upon initial recognition of derivative loan commitments. The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings. The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. Forward Loan Sale Commitments The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterest income. The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments. Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value with changes in fair value recorded in income. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity. Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged. Derivative Loan Commitments Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income. The Company adopted the SEC’s Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” and began including the value associated with servicing of loans in the measurement of all written loan commitments issued after that date. SAB No. 109 requires that the expected net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded. The adoption of SAB No. 109 generally has resulted in higher fair values being recorded upon initial recognition of derivative loan commitments. Forward Loan Sale Commitments The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments. -16- -17- -16- -17- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Earnings Per Share Derivatives – continued Earnings Per Share Derivatives – continued Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. For purposes of computing EPS, the Company excludes ESOP shares that have not been allocated or committed to be released for allocation to participants. Derivatives Derivatives are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Interest Rate Swap Agreements For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans to a variable rate (fair value hedge). The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings. For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterest income. Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares used to compute basic EPS plus the incremental amount of potential common stock determined by the treasury stock method. For purposes of computing EPS, the Company excludes ESOP shares that have not been allocated or committed to be released for allocation to participants. Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value with changes in fair value recorded in income. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity. Derivatives Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged. Derivatives are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Derivative Loan Commitments Interest Rate Swap Agreements Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income. For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans to a variable rate (fair value hedge). The Company adopted the SEC’s Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” and began including the value associated with servicing of loans in the measurement of all written loan commitments issued after that date. SAB No. 109 requires that the expected net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded. The adoption of SAB No. 109 generally has resulted in higher fair values being recorded upon initial recognition of derivative loan commitments. The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings. The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. Forward Loan Sale Commitments The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterest income. The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments. Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value with changes in fair value recorded in income. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity. Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged. Derivative Loan Commitments Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income. The Company adopted the SEC’s Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” and began including the value associated with servicing of loans in the measurement of all written loan commitments issued after that date. SAB No. 109 requires that the expected net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded. The adoption of SAB No. 109 generally has resulted in higher fair values being recorded upon initial recognition of derivative loan commitments. Forward Loan Sale Commitments The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments. -16- -17- -16- -17- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Transfers of Financial Assets Recent Accounting Pronouncements – continued Transfers of Financial Assets Recent Accounting Pronouncements – continued Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Recent Accounting Pronouncements In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, management expects goodwill to be recorded, and as such the Company’s financials will likely be effected by this pronouncement. Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Recent Accounting Pronouncements Reclassifications In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011- 05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of income should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): Net gain on fair value hedge FASB ASC 815 Other income ATM processing Data processing As Previously Reported $ - 856 64 504 As Restated 198 658 - 568 Net Change $ In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, management expects goodwill to be recorded, and as such the Company’s financials will likely be effected by this pronouncement. $ 198 (198) (64) 64 $ - In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011- 05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Reclassifications Other income ATM processing Data processing For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of income should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): Net gain on fair value hedge FASB ASC 815 $ - $ 198 $ 198 As Previously As Reported Restated Net Change 856 64 504 658 - 568 (198) (64) 64 $ - -18- -19- -18- -19- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued NOTE 1: Summary of Significant Accounting Policies – continued Transfers of Financial Assets Recent Accounting Pronouncements – continued Transfers of Financial Assets Recent Accounting Pronouncements – continued Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Recent Accounting Pronouncements In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, management expects goodwill to be recorded, and as such the Company’s financials will likely be effected by this pronouncement. Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Recent Accounting Pronouncements Reclassifications In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011- 05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has complied with the new standard and has presented a separate statement of comprehensive income in these consolidated financial statements. For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of income should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): Net gain on fair value hedge FASB ASC 815 Other income ATM processing Data processing As Previously Reported $ - 856 64 504 As Restated 198 658 - 568 Net Change $ $ In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The Company currently has no goodwill. However upon the successful completion of the pending acquisition of Sterling Bank’s Montana branches, management expects goodwill to be recorded, and as such the Company’s financials will likely be effected by this pronouncement. 198 (198) (64) 64 $ - In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011- 05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements. Reclassifications For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of income should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): Net gain on fair value hedge FASB ASC 815 Other income ATM processing Data processing As Previously Reported $ - 856 64 504 As Restated $ 198 658 - 568 Net Change $ 198 (198) (64) 64 $ - -18- -19- -18- -19- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 3: Securities NOTE 1: Summary of Significant Accounting Policies – continued NOTE 3: Securities Reclassifications – continued For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of cash flows should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): Net gain on fair value hedge FASB ASC 815 Accrued expenses and other liabilities As Previously Reported $ - 331 As Restated $ (198) 529 Net Change $ (198) 198 $ - NOTE 2: Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended June 30: (Dollars In Thousands, Except for Per Share Data) Weighted average shares outstanding during the year on which basic earnings per share is calculated Add: weighted average of stock held in treasury Average outstanding shares on which diluted earnings per share is calculated 2012 2011 3,725,002 193,564 3,892,141 9,761 3,918,566 3,901,902 Net income applicable to common stockholders Basic earnings per share Diluted earnings per share $ $ $ 2,178 0.59 0.56 $ $ $ 2,410 0.62 0.62 Reclassifications – continued For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of cash flows should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): The Company’s investment policy requires that the Company purchase only high-grade investment securities. Most municipal obligations are categorized as “A” or better by a nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the municipality and also supported by third- party credit insurance policies. Mortgage backed securities and collateralized mortgage obligations are issued by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage Association. The Net amortized cost and estimated fair values of securities, together with unrealized gains and losses, Change are as follows: As Restated As Previously Reported $ - 331 June 30, 2012 $ (198) 529 Net gain on fair value hedge FASB ASC 815 Accrued expenses and other liabilities $ (198) 198 $ - Estimated Market Value (10) (107) (74) - 2012 (41) (22) 21,055 42,060 3,945 6,847 2011 169 15,201 The following table sets forth the computation of basic and diluted earnings per share for the years ended June 30: $ $ $ $ (Dollars in Thousands) Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses NOTE 2: Earnings Per Share U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed Total securities available for sale (Dollars In Thousands, Except for Per Share Data) Weighted average shares outstanding during the $ year on which basic earnings per share is calculated Add: weighted average of stock held in treasury Average outstanding shares on which diluted earnings per share is calculated 85,634 $ June 30, 2011 Amortized Cost Gross Unrealized Gains (Dollars in Thousands) Available for Sale Net income applicable to common stockholders Basic earnings per share Diluted earnings per share $ $ U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private label CMOs CMOs - government backed 20,557 39,332 3,937 6,791 210 14,807 25,566 38,450 5,987 6,189 305 23,458 508 2,835 82 56 - 416 3,897 648 1,342 230 183 - 971 3,918,566 Gross Unrealized Losses 2,178 0.59 (6) $ 0.56 (606) (1) $ $ $ $ - (14) (2) $ $ $ 3,901,902 Estimated Market Value 2,410 0.62 0.62 26,208 39,186 6,216 6,372 291 24,427 $ (254) $ 3,725,002 193,564 89,277 3,892,141 9,761 Total securities available for sale $ 85,634 $ 3,897 $ (254) $ 89,277 The Company’s investment policy requires that the Company purchase only high-grade investment securities. Most municipal obligations are categorized as “A” or better by a nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the municipality and also supported by third- party credit insurance policies. Mortgage backed securities and collateralized mortgage obligations are issued by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage Association. The amortized cost and estimated fair values of securities, together with unrealized gains and losses, are as follows: (Dollars in Thousands) Available for Sale U.S. Government and agency Municipal obligations Corporate obligations Private lable CMOs CMOs - government backed Mortgage-backed securites - government-backed (Dollars in Thousands) Available for Sale U.S. Government and agency Municipal obligations Corporate obligations Private label CMOs CMOs - government backed Mortgage-backed securites - government-backed June 30, 2012 Amortized Unrealized Unrealized Gross Gains Gross Losses Estimated Market Value 508 $ (10) $ $ $ Cost $ 20,557 39,332 3,937 6,791 210 14,807 Cost $ 25,566 38,450 5,987 6,189 305 23,458 2,835 82 56 - 416 1,342 230 183 - 971 (107) (74) - (41) (22) (606) (1) - (14) (2) 21,055 42,060 3,945 6,847 169 15,201 26,208 39,186 6,216 6,372 291 24,427 June 30, 2011 Amortized Unrealized Unrealized Gross Gains Gross Losses Estimated Market Value 648 $ (6) $ Total securities available for sale $ 99,955 $ 3,374 $ (629) $ 102,700 Total securities available for sale $ 99,955 $ 3,374 $ (629) $ 102,700 -20- -21- -20- -21- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 1: Summary of Significant Accounting Policies – continued NOTE 3: Securities NOTE 1: Summary of Significant Accounting Policies – continued NOTE 3: Securities Reclassifications – continued For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of cash flows should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): As Previously As Reported Restated Net Change Net gain on fair value hedge FASB ASC 815 $ - $ (198) $ (198) Accrued expenses and other liabilities 331 529 198 $ - NOTE 2: Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended June 30: 2012 2011 (Dollars In Thousands, Except for Per Share Data) Weighted average shares outstanding during the year on which basic earnings per share is calculated Add: weighted average of stock held in treasury 3,725,002 193,564 3,892,141 9,761 Average outstanding shares on which diluted earnings per share is calculated Net income applicable to common stockholders Basic earnings per share Diluted earnings per share 3,918,566 3,901,902 $ $ $ 2,178 0.58 0.56 $ $ $ 2,410 0.62 0.62 Reclassifications – continued For the year ended June 30, 2012, the Company determined that some of the line items for fiscal year 2011 in the consolidated statements of cash flows should be reported differently to provide more clarity and be more in line with industry standards. The following table depicts the items affected by these changes (dollars in thousands): The Company’s investment policy requires that the Company purchase only high-grade investment securities. Most municipal obligations are categorized as “A” or better by a nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the municipality and also supported by third- party credit insurance policies. Mortgage backed securities and collateralized mortgage obligations are issued by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage Association. The Net amortized cost and estimated fair values of securities, together with unrealized gains and losses, Change are as follows: As Restated As Previously Reported $ - 331 June 30, 2012 $ (198) 529 Net gain on fair value hedge FASB ASC 815 Accrued expenses and other liabilities $ (198) 198 $ - Estimated Market Value (10) (107) (74) - 2012 (41) (22) 21,055 42,060 3,945 6,847 2011 169 15,201 (Dollars in Thousands) Available for Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses The following table sets forth the computation of basic and diluted earnings per share for the years ended June 30: $ $ $ $ NOTE 2: Earnings Per Share U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed Total securities available for sale (Dollars In Thousands, Except for Per Share Data) Weighted average shares outstanding during the $ year on which basic earnings per share is calculated Add: weighted average of stock held in treasury Average outstanding shares on which diluted earnings per share is calculated 85,634 $ Amortized Cost Gross Unrealized Gains (Dollars in Thousands) Available for Sale Net income applicable to common stockholders Basic earnings per share Diluted earnings per share $ $ U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private label CMOs CMOs - government backed $ $ (254) 3,725,002 193,564 89,277 3,892,141 9,761 June 30, 2011 3,918,566 Gross Unrealized Losses 2,178 0.58 (6) $ 0.56 (606) (1) $ $ $ $ - (14) (2) $ $ $ 3,901,902 Estimated Market Value 2,410 0.62 0.62 26,208 39,186 6,216 6,372 291 24,427 20,557 39,332 3,937 6,791 210 14,807 25,566 38,450 5,987 6,189 305 23,458 508 2,835 82 56 - 416 3,897 648 1,342 230 183 - 971 The Company’s investment policy requires that the Company purchase only high-grade investment securities. Most municipal obligations are categorized as “A” or better by a nationally recognized statistical rating organization. These ratings are achieved because the securities are backed by the full faith and credit of the municipality and also supported by third- party credit insurance policies. Mortgage backed securities and collateralized mortgage obligations are issued by government sponsored corporations, including Federal Home Loan Mortgage Corporation, Fannie Mae, and the Guaranteed National Mortgage Association. The amortized cost and estimated fair values of securities, together with unrealized gains and losses, are as follows: (Dollars in Thousands) Available for Sale June 30, 2012 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed $ $ 20,557 39,332 3,937 6,791 210 14,807 $ 508 2,835 82 56 - 416 $ (10) (107) (74) - (41) (22) 21,055 42,060 3,945 6,847 169 15,201 Total securities available for sale $ 85,634 $ 3,897 $ (254) $ 89,277 (Dollars in Thousands) Available for Sale June 30, 2011 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value U.S. Government and agency Municipal obligations Corporate obligations Mortgage-backed securites - government-backed Private label CMOs CMOs - government backed $ $ 25,566 38,450 5,987 6,189 305 23,458 $ 648 1,342 230 183 - 971 $ (6) (606) (1) - (14) (2) 26,208 39,186 6,216 6,372 291 24,427 Total securities available for sale $ 99,955 $ 3,374 $ (629) $ 102,700 Total securities available for sale $ 99,955 $ 3,374 $ (629) $ 102,700 -20- -21- -20- -21- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued The Company has not entered into any interest rate swaps, options, or futures contracts relating to investment securities. Gross recognized gains on securities available-for-sale were $512,000 and $143,000 for the years ended June 30, 2012 and 2011, respectively. Gross realized losses on securities available- for-sale were $22,000, and $125,000 for the years ended June 30, 2012 and 2011, respectively. The amortized cost and estimated fair value of securities at June 30, 2012 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. The Company has not entered into any interest rate swaps, options, or futures contracts relating to investment securities. At June 30, 2012 and 2011, securities with a carrying value of $14,665,000 and $30,461,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gross recognized gains on securities available-for-sale were $512,000 and $143,000 for the years ended June 30, 2012 and 2011, respectively. Gross realized losses on securities available- for-sale were $22,000, and $125,000 for the years ended June 30, 2012 and 2011, respectively. The following table discloses, as of June 30, 2012 and 2011, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: The amortized cost and estimated fair value of securities at June 30, 2012 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. Less than 12 months 12 months or longer June 30, 2012 June 30, 2012 (Dollars in Thousands) Held to Maturity Available for Sale Amortized Cost Estimated Market Value Amortized Cost Estimated Market Value $ $ - - - - - - - - - $ $ - - - - - - - - - $ $ $ 2,533 22,098 17,762 21,433 2,564 22,816 18,846 22,834 63,826 67,060 6,791 210 14,807 85,634 $ 6,847 169 15,201 89,277 (Dollars in Thousands) Due in one year or less Due from one to five years Due from five to ten years Due after ten years Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed Total Maturities of securities do not reflect repricing opportunities present in adjustable rate securities. Estimated Market Value Gross Held to Maturity Unrealized Losses June 30, 2012 Estimated Market Value Gross Available for Sale Unrealized Losses Amortized 1,751 $ Cost - 1,760 - 2,514 - - - - 6,025 Estimated Market 8 $ Value - $ - 2 - - - - 22 32 $ $ $ Amortized 341 Cost 884 1,402 2,533 168 22,098 - 17,762 21,433 $ 2,795 $ Estimated Market 2 Value 74 105 2,564 41 22,816 18,846 22,834 222 - U.S. Government and agency $ (Dollars in Thousands) Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs Due in one year or less Due from one to five years Due from five to ten years Due after ten years Total $ $ Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed U.S. Government and agency $ Corporate obligations Municipal obligations Private label CMOs Total Mortgage-backed & CMOs $ - 916 - 944 - 4,412 - 216 - 1,151 - June 30, 2011 63,826 67,060 $ 2 - 1 - 194 - 14 - 2 1,789 - 1,714 - - $ 6,791 210 14,807 85,634 $ $ 4 6,847 - 169 412 15,201 - 89,277 - $ Total Maturities of securities do not reflect repricing opportunities present in adjustable rate securities. 7,639 3,503 213 416 $ $ $ $ $ $ The table above shows the Company’s investment gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2012 and 2011. 25 and 37 securities were in an unrealized loss position as of June 30, 2012 and 2011, respectively. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, 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. -22- -23- -22- -23- At June 30, 2012 and 2011, securities with a carrying value of $14,665,000 and $30,461,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The following table discloses, as of June 30, 2012 and 2011, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: (Dollars in Thousands) Less than 12 months 12 months or longer June 30, 2012 Estimated Gross Estimated Gross Market Value Unrealized Losses Market Value Unrealized Losses U.S. Government and agency $ 1,751 $ 8 $ Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs 1,760 - - 2,514 Total $ 6,025 $ 32 $ 2,795 $ U.S. Government and agency $ $ 1,789 $ Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs $ 916 944 4,412 216 1,151 Total $ 7,639 $ 213 $ 3,503 $ The table above shows the Company’s investment gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2012 and 2011. 25 and 37 securities were in an unrealized loss position as of June 30, 2012 and 2011, respectively. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, 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. - - 2 22 2 1 194 14 2 June 30, 2011 $ 341 884 1,402 168 - 1,714 - - - 2 74 105 41 - 222 4 412 - - - 416 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued The Company has not entered into any interest rate swaps, options, or futures contracts relating to investment securities. Gross recognized gains on securities available-for-sale were $512,000 and $143,000 for the years ended June 30, 2012 and 2011, respectively. Gross realized losses on securities available- for-sale were $22,000, and $125,000 for the years ended June 30, 2012 and 2011, respectively. The amortized cost and estimated fair value of securities at June 30, 2012 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. Due in one year or less $ $ $ 2,533 $ (Dollars in Thousands) Due from one to five years Due from five to ten years Due after ten years Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed Held to Maturity Available for Sale Amortized Cost Estimated Market Value Amortized Cost Estimated Market Value - - - - - - - - - - - - - - - - - - 63,826 67,060 22,098 17,762 21,433 6,791 210 14,807 2,564 22,816 18,846 22,834 6,847 169 15,201 89,277 Total $ $ $ 85,634 $ Maturities of securities do not reflect repricing opportunities present in adjustable rate securities. June 30, 2012 (Dollars in Thousands) The Company has not entered into any interest rate swaps, options, or futures contracts relating to investment securities. At June 30, 2012 and 2011, securities with a carrying value of $14,665,000 and $30,461,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gross recognized gains on securities available-for-sale were $512,000 and $143,000 for the years ended June 30, 2012 and 2011, respectively. Gross realized losses on securities available- for-sale were $22,000, and $125,000 for the years ended June 30, 2012 and 2011, respectively. The following table discloses, as of June 30, 2012 and 2011, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: The amortized cost and estimated fair value of securities at June 30, 2012 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. Less than 12 months 12 months or longer June 30, 2012 Estimated Market Value Gross Held to Maturity Unrealized Losses June 30, 2012 Estimated Market Value Gross Available for Sale Unrealized Losses Amortized 1,751 $ Cost - 1,760 - 2,514 - - - - 6,025 Estimated Market 8 $ Value - $ - 2 - - - - 22 32 $ $ $ Amortized 341 Cost 884 1,402 2,533 168 22,098 - 17,762 21,433 $ 2,795 $ Estimated Market 2 Value 74 105 2,564 41 22,816 18,846 22,834 222 - U.S. Government and agency $ (Dollars in Thousands) Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs Due in one year or less Due from one to five years Due from five to ten years Due after ten years Total $ $ Mortgage-backed securites - government-backed Private lable CMOs CMOs - government backed U.S. Government and agency $ Corporate obligations Municipal obligations Private label CMOs Total Mortgage-backed & CMOs $ - 916 - 944 - 4,412 - 216 - 1,151 - June 30, 2011 63,826 67,060 $ 2 - 1 - 194 - 14 - 2 1,789 - 1,714 - - $ 6,791 210 14,807 85,634 $ $ 4 6,847 - 169 412 15,201 - 89,277 - $ Total Maturities of securities do not reflect repricing opportunities present in adjustable rate securities. 7,639 3,503 213 416 $ $ $ $ The table above shows the Company’s investment gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2012 and 2011. 25 and 37 securities were in an unrealized loss position as of June 30, 2012 and 2011, respectively. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, 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. $ $ At June 30, 2012 and 2011, securities with a carrying value of $14,665,000 and $30,461,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The following table discloses, as of June 30, 2012 and 2011, the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months: (Dollars in Thousands) Less than 12 months 12 months or longer June 30, 2012 Estimated Market Value Gross Unrealized Losses Estimated Market Value Gross Unrealized Losses U.S. Government and agency $ Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs 1,751 - 1,760 - 2,514 $ 8 $ - - 2 22 $ 341 884 1,402 168 - Total $ 6,025 $ 32 $ 2,795 $ June 30, 2011 U.S. Government and agency $ Corporate obligations Municipal obligations Private label CMOs Mortgage-backed & CMOs $ 916 944 4,412 216 1,151 $ 2 1 194 14 2 $ 1,789 - 1,714 - - Total $ 7,639 $ 213 $ 3,503 $ 2 74 105 41 - 222 4 - 412 - - 416 The table above shows the Company’s investment gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2012 and 2011. 25 and 37 securities were in an unrealized loss position as of June 30, 2012 and 2011, respectively. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, 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. -22- -23- -22- -23- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued At June 30, 2012, 17 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 3.57% from the Company's amortized cost basis. 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. The fair value of these securities represents less than 3.54% of the total fair value of all securities available for sale and their unrealized loss is less than $115,000 as of June 30, 2012. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 7 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 2.33% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2012 revealed no expected credit losses on the securities. One of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.19% of the total fair value of all securities available for sale and its unrealized loss is $41,000 as of June 30, 2012. At June 30, 2012, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 7.72% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 31 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 0.96% from the Company's amortized cost basis. 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. Two municipal obligations have a rating below investment grade from the credit rating agencies. The fair value of these securities represents less than 0.22% of the total fair value of all securities available for sale and their unrealized loss is of less than $1,000 as of June 30, 2011. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 17 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 3.57% from the Company's amortized cost basis. 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. The fair value of these securities represents less than 3.54% of the total fair value of all securities available for sale and their unrealized loss is less than $115,000 as of June 30, 2012. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 5 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 0.06% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2011 revealed no expected credit losses on the securities. 1 of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.21% of the total fair value of all securities available for sale and its unrealized loss is $14,000 as of June 30, 2011. At June 30, 2012, 7 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 2.33% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2012 revealed no expected credit losses on the securities. One of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.19% of the total fair value of all securities available for sale and its unrealized loss is $41,000 as of June 30, 2012. At June 30, 2011, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 0.02% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 7.72% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 31 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 0.96% from the Company's amortized cost basis. 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. Two municipal obligations have a rating below investment grade from the credit rating agencies. The fair value of these securities represents less than 0.22% of the total fair value of all securities available for sale and their unrealized loss is of less than $1,000 as of June 30, 2011. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 5 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 0.06% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2011 revealed no expected credit losses on the securities. 1 of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.21% of the total fair value of all securities available for sale and its unrealized loss is $14,000 as of June 30, 2011. At June 30, 2011, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 0.02% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. -24- -25- -24- -25- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued NOTE 3: Securities – continued At June 30, 2012, 17 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 3.57% from the Company's amortized cost basis. 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. The fair value of these securities represents less than 3.54% of the total fair value of all securities available for sale and their unrealized loss is less than $115,000 as of June 30, 2012. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 7 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 2.33% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2012 revealed no expected credit losses on the securities. One of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.19% of the total fair value of all securities available for sale and its unrealized loss is $41,000 as of June 30, 2012. At June 30, 2012, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 7.72% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 31 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 0.96% from the Company's amortized cost basis. 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. Two municipal obligations have a rating below investment grade from the credit rating agencies. The fair value of these securities represents less than 0.22% of the total fair value of all securities available for sale and their unrealized loss is of less than $1,000 as of June 30, 2011. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 17 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 3.57% from the Company's amortized cost basis. 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. The fair value of these securities represents less than 3.54% of the total fair value of all securities available for sale and their unrealized loss is less than $115,000 as of June 30, 2012. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 5 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 0.06% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2011 revealed no expected credit losses on the securities. 1 of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.21% of the total fair value of all securities available for sale and its unrealized loss is $14,000 as of June 30, 2011. At June 30, 2012, 7 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 2.33% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2012 revealed no expected credit losses on the securities. One of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.19% of the total fair value of all securities available for sale and its unrealized loss is $41,000 as of June 30, 2012. At June 30, 2011, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 0.02% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 5 mortgage backed and CMO securities have unrealized losses with aggregate depreciation of less than 0.06% from the Company’s cost basis. We believe these unrealized losses are principally due to the credit market’s concerns regarding the stability of the mortgage market. 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 June 30, 2011 revealed no expected credit losses on the securities. 1 of the CMO securities is non-agency securities (backed by Alt-A collateral) which has a rating below investment grade from the credit rating agencies. The fair value of this security represents less than 0.21% of the total fair value of all securities available for sale and its unrealized loss is $14,000 as of June 30, 2011. At June 30, 2011, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 0.02% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2012, 1 corporate obligation had an unrealized loss with aggregate depreciation of less than 7.72% from the Company's cost basis. This unrealized loss is 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 if classified as available for sale, no declines are deemed to be other than temporary. At June 30, 2011, 31 U.S. Government and agency securities and municipal obligations have unrealized losses with aggregate depreciation of less than 0.96% from the Company's amortized cost basis. 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. Two municipal obligations have a rating below investment grade from the credit rating agencies. The fair value of these securities represents less than 0.22% of the total fair value of all securities available for sale and their unrealized loss is of less than $1,000 as of June 30, 2011. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. -24- -25- -24- -25- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements June 30, 2012 and 2011 June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans NOTE 4: Loans – continued NOTE 4: Loans NOTE 4: Loans – continued Non-Performing Assets – The following table sets forth information regarding non-performing assets as of the dates indicated. June 30, A summary of the balances of loans follows: Non-Performing Assets – The following table sets forth information regarding non-performing assets as of the dates indicated. A summary of the balances of loans follows: (Dollars in Thousands) First mortgage loans: Residential mortgage (1-4 family) Commercial real estate Real estate construction Other loans: Home equity Consumer Commercial Subtotal Less: Allowance for loan losses Deferred loan fees, net June 30, 2012 2011 $ $ 61,671 64,672 1,455 70,003 64,701 5,020 23,709 8,778 15,343 175,628 (1,625) (164) 27,816 9,343 10,564 187,447 (1,800) (176) Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net (Dollars in Thousands) First mortgage loans: Residential mortgage (1-4 family) Commercial real estate Real estate construction Total nonperforming loans Other loans: Home equity Total non-performing assets Consumer Commercial Subtotal Allowance for loan losses Real estate owned and other repossessed assets, net Total non-performing assets as a percentage of total assets Less: Allowance for loan losses Percent of allowance for loan losses to non-performing loans Deferred loan fees, net June 30, 2012 2012 June 30, 2011 2011 (Dollars in Thousands) $ $ $ 1,814 $ - 1,404 3,218 2,361 5,579 1.7% 1,625 50.5% 29.1% $ $ $ 61,671 64,672 1,455 $ 23,709 8,778 15,343 175,628 $ (1,625) (164) 2,939 70,003 - 64,701 - 5,020 2,939 1,181 4,120 27,816 9,343 10,564 187,447 (1,800) (176) 1.2% 1,800 61.2% 43.7% 173,839 $ 185,471 Total loans, net $ 173,839 $ 185,471 Percent of allowance for loan losses to non-performing assets Total loans, net Within the commercial real estate loan category above, $21,610,000 and $18,878,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2012 and 2011, respectively. The following is a summary of changes in the allowance for loan losses: (Dollars in Thousands) Balance at beginning of period Provision for loan losses Loans charged off Recoveries of loans previously charged off June 30, 2012 2011 $ $ 1,800 1,101 (1,296) 20 1,100 948 (252) 4 The following table sets forth information regarding loans and non-performing assets by geographical location as of the dates indicated (dollars in thousands). The following table sets forth information regarding loans and non-performing assets by geographical location as of the dates indicated (dollars in thousands). Within the commercial real estate loan category above, $21,610,000 and $18,878,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2012 and 2011, respectively. June 30, 2012 Townsend Bozeman Helena Butte Total Non-accrual loans $ The following is a summary of changes in the allowance for loan losses: $ $ 1,735 22 56 $ 1 $ 1,814 $ 1,735 $ 56 $ 22 $ 1 $ 1,814 Accruing loans delinquent 90 days or more Restructured loans, net - 90 Real estate owned and other repossessed assets, net (Dollars in Thousands) Balance at beginning of period Provision for loan losses Loans charged off Recoveries of loans previously charged off Percent of non-performing assets to loans Total loans, net 90,744 2,514 2.8% $ $ 689 - 1,314 1,610 - - - June 30, - - 2012 62 - 1,404 2011 2,361 $ 2,980 $ $ 22 $ 42,417 $ 34,942 $ $ 63 1,800 5,736 1,101 (1,296) 1.1% 20 $ $ $ 173,839 5,579 1,100 948 (252) 3.2% 4 8.5% 0.1% June 30, 2011 Balance at end of period $ 1,625 $ 1,800 Non-accrual loans Balance at end of period $ 1,773 $ 1,138 $ - $ $ 1,625 28 $ $ 1,800 2,939 $ 1,773 $ 1,138 $ - $ 28 $ 2,939 Accruing loans delinquent 90 days or more Restructured loans, net - - Real estate owned and other repossessed assets, net 306 - - 794 - - - - - 81 - - 1,181 $ 2,079 $ 1,932 $ - $ 109 $ 4,120 $ 2,079 $ 1,932 $ - $ 109 $ 4,120 Total loans, net $ 96,816 $ 41,916 $ 45,811 $ 928 $ 185,471 Total loans, net $ 96,816 $ 41,916 $ 45,811 $ 928 $ 185,471 Percent of non-performing assets to loans 2.2% 4.6% 0.0% 11.8% 2.2% Percent of non-performing assets to loans 2.2% 4.6% 0.0% 11.8% 2.2% -26- -27- -26- -27- Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Total nonperforming loans Real estate owned and other repossessed assets, net Total non-performing assets Total non-performing assets as a percentage of total assets Allowance for loan losses Percent of allowance for loan losses to non-performing loans Percent of allowance for loan losses to non-performing assets $ $ $ June 30, 2012 June 30, 2011 (Dollars in Thousands) 1,814 $ - 1,404 3,218 2,361 5,579 1.7% 1,625 50.5% 29.1% $ $ 2,939 - - 2,939 1,181 4,120 1.2% 1,800 61.2% 43.7% Helena Bozeman Butte Townsend Total June 30, 2012 Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Real estate owned and other repossessed assets, net - 90 689 - 1,314 1,610 $ 2,514 $ 2,980 $ 22 $ 63 $ 5,579 Total loans, net $ 90,744 $ 34,942 $ 42,417 $ 5,736 $ 173,839 Percent of non-performing assets to loans 2.8% 8.5% 0.1% 1.1% 3.2% June 30, 2011 - - - - - - - - 62 - - 81 - 1,404 2,361 - - 1,181 Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Real estate owned and other repossessed assets, net 306 - - - - 794 Residential mortgage (1-4 family) $ 61,671 $ (Dollars in Thousands) First mortgage loans: Commercial real estate Real estate construction Other loans: Home equity Consumer Commercial Subtotal Less: Allowance for loan losses Deferred loan fees, net June 30, 2012 2011 64,672 1,455 23,709 8,778 15,343 70,003 64,701 5,020 27,816 9,343 10,564 175,628 187,447 (1,625) (164) (1,800) (176) Within the commercial real estate loan category above, $21,610,000 and $18,878,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2012 and 2011, respectively. The following is a summary of changes in the allowance for loan losses: (Dollars in Thousands) Balance at beginning of period Provision for loan losses Loans charged off Recoveries of loans previously charged off June 30, 2012 2011 $ $ 1,800 1,101 (1,296) 20 1,100 948 (252) 4 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements June 30, 2012 and 2011 June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans NOTE 4: Loans – continued NOTE 4: Loans NOTE 4: Loans – continued A summary of the balances of loans follows: Non-Performing Assets – The following table sets forth information regarding non-performing assets as of the dates indicated. June 30, A summary of the balances of loans follows: Non-Performing Assets – The following table sets forth information regarding non-performing assets as of the dates indicated. Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net (Dollars in Thousands) First mortgage loans: Residential mortgage (1-4 family) Commercial real estate Real estate construction Total nonperforming loans Other loans: Home equity Total non-performing assets Consumer Commercial Subtotal Allowance for loan losses Real estate owned and other repossessed assets, net Total non-performing assets as a percentage of total assets Less: Allowance for loan losses Percent of allowance for loan losses to non-performing loans Deferred loan fees, net Total loans, net $ 173,839 $ 185,471 Percent of allowance for loan losses to non-performing assets Total loans, net June 30, 2012 2012 June 30, 2011 2011 (Dollars in Thousands) $ $ $ 1,814 $ - 1,404 3,218 2,361 5,579 1.7% 1,625 50.5% 29.1% $ $ $ 61,671 64,672 1,455 $ 23,709 8,778 15,343 175,628 $ (1,625) (164) 2,939 70,003 - 64,701 - 5,020 2,939 1,181 4,120 27,816 9,343 10,564 187,447 (1,800) (176) 1.2% 1,800 61.2% 43.7% 173,839 $ 185,471 June 30, 2012 June 30, 2011 (Dollars in Thousands) Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Total nonperforming loans Real estate owned and other repossessed assets, net Total non-performing assets Total non-performing assets as a percentage of total assets Allowance for loan losses Percent of allowance for loan losses to non-performing loans Percent of allowance for loan losses to non-performing assets $ $ $ $ $ $ 1,814 - 1,404 3,218 2,361 5,579 1.7% 1,625 50.5% 29.1% 2,939 - - 2,939 1,181 4,120 1.2% 1,800 61.2% 43.7% The following table sets forth information regarding loans and non-performing assets by geographical location as of the dates indicated (dollars in thousands). The following table sets forth information regarding loans and non-performing assets by geographical location as of the dates indicated (dollars in thousands). Within the commercial real estate loan category above, $21,610,000 and $18,878,000 was guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2012 and 2011, respectively. June 30, 2012 Townsend Bozeman Helena Butte Total Non-accrual loans $ The following is a summary of changes in the allowance for loan losses: $ $ 1,735 22 56 $ 1 $ 1,814 Accruing loans delinquent 90 days or more Restructured loans, net - 90 Real estate owned and other repossessed assets, net (Dollars in Thousands) Balance at beginning of period Provision for loan losses Loans charged off Recoveries of loans previously charged off Percent of non-performing assets to loans Total loans, net 90,744 2,514 2.8% $ $ 689 - 1,314 1,610 - - - June 30, - - 2012 62 - 1,404 2011 2,361 $ 2,980 $ $ 22 $ 42,417 $ 34,942 $ $ 63 1,800 5,736 1,101 (1,296) 1.1% 20 $ $ $ 173,839 5,579 1,100 948 (252) 3.2% 4 8.5% 0.1% June 30, 2011 Balance at end of period $ 1,625 $ 1,800 Non-accrual loans Balance at end of period $ 1,773 $ 1,138 $ - $ $ 1,625 28 $ $ 1,800 2,939 Accruing loans delinquent 90 days or more Restructured loans, net - - Real estate owned and other repossessed assets, net 306 - - 794 - - - - - 81 - - 1,181 Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Real estate owned and other repossessed assets, net Helena Bozeman Butte Townsend Total June 30, 2012 $ 1,735 $ 56 $ 22 $ 1 $ 1,814 - 90 689 - 1,314 1,610 - - - - - 62 - 1,404 2,361 $ 2,514 $ 2,980 $ 22 $ 63 $ 5,579 Total loans, net $ 90,744 $ 34,942 $ 42,417 $ 5,736 $ 173,839 Percent of non-performing assets to loans 2.8% 8.5% 0.1% 1.1% 3.2% June 30, 2011 $ 1,773 $ 1,138 $ - $ 28 $ 2,939 Non-accrual loans Accruing loans delinquent 90 days or more Restructured loans, net Real estate owned and other repossessed assets, net 306 - - - - 794 - - - - - 81 - - 1,181 -26- -27- -26- -27- $ 2,079 $ 1,932 $ - $ 109 $ 4,120 $ 2,079 $ 1,932 $ - $ 109 $ 4,120 Total loans, net $ 96,816 $ 41,916 $ 45,811 $ 928 $ 185,471 Total loans, net $ 96,816 $ 41,916 $ 45,811 $ 928 $ 185,471 Percent of non-performing assets to loans 2.2% 4.6% 0.0% 11.8% 2.2% Percent of non-performing assets to loans 2.2% 4.6% 0.0% 11.8% 2.2% EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued The following table sets forth information regarding the activity in the allowance for loan losses for the dates as indicated (dollars in thousands): 1-4 Family Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total June 30, 2012 Allowance for credit losses: Beginning balance, June 30, 2011 Charge-offs Recoveries Provision Ending balance, June 30, 2012 Ending balance allocated to loans $ $ $ $ $ $ $ 369 (125) - 159 403 652 (309) 8 421 772 18 (239) - 231 10 481 (351) - 26 156 57 (33) 12 42 78 223 (239) - 222 206 1,800 (1,296) 20 1,101 1,625 $ $ $ $ $ $ $ individually evaluated for impairment $ - $ - $ - $ - $ 2 $ - $ 2 Ending balance allocated to loans collectively evaluated for impairment $ 403 $ 772 $ 10 $ 156 $ 76 $ 206 $ 1,623 Loans receivable: Ending balance June 30, 2012 $ 61,671 $ 64,672 $ 1,455 $ 23,709 $ 8,778 $ 15,343 $ 175,628 Ending balance of loans individually evaluated for impairment June 30, 2012 Ending balance of loans collectively evaluated for impairment June 30, 2012 $ 923 $ 833 $ - $ 390 $ 93 $ 1,497 $ 3,736 $ 60,748 $ 63,839 $ 1,455 $ 23,319 $ 8,685 $ 13,846 $ 171,892 The following table sets forth information regarding the activity in the allowance for loan losses Home for the dates as indicated (dollars in thousands): Equity 1-4 Family Commercial Real Estate Real Estate Construction Commercial Consumer Total June 30, 2011 Allowance for credit losses: Beginning balance, June 30, 2010 Charge-offs Recoveries Provision Allowance for credit losses: Beginning balance, June 30, 2011 Ending balance, June 30, 2011 Charge-offs Recoveries Ending balance allocated to loans Provision individually evaluated for impairment Ending balance, June 30, 2012 $ $ 1-4 Family Commercial $ Real Estate Real Estate Construction 391 (75) - 53 369 447 (130) - 335 652 110 - - (92) $ 18 6 $ (30) - 505 481 $ Consumer 78 (17) 4 (8) $ 57 $ 68 Commercial - - 155 223 $ 1,100 (252) 4 948 1,800 $ $ $ 369 $ (125) - 159 $ 403 260 $ 652 $ (309) 8 421 - $ $ 772 18 $ (239) - 231 $ 10 $ $ 378 $ 481 $ (351) - 26 $ 156 14 57 $ (33) 12 42 78 $ $ 111 223 $ (239) - 222 $ 206 $ $ $ $ 125 888 1,800 (1,296) 20 1,101 1,625 June 30, 2012 Home $ Equity Total Beginning balance, June 30, 2010 $ 391 $ 447 $ 110 $ 6 $ 78 $ 68 $ 1,100 Ending balance allocated to loans Ending balance allocated to loans collectively evaluated for impairment $ individually evaluated for impairment 258 Loans receivable: Ending balance allocated to loans Ending balance June 30, 2011 collectively evaluated for impairment $ 70,003 $ 392 $ - $ $ 403 64,701 $ $ - 18 $ $ - 103 $ 43 $ 98 $ 912 $ - $ 2 $ - $ 2 $ 772 $ 5,020 $ $ 10 27,816 $ 156 $ 9,343 $ $ 76 10,564 $ $ 206 187,447 $ 1,623 Ending balance of loans individually Loans receivable: evaluated for impairment June 30, 2011 Ending balance June 30, 2012 $ 1,411 $ 61,671 $ 998 $ 64,672 $ $ 1,455 $ 721 611 $ 23,709 $ $ 8,778 $ 135 2,025 $ 15,343 $ 5,901 $ 175,628 Ending balance of loans collectively Ending balance of loans individually evaluated for impairment evaluated for impairment June 30, 2012 June 30, 2011 $ 68,592 $ $ 923 63,703 $ 833 $ 4,299 $ - 27,205 $ $ 390 $ 9,208 $ 93 $ 8,539 $ 1,497 $ 181,546 $ 3,736 Ending balance of loans collectively The following table sets forth information regarding the internal classification of the loan portfolio as of the dates indicated (dollars in thousands): evaluated for impairment June 30, 2012 $ $ 23,319 13,846 63,839 60,748 $ 8,685 1,455 $ $ $ $ 171,892 1-4 Family Real Estate Commercial Real Estate Construction June 30, 2012 Home Equity Consumer Commercial Total Real Estate Real Estate Construction Consumer Commercial Total Grade: Pass Special mention Substandard Doubtful Loss Total $ $ 60,748 - 923 - - 61,671 $ $ 63,839 51 782 - - 64,672 $ $ 1,455 - - - - 1,455 $ $ 23,319 - 242 148 - 23,709 Credit Risk Profile Based on Payment Activity Performing Restructured loans Nonperforming Total $ $ $ $ $ 61,011 - 660 61,671 63,749 90 833 64,672 $ 1,455 - - 1,455 $ 23,444 - 265 23,709 $ $ $ $ $ $ $ $ $ 8,685 - 76 15 2 8,778 8,742 - 36 8,778 13,846 5 1,492 - - 15,343 14,009 1,314 20 15,343 $ $ $ $ 171,892 56 3,515 163 2 175,628 172,410 1,404 1,814 175,628 1-4 Family Commercial Real Estate Real Estate Construction Consumer Commercial Total June 30, 2011 Home Equity Ending balance, June 30, 2011 $ 369 $ 652 $ 18 $ 481 $ 57 $ 223 $ 1,800 (75) - 53 (130) - 335 - - (92) (30) - 505 (17) 4 (8) - - 155 (252) 4 948 individually evaluated for impairment $ 111 $ 260 $ - $ 378 $ 14 $ 125 $ 888 collectively evaluated for impairment $ 258 $ 392 $ 18 $ 103 $ 43 $ 98 $ 912 Ending balance June 30, 2011 $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 $ 1,411 $ 998 $ 721 $ 611 $ 135 $ 2,025 $ 5,901 Allowance for credit losses: Charge-offs Recoveries Provision Ending balance allocated to loans Ending balance allocated to loans Loans receivable: Ending balance of loans individually evaluated for impairment June 30, 2011 Ending balance of loans collectively evaluated for impairment June 30, 2011 $ 68,592 $ 63,703 $ 4,299 $ 27,205 $ 9,208 $ 8,539 $ 181,546 The following table sets forth information regarding the internal classification of the loan portfolio as of the dates indicated (dollars in thousands): 1-4 Family Commercial June 30, 2012 Home Equity $ 60,748 $ 63,839 $ 1,455 $ 23,319 $ 8,685 $ 13,846 $ 171,892 923 - - - 51 782 - - - - - - - 76 15 2 1,492 5 - - 56 3,515 163 2 $ 61,671 $ 64,672 $ 1,455 $ 23,709 $ 8,778 $ 15,343 $ 175,628 Grade: Pass Special mention Substandard Doubtful Loss Total Credit Risk Profile Based on Payment Activity Performing Restructured loans Nonperforming Total $ 61,011 $ 63,749 $ 1,455 $ 23,444 $ 8,742 $ 14,009 $ 172,410 - 660 90 833 - - - 36 1,314 20 1,404 1,814 $ 61,671 $ 64,672 $ 1,455 $ 23,709 $ 8,778 $ 15,343 $ 175,628 242 148 - - - 265 -28- -29- -28- -29- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued The following table sets forth information regarding the activity in the allowance for loan losses Home for the dates as indicated (dollars in thousands): Equity 1-4 Family Commercial Real Estate Real Estate Construction Commercial Consumer Total June 30, 2011 1-4 Family Commercial Real Estate Real Estate Construction Home Equity Consumer Commercial Total June 30, 2011 The following table sets forth information regarding the activity in the allowance for loan losses for the dates as indicated (dollars in thousands): 1-4 Family Commercial Real Estate Real Estate Construction Consumer Commercial Total June 30, 2012 Home Equity Beginning balance, June 30, 2011 $ 369 $ 652 $ 18 $ 481 $ 57 $ 223 $ 1,800 (125) - 159 (309) 8 421 (239) - 231 (351) - 26 (33) 12 42 (239) - 222 (1,296) 20 1,101 Ending balance, June 30, 2012 $ 403 $ 772 $ 10 $ 156 $ 78 $ 206 $ 1,625 individually evaluated for impairment $ - $ - $ - $ - $ 2 $ - $ 2 collectively evaluated for impairment $ 403 $ 772 $ 10 $ 156 $ 76 $ 206 $ 1,623 Allowance for credit losses: Charge-offs Recoveries Provision Ending balance allocated to loans Ending balance allocated to loans Loans receivable: Ending balance of loans individually evaluated for impairment June 30, 2012 Ending balance of loans collectively evaluated for impairment June 30, 2012 $ 923 $ 833 $ - $ 390 $ 93 $ 1,497 $ 3,736 $ 60,748 $ 63,839 $ 1,455 $ 23,319 $ 8,685 $ 13,846 $ 171,892 Ending balance June 30, 2012 $ 61,671 $ 64,672 $ 1,455 $ 23,709 $ 8,778 $ 15,343 $ 175,628 Ending balance of loans individually Loans receivable: evaluated for impairment June 30, 2011 Ending balance June 30, 2012 $ 1,411 $ 61,671 $ 998 $ 64,672 $ $ 1,455 $ 721 611 $ 23,709 $ $ 8,778 $ 135 2,025 $ 15,343 $ 5,901 $ 175,628 Ending balance allocated to loans Ending balance allocated to loans collectively evaluated for impairment $ individually evaluated for impairment 258 Loans receivable: Ending balance allocated to loans Ending balance June 30, 2011 collectively evaluated for impairment $ 70,003 $ 392 $ - $ $ 403 64,701 $ $ - 18 $ $ - 103 $ 43 $ 98 $ 912 $ - $ 2 $ - $ 2 $ 772 $ 5,020 $ $ 10 27,816 $ 156 $ 9,343 $ $ 76 10,564 $ $ 206 187,447 $ 1,623 Ending balance of loans collectively Ending balance of loans individually evaluated for impairment evaluated for impairment June 30, 2012 June 30, 2011 $ 68,592 $ $ 923 63,703 $ 833 $ 4,299 $ - 27,205 $ $ 390 $ 9,208 $ 93 $ 8,539 $ 1,497 $ 181,546 $ 3,736 Ending balance of loans collectively The following table sets forth information regarding the internal classification of the loan portfolio as of the dates indicated (dollars in thousands): evaluated for impairment June 30, 2012 $ $ 23,319 63,839 60,748 13,846 $ 1,455 8,685 $ $ $ $ 171,892 $ $ 369 $ (125) - 159 $ 403 260 $ 652 $ (309) 8 421 - $ $ 772 18 $ (239) - 231 $ 10 $ $ 378 $ 481 $ (351) - 26 $ 156 14 57 $ (33) 12 42 78 $ $ 111 223 $ (239) - 222 $ 206 $ $ $ $ 125 888 1,800 (1,296) 20 1,101 1,625 Allowance for credit losses: Beginning balance, June 30, 2010 Charge-offs Recoveries Provision Allowance for credit losses: Beginning balance, June 30, 2011 Ending balance, June 30, 2011 Charge-offs Recoveries Ending balance allocated to loans Provision individually evaluated for impairment Ending balance, June 30, 2012 $ $ 1-4 Family Commercial $ Real Estate Real Estate Construction 391 (75) - 53 369 447 (130) - 335 652 110 - - (92) $ 18 6 $ (30) - 505 481 $ Consumer 78 (17) 4 (8) $ 57 $ 68 Commercial - - 155 223 $ 1,100 (252) 4 948 1,800 $ Total June 30, 2012 Home $ Equity Allowance for credit losses: Beginning balance, June 30, 2010 Charge-offs Recoveries Provision Ending balance, June 30, 2011 Ending balance allocated to loans $ $ $ $ $ $ 391 (75) - 53 369 447 (130) - 335 652 110 - - (92) 18 6 $ (30) - 505 481 $ 78 (17) 4 (8) 57 68 - - 155 223 1,100 (252) 4 948 1,800 $ $ $ $ $ $ individually evaluated for impairment $ 111 $ 260 $ - $ 378 $ 14 $ 125 $ 888 Ending balance allocated to loans collectively evaluated for impairment $ 258 $ 392 $ 18 $ 103 $ 43 $ 98 $ 912 Loans receivable: Ending balance June 30, 2011 $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 Ending balance of loans individually evaluated for impairment June 30, 2011 Ending balance of loans collectively evaluated for impairment June 30, 2011 $ 1,411 $ 998 $ 721 $ 611 $ 135 $ 2,025 $ 5,901 $ 68,592 $ 63,703 $ 4,299 $ 27,205 $ 9,208 $ 8,539 $ 181,546 The following table sets forth information regarding the internal classification of the loan portfolio as of the dates indicated (dollars in thousands): Grade: Pass Special mention Substandard Doubtful Loss Total 1-4 Family Real Estate Commercial Real Estate Construction $ $ 60,748 - 923 - - 61,671 $ $ 63,839 51 782 - - 64,672 $ $ 1,455 - - - - 1,455 June 30, 2012 Home Equity $ $ 23,319 - 242 148 - 23,709 Credit Risk Profile Based on Payment Activity Consumer Commercial Total 1-4 Family Real Estate Commercial Real Estate Construction Grade: Pass Special mention Substandard Doubtful Loss Total $ $ 60,748 - 923 - - 61,671 $ $ 63,839 51 782 - - 64,672 $ $ 1,455 - - - - 1,455 Credit Risk Profile Based on Payment Activity Performing Restructured loans Nonperforming Total $ $ $ $ $ 61,011 - 660 61,671 63,749 90 833 64,672 $ 1,455 - - 1,455 $ 23,444 - 265 23,709 $ $ $ $ $ Performing Restructured loans Nonperforming Total $ $ $ $ $ 61,011 - 660 61,671 63,749 90 833 64,672 $ 1,455 - - 1,455 $ 23,444 - 265 23,709 $ $ $ $ $ June 30, 2012 Home Equity $ $ 23,319 - 242 148 - 23,709 $ $ Consumer Commercial Total $ $ 8,685 - 76 15 2 8,778 8,742 - 36 8,778 13,846 5 1,492 - - 15,343 14,009 1,314 20 15,343 $ $ $ $ 171,892 56 3,515 163 2 175,628 172,410 1,404 1,814 175,628 $ $ $ $ 8,685 - 76 15 2 8,778 8,742 - 36 8,778 13,846 5 1,492 - - 15,343 14,009 1,314 20 15,343 $ $ $ $ 171,892 56 3,515 163 2 175,628 172,410 1,404 1,814 175,628 -28- -29- -28- -29- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued Grade: Pass Special mention Substandard Doubtful Loss Total Commercial 1-4 Family Real Estate Real Estate Construction June 30, 2011 Home Equity Consumer Commercial Total $ $ $ $ $ $ $ 68,592 - 1,300 - 111 70,003 63,703 - 738 - 260 64,701 4,299 - 721 - - 5,020 27,205 - 233 - 378 27,816 9,208 - 121 - 14 9,343 8,539 1,454 446 - 125 10,564 181,546 1,454 3,559 - 888 187,447 $ $ $ $ $ $ $ Credit Risk Profile Based on Payment Activity Performing Nonperforming Total $ 68,579 $ 64,515 $ 4,370 $ 27,440 $ 9,287 $ 10,317 $ 184,508 1,424 186 650 376 56 247 2,939 $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 The Company utilizes a 5 point internal loan rating system, largely basis on regulatory classifications, for 1-4 family real estate, commercial real estate, construction, home equity and commercial loans as follows: Loans rated Pass: these are loans 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 have potential weaknesses that deserve management’s close attention. 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 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. June 30, 2011 Home Equity June 30, 2012 $ $ The following table sets forth information regarding impaired loans as of the dates indicated (dollars in thousands): Commercial 1-4 Family Real Estate Real Estate Construction Consumer Commercial Total Grade: Pass Special mention Substandard Doubtful Loss Total $ 68,592 - 1,300 - 111 70,003 $ $ 63,703 Recorded - Investment 738 - 260 $ - 64,701 - - - - 64,515 - 186 $ $ Unpaid 4,299 Principal - Balance 721 - - $ - $ 5,020 - - - 2 - 4,370 $ 650 27,205 Related - Allowance 233 - 378 $ - 27,816 - - - 2 - 27,440 376 $ Interest 9,208 Income - Recognized 121 - 14 - $ $ 9,343 - - - - $ - Average 181,546 8,539 $ Recorded 1,454 1,454 Investment 3,559 446 - - 888 125 - $ $ 187,447 10,564 - - - 2 $ 184,508 - 10,317 9,287 2,939 247 56 $ $ $ $ With no related allowance: $ 1-4 Family Commercial real estate Construction Credit Risk Profile Based on Payment Activity Home equity Consumer Commerical Performing Nonperforming $ 68,579 1,424 Total With a related allowance: $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 - - The Company utilizes a 5 point internal loan rating system, largely basis on regulatory classifications, for 1-4 - - family real estate, commercial real estate, construction, home equity and commercial loans as follows: - - - - - - - - Loans rated Pass: these are loans 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. 1-4 Family Commercial real estate Construction Home equity Consumer Commerical - - - - - - - - - - - - - - - - - - Total: Loans rated Special Mention: these loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. 1-4 Family Commercial real estate Construction Loans rated Substandard: these loans are inadequately protected by the current net worth and paying capacity Home equity of the obligor of the collateral pledged, if any. Loans so classified have a well-defined weakness or Consumer weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the Commerical deficiencies are not corrected. Total - - - - 2 - $ 2 - - - - - - $ - - - - - 2 - $ 2 - - - - 2 - $ 2 - - - - - - $ - The following table sets forth information regarding impaired loans as of the dates indicated (dollars in thousands): June 30, 2012 Recorded Investment Unpaid Principal Balance Related Interest Income Average Recorded Allowance Recognized Investment $ - $ - $ - $ - $ - - - - - - - - - - - - - - - - - - - - - 2 - - - - - - - - - - - 2 - - - - 2 - - - - - - - - - - - 2 - - - - - - - - - - - - - - - - - - - - - 2 - - - - - - - - - - - 2 - $ - $ 2 $ 2 $ - $ 2 With no related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical With a related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total Loans rated Doubtful: these loans 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 Doubtful: these loans 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 of such little 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 effected in the future. 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 $500,000 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. Loans rated Loss: these loans are considered uncollectible and of such little 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 effected in the future. 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 $500,000 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. -30- -31- -30- -31- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued 1-4 Family Commercial Real Estate Real Estate Construction Consumer Commercial Total June 30, 2011 Home Equity $ 68,592 $ 63,703 $ 4,299 $ 27,205 $ 9,208 $ 8,539 $ 181,546 - - 1,300 111 - - 738 260 721 - - - - - 233 378 121 - - 14 1,454 446 - 125 1,454 3,559 - 888 $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 Grade: Pass Special mention Substandard Doubtful Loss Total Credit Risk Profile Based on Payment Activity Performing Nonperforming Total $ 68,579 $ 64,515 $ 4,370 $ 27,440 $ 9,287 $ 10,317 $ 184,508 1,424 186 650 376 56 247 2,939 $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 The Company utilizes a 5 point internal loan rating system, largely basis on regulatory classifications, for 1-4 family real estate, commercial real estate, construction, home equity and commercial loans as follows: Loans rated Pass: these are loans 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 have potential weaknesses that deserve management’s close attention. 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 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. June 30, 2011 Home Equity June 30, 2012 $ $ The following table sets forth information regarding impaired loans as of the dates indicated (dollars in thousands): Commercial 1-4 Family Real Estate Real Estate Construction Consumer Commercial Total Grade: Pass Special mention Substandard Doubtful Loss Total $ 68,592 - 1,300 - 111 70,003 $ $ 63,703 Recorded - Investment 738 - 260 $ - 64,701 - - - - 64,515 - 186 $ $ Unpaid 4,299 Principal - Balance 721 - - $ - $ 5,020 - - - 2 - 4,370 $ 650 27,205 Related - Allowance 233 - 378 $ - 27,816 - - - 2 - 27,440 376 $ Interest 9,208 Income - Recognized 121 - 14 - $ $ 9,343 - - - - $ - Average 181,546 8,539 $ Recorded 1,454 1,454 Investment 3,559 446 - - 125 888 - $ $ 187,447 10,564 - - - 2 $ 184,508 - 10,317 9,287 2,939 247 56 $ $ $ $ With no related allowance: $ 1-4 Family Commercial real estate Construction Credit Risk Profile Based on Payment Activity Home equity Consumer Commerical Performing Nonperforming $ 68,579 1,424 Total With a related allowance: $ 70,003 $ 64,701 $ 5,020 $ 27,816 $ 9,343 $ 10,564 $ 187,447 - - The Company utilizes a 5 point internal loan rating system, largely basis on regulatory classifications, for 1-4 - - family real estate, commercial real estate, construction, home equity and commercial loans as follows: - - - - - - - - Loans rated Pass: these are loans 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. 1-4 Family Commercial real estate Construction Home equity Consumer Commerical - - - - - - - - - - - - - - - - - - Total: Loans rated Special Mention: these loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. 1-4 Family Commercial real estate Construction Loans rated Substandard: these loans are inadequately protected by the current net worth and paying capacity Home equity of the obligor of the collateral pledged, if any. Loans so classified have a well-defined weakness or Consumer weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the Commerical deficiencies are not corrected. Total - - - - 2 - $ 2 - - - - - - $ - - - - - 2 - $ 2 - - - - 2 - $ 2 - - - - - - $ - The following table sets forth information regarding impaired loans as of the dates indicated (dollars in thousands): June 30, 2012 Recorded Investment Unpaid Principal Balance Related Allowance Interest Income Recognized Average Recorded Investment $ - - - - - - $ - - - - 2 - $ - - - - 2 - $ - - - - - - $ - - - - 2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ - - - - - 2 - $ 2 - - - - 2 - $ 2 - - - - - - $ - - - - - 2 - $ 2 With no related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical With a related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total Loans rated Doubtful: these loans 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 Doubtful: these loans 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 of such little 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 effected in the future. 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 $500,000 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. Loans rated Loss: these loans are considered uncollectible and of such little 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 effected in the future. 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 $500,000 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. -30- -31- -30- -31- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued June 30, 2011 Recorded Investment Unpaid Principal Balance Related Allowance Interest Income Recognized Average Recorded Investment $ - $ - - - - - - $ - - - - - - $ - - - - - 289 179 479 - - 57 289 179 479 - - 57 1,004 400 268 650 378 14 182 400 268 650 378 14 182 1,892 $ $ 111 89 171 378 14 125 111 89 171 378 14 125 888 $ $ - - - - - - - - - - - - - - - - - - - $ $ - - - - - - 145 90 240 - 1 29 145 90 240 - 1 29 505 With no related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical With a related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total The following table sets forth information regarding the delinquencies within the loan portfolio as of the dates indicated (dollars in thousands): 30-89 Days Past Due With no related allowance: $ 1-4 Family Commercial real estate Construction Home equity Consumer Commerical 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total $ With a related allowance: 638 1,501 770 132 78 - 3,119 June 30, 2011 June 30, 2011 Unpaid Principal Balance Recorded Investment 90 Days and Greater Total Past Due Related Allowance Recorded Interest Income Recognized Investment >90 Days and Still Accruing Average Recorded Investment Total Loans Current $ $ $ $ - $ 1,424 - 186 - 650 - 376 - 56 - 247 2,939 $ $ - $ 2,062 - 1,687 - 1,420 - 508 - 134 - 247 6,058 67,941 63,014 3,600 27,308 9,209 10,317 181,389 $ - $ - - - - - 70,003 64,701 5,020 27,816 9,343 10,564 187,447 $ $ $ - - - - - - - $ - - - - - $ - 289 400 Interest income not accrued on these loans and cash interest income was immaterial for the years 179 268 ended June 30, 2012 and 2011. The allowance for loan losses on nonaccrual loans as of June 30, 479 650 2012 and 2011 was $1,000 and $817,000, respectively. There were $2,000 ($0 net of loss 378 - reserves of $2,000) and $1,892,000 ($1,004,000 net of loss reserves of $888,000) of loans - 14 considered impaired at June 30, 2012 and 2011, respectively. 182 57 1-4 Family Commercial real estate Construction Home equity Consumer Commerical 111 89 171 378 14 125 - - - - - - Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except 289 that directors, officers, and employees may be eligible to receive discounts on loan origination 179 costs. 479 - Loans receivable from directors and senior officers, and their related parties, of the Company at - June 30, 2012 and 2011, were $1,787,000 ($7,998,000 including loans serviced for others) and 57 $1,813,000 ($8,558,000 including loans serviced for others), respectively. During the year 1,004 ended June 30, 2012, including loans sold and serviced for others, total principal additions amounted to $481,000 and total principal payments amounted to $1,041,000. Interest income from loans owned was $108,000 and $116,000 for the years ended June 30, 2012 and 2011, respectively. The Bank serviced, for the benefit of others, $6,211,000 and $6,745,000 at June 30, 2012 and 2011, respectively, loans from directors and senior officers. The following table sets forth information regarding the delinquencies within the loan portfolio as of the dates indicated (dollars in thousands): 400 268 650 378 14 182 1,892 111 89 171 378 14 125 888 $ - - - - - - - $ $ $ $ - - - - - - 145 90 240 - 1 29 145 90 240 - 1 29 505 June 30, 2011 90 Days 30-89 Days and Total Past Due Greater Past Due Current Total Loans Recorded Investment >90 Days and Still Accruing 1-4 Family real estate $ 638 $ 1,424 $ 2,062 $ 67,941 $ 70,003 $ - Commercial real estate 1,501 770 132 78 - 186 650 376 56 247 1,687 1,420 508 134 247 63,014 3,600 27,308 9,209 10,317 64,701 5,020 27,816 9,343 10,564 - - - - - $ 3,119 $ 2,939 $ 6,058 $ 181,389 $ 187,447 $ - Construction Home equity Consumer Commerical Total Interest income not accrued on these loans and cash interest income was immaterial for the years ended June 30, 2012 and 2011. The allowance for loan losses on nonaccrual loans as of June 30, 2012 and 2011 was $1,000 and $817,000, respectively. There were $2,000 ($0 net of loss reserves of $2,000) and $1,892,000 ($1,004,000 net of loss reserves of $888,000) of loans considered impaired at June 30, 2012 and 2011, respectively. Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except that directors, officers, and employees may be eligible to receive discounts on loan origination costs. Loans receivable from directors and senior officers, and their related parties, of the Company at June 30, 2012 and 2011, were $1,787,000 ($7,998,000 including loans serviced for others) and $1,813,000 ($8,558,000 including loans serviced for others), respectively. During the year ended June 30, 2012, including loans sold and serviced for others, total principal additions amounted to $481,000 and total principal payments amounted to $1,041,000. Interest income from loans owned was $108,000 and $116,000 for the years ended June 30, 2012 and 2011, respectively. The Bank serviced, for the benefit of others, $6,211,000 and $6,745,000 at June 30, 2012 and 2011, respectively, loans from directors and senior officers. June 30, 2012 June 30, 2012 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total $ $ $ $ 613 - - 362 221 171 1,367 501 91 - 227 37 747 1,603 $ $ 1,114 91 - 589 258 918 2,970 60,557 64,581 1,455 23,120 8,520 14,425 172,658 61,671 64,672 1,455 23,709 8,778 15,343 175,628 $ $ $ $ Recorded Investment >90 Days and Still Accruing $ $ - - - - - - - 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans $ $ $ $ 613 - - 362 221 171 1,367 501 91 - 227 37 747 1,603 $ $ 1,114 91 - 589 258 918 2,970 60,557 64,581 1,455 23,120 8,520 14,425 172,658 61,671 64,672 1,455 23,709 8,778 15,343 175,628 $ $ $ $ Recorded Investment >90 Days and Still Accruing $ $ - - - - - - - -32- -33- -32- -33- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued NOTE 4: Loans – continued June 30, 2011 June 30, 2011 June 30, 2011 Unpaid Principal Balance Recorded Investment 90 Days and Greater Total Past Due Related Allowance Recorded Interest Income Recognized Investment >90 Days and Still Accruing Average Recorded Investment Total Loans Current 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans 30-89 Days Past Due With no related allowance: $ 1-4 Family Commercial real estate Construction Home equity Consumer Commerical 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total $ With a related allowance: 638 1,501 770 132 78 - 3,119 $ $ $ $ - $ 1,424 - 186 - 650 - 376 - 56 - 247 2,939 $ $ - $ 2,062 - 1,687 - 1,420 - 508 - 134 - 247 6,058 67,941 63,014 3,600 27,308 9,209 10,317 181,389 $ - $ - - - - - 70,003 64,701 5,020 27,816 9,343 10,564 187,447 $ $ $ - - - - - - - $ - - - - - $ - 289 400 Interest income not accrued on these loans and cash interest income was immaterial for the years 179 268 ended June 30, 2012 and 2011. The allowance for loan losses on nonaccrual loans as of June 30, 479 650 2012 and 2011 was $1,000 and $817,000, respectively. There were $2,000 ($0 net of loss 378 - reserves of $2,000) and $1,892,000 ($1,004,000 net of loss reserves of $888,000) of loans - 14 considered impaired at June 30, 2012 and 2011, respectively. 182 57 1-4 Family Commercial real estate Construction Home equity Consumer Commerical 111 89 171 378 14 125 - - - - - - Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except 289 that directors, officers, and employees may be eligible to receive discounts on loan origination 179 costs. 479 - Loans receivable from directors and senior officers, and their related parties, of the Company at - June 30, 2012 and 2011, were $1,787,000 ($7,998,000 including loans serviced for others) and 57 $1,813,000 ($8,558,000 including loans serviced for others), respectively. During the year 1,004 ended June 30, 2012, including loans sold and serviced for others, total principal additions amounted to $481,000 and total principal payments amounted to $1,041,000. Interest income from loans owned was $108,000 and $116,000 for the years ended June 30, 2012 and 2011, respectively. The Bank serviced, for the benefit of others, $6,211,000 and $6,745,000 at June 30, 2012 and 2011, respectively, loans from directors and senior officers. The following table sets forth information regarding the delinquencies within the loan portfolio as of the dates indicated (dollars in thousands): 400 268 650 378 14 182 1,892 111 89 171 378 14 125 888 $ - - - - - - - $ $ $ $ - - - - - - 145 90 240 - 1 29 145 90 240 - 1 29 505 Recorded Investment >90 Days and Still Accruing - $ - - - - - $ - $ $ $ $ $ 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total 638 1,501 770 132 78 - 3,119 1,424 186 650 376 56 247 2,939 2,062 1,687 1,420 508 134 247 6,058 67,941 63,014 3,600 27,308 9,209 10,317 181,389 70,003 64,701 5,020 27,816 9,343 10,564 187,447 $ $ $ $ $ Interest income not accrued on these loans and cash interest income was immaterial for the years ended June 30, 2012 and 2011. The allowance for loan losses on nonaccrual loans as of June 30, 2012 and 2011 was $1,000 and $817,000, respectively. There were $2,000 ($0 net of loss reserves of $2,000) and $1,892,000 ($1,004,000 net of loss reserves of $888,000) of loans considered impaired at June 30, 2012 and 2011, respectively. Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except that directors, officers, and employees may be eligible to receive discounts on loan origination costs. Loans receivable from directors and senior officers, and their related parties, of the Company at June 30, 2012 and 2011, were $1,787,000 ($7,998,000 including loans serviced for others) and $1,813,000 ($8,558,000 including loans serviced for others), respectively. During the year ended June 30, 2012, including loans sold and serviced for others, total principal additions amounted to $481,000 and total principal payments amounted to $1,041,000. Interest income from loans owned was $108,000 and $116,000 for the years ended June 30, 2012 and 2011, respectively. The Bank serviced, for the benefit of others, $6,211,000 and $6,745,000 at June 30, 2012 and 2011, respectively, loans from directors and senior officers. June 30, 2011 Recorded Investment Unpaid Principal Balance Related Interest Income Average Recorded Allowance Recognized Investment $ - $ - $ - $ $ - - - - - 289 179 479 - - 57 289 179 479 - - 57 - - - - - 400 268 650 378 14 182 400 268 650 378 14 182 - - - - - 111 89 171 378 14 125 111 89 171 378 14 125 - - - - - - - - - - - - - - - - - - - - - - - - - 145 90 240 - 1 29 145 90 240 - 1 29 505 With no related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical With a related allowance: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total: 1-4 Family Commercial real estate Construction Home equity Consumer Commerical Total $ 1,004 $ 1,892 $ 888 $ $ The following table sets forth information regarding the delinquencies within the loan portfolio as of the dates indicated (dollars in thousands): June 30, 2012 June 30, 2012 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans 1-4 Family real estate $ 613 $ 501 $ 1,114 $ 60,557 $ 61,671 $ Commercial real estate Construction Home equity Consumer Commerical Total - - 362 221 171 91 - 227 37 747 91 - 589 258 918 64,581 1,455 23,120 8,520 14,425 64,672 1,455 23,709 8,778 15,343 $ 1,367 $ 1,603 $ 2,970 $ 172,658 $ 175,628 $ Recorded Investment >90 Days and Still Accruing - - - - - - - 1-4 Family real estate Commercial real estate Construction Home equity Consumer Commerical Total 30-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans $ $ $ $ 613 - - 362 221 171 1,367 501 91 - 227 37 747 1,603 $ $ 1,114 91 - 589 258 918 2,970 60,557 64,581 1,455 23,120 8,520 14,425 172,658 61,671 64,672 1,455 23,709 8,778 15,343 175,628 $ $ $ $ Recorded Investment >90 Days and Still Accruing $ $ - - - - - - - -32- -33- -32- -33- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 5: Troubled Debt Restructurings NOTE 5: Troubled Debt Restructurings – continued NOTE 5: Troubled Debt Restructurings NOTE 5: Troubled Debt Restructurings – continued The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current 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 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. As of June 30, 2012, 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 Section 310-10-35 was $1,404,000 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $62,000 (310-40-65-1(b)). Modification Categories 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. Residential Mortgage (1-4 family) The following tables present troubled debt restructurings as of June 30, 2012 and 2011: June 30, 2012 Accrual Status Non-Accrual Status The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current 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 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. As of June 30, 2012, 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 Section 310-10-35 was $1,404,000 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $62,000 (310-40-65-1(b)). Total Modification $ $ $ 1,404 1,314 1,314 1,314 90 90 90 Real estate construction Commercial Real Estate Home equity Commercial Consumer Total - - - - - - - - - - - - - - Modification Categories The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories: Non-Accrual Status Total Modification Accrual Status June 30, 2011 Residential Mortgage (1-4 family) Rate Modification – A modification in which the interest rate is changed. - - Commercial Real Estate - - - - Real estate construction Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed. - - - Home equity Consumer - - - - - - Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time. Commercial - - - Total $ - $ - $ - Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. $ - $ - $ - The following tables present troubled debt restructurings as of June 30, 2012 and 2011: Accrual Status June 30, 2012 Non-Accrual Total Status Modification 90 90 $ 90 $ 1,314 $ 1,404 1,314 1,314 Accrual Status June 30, 2011 Non-Accrual Total Status Modification - - - - - - - - - - - - - - - - - - - - - Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total - - - - - - - - - - - Combination Modification – Any other type of modification, including the use of multiple categories above. Combination Modification – Any other type of modification, including the use of multiple categories above. -34- -35- -34- -35- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 5: Troubled Debt Restructurings NOTE 5: Troubled Debt Restructurings – continued NOTE 5: Troubled Debt Restructurings NOTE 5: Troubled Debt Restructurings – continued The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current 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 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. As of June 30, 2012, 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 Section 310-10-35 was $1,404,000 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $62,000 (310-40-65-1(b)). Modification Categories 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. Residential Mortgage (1-4 family) The following tables present troubled debt restructurings as of June 30, 2012 and 2011: June 30, 2012 Accrual Status Non-Accrual Status The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the quarter ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current 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 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. As of June 30, 2012, 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 Section 310-10-35 was $1,404,000 (310-40-65-1(b)), and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $62,000 (310-40-65-1(b)). Total Modification $ $ $ 1,404 1,314 1,314 1,314 90 90 90 Real estate construction Commercial Real Estate Home equity Commercial Consumer Total - - - - - - - - - - - - - - Modification Categories The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories: Non-Accrual Status Total Modification Accrual Status June 30, 2011 Residential Mortgage (1-4 family) Rate Modification – A modification in which the interest rate is changed. - - Commercial Real Estate - - - - Real estate construction Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed. - - - Home equity Consumer - - - - - - Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time. Commercial - - - Combination Modification – Any other type of modification, including the use of multiple categories above. Combination Modification – Any other type of modification, including the use of multiple categories above. Total $ - $ - $ - Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. The following tables present troubled debt restructurings as of June 30, 2012 and 2011: Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total Accrual Status June 30, 2012 Non-Accrual Status Total Modification - 90 - - - - - - - - - - 90 - - - 1,314 1,314 $ 90 $ 1,314 $ 1,404 Accrual Status June 30, 2011 Non-Accrual Status Total Modification Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total - - - - - - - - - - - - - - - - - - $ - $ - $ - -34- -35- -34- -35- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 5: Troubled Debt Restructurings - continued NOTE 6: Foreclosed Assets NOTE 5: Troubled Debt Restructurings - continued NOTE 6: Foreclosed Assets The following tables present newly restructured loans that occurred as of June 30, 2012: Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for The following tables present newly restructured loans that occurred as of June 30, 2012: losses on foreclosed assets is as follows: Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses on foreclosed assets is as follows: Rate Term Interest Only Payment Combination Total Modification Modification Modification Modification Modification Modification June 30, 2012 Pre-modification Outstanding Recorded Investment: Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total - $ - - - - - $ - - $ - - - - - $ - - $ 97 - - - - $ 97 - $ - - - - - $ - - $ - - - - 1,385 1,385 $ $ $ - 97 - - - 1,385 1,482 Rate Term Interest Only Payment Combination Total Modification Modification Modification Modification Modification Modification June 30, 2012 Post-modification Outstanding Recorded Investment: Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total $ - - - - - - $ - $ - - - - - - $ - $ - 90 - - - - $ 90 $ - - - - - - $ - $ - - - - - 1,314 1,314 $ $ $ - 90 - - - 1,314 1,404 There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default at June 30, 2012 and 2011. 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 June 30, 2012 and 2011, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures. Rate Term Interest Only Payment 2012 Combination 2011 Total Modification Modification Modification Modification Modification Modification June 30, 2012 June 30, Pre-modification Outstanding Recorded Investment: (Dollars in Thousands) Balance at beginning of period $ $ Balance at end of period Provision for losses Residential Mortgage (1-4 family) Charge-offs Commercial Real Estate Real estate construction Home equity Consumer Commercial Total - $ - - - - - The Company is servicing loans for the benefit of others totaling approximately $355,020,000 $ - and $343,750,000 at June 30, 2012 and 2011, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. - $ 97 - - - - $ 97 - $ - - - - - $ - $ 189 $ $ - 201 - $ (12) - - - - 1,385 1,385 189 169 $ - (58) - - - - - $ - 300 NOTE 7: Mortgage Servicing Rights June 30, 2012 Custodial escrow balances maintained in connection with the foregoing loan servicing, and Combination included in demand deposits, were approximately $3,943,000 and $2,569,000 at June 30, 2012 and 2011, respectively. Modification Modification Modification Modification Modification Modification Interest Only Payment Term Rate Post-modification Outstanding Recorded Investment: $ (Dollars in Thousands) Mortgage servicing rights $ - 90 - - - - $ $ 90 Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total The following is a summary of activity in mortgage servicing rights and the valuation allowance: $ - - - - - - $ - $ - - - - - - Balance at beginning of period $ - Mortgage servicing rights capitalized Amortization of mortgage servicing rights Balance at end of period There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default at June 30, 2012 and 2011. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or Balance at beginning of period results in the foreclosure and repossession of the applicable collateral. As of June 30, 2012 and Provision (credited) to operations 2011, the Company had no commitments to lend additional funds to loan customers whose terms Balance at end of period had been modified in trouble debt restructures. $ - - Years Ended June 30, - - - - 2,142 $ $ - 705 (629) 2,218 $ - - - - - 1,314 1,314 2,337 $ 963 (1,158) 2,142 Valuation allowance - - - - - - 2011 2012 $ $ $ - 97 - - - 1,385 1,482 Total - 90 - - - 1,314 1,404 (Dollars in Thousands) Balance at beginning of period Provision for losses Charge-offs Balance at end of period NOTE 7: Mortgage Servicing Rights June 30, 2012 2011 $ $ 189 169 (58) $ - 201 (12) 300 $ 189 The Company is servicing loans for the benefit of others totaling approximately $355,020,000 and $343,750,000 at June 30, 2012 and 2011, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $3,943,000 and $2,569,000 at June 30, 2012 and 2011, respectively. The following is a summary of activity in mortgage servicing rights and the valuation allowance: (Dollars in Thousands) Mortgage servicing rights Balance at beginning of period Mortgage servicing rights capitalized Amortization of mortgage servicing rights Balance at end of period Valuation allowance Balance at beginning of period Provision (credited) to operations Balance at end of period Years Ended June 30, 2012 2011 $ 2,142 $ 705 (629) 2,218 - - - 2,337 963 (1,158) 2,142 - - - Net mortgage servicing rights $ 2,218 $ 2,142 Net mortgage servicing rights $ 2,218 $ 2,142 The fair values of these rights were $2,424,000 and $2,871,000 at June 30, 2012 and June 30, 2011, respectively. The fair value of servicing rights was determined using discount rates ranging from 9.00% to 20.00%, prepayment speeds ranging from 220% to 420% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. The fair values of these rights were $2,424,000 and $2,871,000 at June 30, 2012 and June 30, 2011, respectively. The fair value of servicing rights was determined using discount rates ranging from 9.00% to 20.00%, prepayment speeds ranging from 220% to 420% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. -36- -37- -36- -37- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 5: Troubled Debt Restructurings - continued NOTE 6: Foreclosed Assets NOTE 5: Troubled Debt Restructurings - continued NOTE 6: Foreclosed Assets The following tables present newly restructured loans that occurred as of June 30, 2012: Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for The following tables present newly restructured loans that occurred as of June 30, 2012: losses on foreclosed assets is as follows: Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses on foreclosed assets is as follows: Rate Term Interest Only Payment Combination Total Modification Modification Modification Modification Modification Modification June 30, 2012 - 97 - - - 1,385 1,482 Rate Term Interest Only Payment Combination Total Modification Modification Modification Modification Modification Modification June 30, 2012 - 90 - - - 1,314 1,404 Residential Mortgage (1-4 family) $ - $ - $ - $ - $ - $ Pre-modification Outstanding Recorded Investment: Commercial Real Estate Real estate construction Home equity Consumer Commercial Total Post-modification Outstanding Recorded Investment: Commercial Real Estate Real estate construction Home equity Consumer Commercial Total $ - $ - $ 97 $ - $ 1,385 $ - - - - - - - - - - - - - - - - - - - - 97 90 - - - - - - - - - - - - - - - - - - - - - - - - - - 1,385 1,314 $ - $ - $ 90 $ - $ 1,314 $ There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default at June 30, 2012 and 2011. 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 June 30, 2012 and 2011, the Company had no commitments to lend additional funds to loan customers whose terms had been modified in trouble debt restructures. Residential Mortgage (1-4 family) $ - $ - $ - $ - $ - $ Rate Term Interest Only Payment 2012 Combination 2011 Total Modification Modification Modification Modification Modification Modification June 30, 2012 June 30, Pre-modification Outstanding Recorded Investment: (Dollars in Thousands) Balance at beginning of period $ $ Balance at end of period Provision for losses Residential Mortgage (1-4 family) Charge-offs Commercial Real Estate Real estate construction Home equity Consumer Commercial Total - $ - - - - - The Company is servicing loans for the benefit of others totaling approximately $355,020,000 $ - and $343,750,000 at June 30, 2012 and 2011, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. - $ 97 - - - - $ 97 - $ - - - - - $ - $ $ $ - 201 - $ (12) - - - - 1,385 1,385 189 189 169 $ - (58) - - - - - $ - 300 NOTE 7: Mortgage Servicing Rights June 30, 2012 Custodial escrow balances maintained in connection with the foregoing loan servicing, and Combination included in demand deposits, were approximately $3,943,000 and $2,569,000 at June 30, 2012 and 2011, respectively. Modification Modification Modification Modification Modification Modification Interest Only Payment Term Rate Post-modification Outstanding Recorded Investment: $ (Dollars in Thousands) Mortgage servicing rights $ - 90 - - - - $ $ 90 Residential Mortgage (1-4 family) Commercial Real Estate Real estate construction Home equity Consumer Commercial Total The following is a summary of activity in mortgage servicing rights and the valuation allowance: $ - - - - - - $ - $ - - - - - - Balance at beginning of period $ - Mortgage servicing rights capitalized Amortization of mortgage servicing rights Balance at end of period There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default at June 30, 2012 and 2011. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or Balance at beginning of period results in the foreclosure and repossession of the applicable collateral. As of June 30, 2012 and Provision (credited) to operations 2011, the Company had no commitments to lend additional funds to loan customers whose terms Balance at end of period had been modified in trouble debt restructures. $ - - Years Ended June 30, - - - - 2,142 $ $ - 705 (629) 2,218 $ - - - - - 1,314 1,314 2,337 $ 963 (1,158) 2,142 Valuation allowance - - - - - - 2011 2012 $ $ $ - 97 - - - 1,385 1,482 Total - 90 - - - 1,314 1,404 (Dollars in Thousands) Balance at beginning of period Provision for losses Charge-offs Balance at end of period NOTE 7: Mortgage Servicing Rights June 30, 2012 2011 $ $ $ 189 169 (58) - 201 (12) 300 $ 189 The Company is servicing loans for the benefit of others totaling approximately $355,020,000 and $343,750,000 at June 30, 2012 and 2011, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $3,943,000 and $2,569,000 at June 30, 2012 and 2011, respectively. The following is a summary of activity in mortgage servicing rights and the valuation allowance: (Dollars in Thousands) Mortgage servicing rights Balance at beginning of period Mortgage servicing rights capitalized Amortization of mortgage servicing rights Balance at end of period Valuation allowance Balance at beginning of period Provision (credited) to operations Balance at end of period Years Ended June 30, 2012 2011 $ $ 2,142 705 (629) 2,218 - - - 2,337 963 (1,158) 2,142 - - - Net mortgage servicing rights $ 2,218 $ 2,142 Net mortgage servicing rights $ 2,218 $ 2,142 The fair values of these rights were $2,424,000 and $2,871,000 at June 30, 2012 and June 30, 2011, respectively. The fair value of servicing rights was determined using discount rates ranging from 9.00% to 20.00%, prepayment speeds ranging from 220% to 420% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. The fair values of these rights were $2,424,000 and $2,871,000 at June 30, 2012 and June 30, 2011, respectively. The fair value of servicing rights was determined using discount rates ranging from 9.00% to 20.00%, prepayment speeds ranging from 220% to 420% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. -36- -37- -36- -37- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 8: Premises and Equipment NOTE 9: Deposits NOTE 8: Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment follows: The composition of deposits is summarized as follows: A summary of the cost and accumulated depreciation of premises and equipment follows: (Dollars in Thousands) Land, buildings, and improvements Furniture and equipment Accumulated depreciation June 30, 2012 2011 $ $ 19,235 4,052 23,287 (7,726) 19,189 4,246 23,435 (7,284) $ 15,561 $ 16,151 Depreciation expense totaled $760,000 and $739,000 for the years ended June 30, 2012 and 2011, respectively. June 30, 2012 Weighted Average Rate (Dollars in Thousands) Land, buildings, and improvements Furniture and equipment Balance Accumulated depreciation (Dollars in Thousands) Noninterest checking Interest bearing checking Passbook savings Money market accounts Time certificates of deposits $ 23,425 46,125 40,591 28,489 81,359 0.00% $ 0.05% 0.10% 0.14% 1.12% 2011 2012 June 30, Weighted Average $ Rate 19,235 4,052 23,287 (7,726) 15,561 $ Balance 19,052 40,352 36,945 $ 28,284 84,553 0.00% 0.05% 0.10% $ 0.12% 1.29% 2011 19,189 4,246 23,435 (7,284) 16,151 Depreciation expense totaled $760,000 and $739,000 for the years ended June 30, 2012 and 2011, respectively. 0.46% $ 209,186 219,989 0.57% $ Time certificates of deposits with balances of $100,000 and great was $26,356 and $25,463 at June 30, 2012 and 2011, respectively. Time certificates of deposits with balances of $100,000 and great was $26,356 and $25,463 at June 30, 2012 and 2011, respectively. At June 30, 2012, the scheduled maturities of time deposits are as follows: At June 30, 2012, the scheduled maturities of time deposits are as follows: (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Thereafter Total $ 54,748 14,695 5,977 701 5,238 $ 81,359 Interest expense on deposits is summarized as follows: Interest expense on deposits is summarized as follows: (Dollars in Thousands) Checking Passbook savings Money market accounts Time certificates of deposits Years Ended June 30, 2012 2011 $ $ 24 39 37 974 28 48 46 1,270 $ 1,074 $ 1,392 -38- -39- -38- -39- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 9: Deposits The composition of deposits is summarized as follows: June 30, 2012 2011 Weighted Average Rate Balance Balance 23,425 46,125 40,591 28,489 81,359 0.00% $ 0.05% 0.10% 0.14% 1.12% 19,052 40,352 36,945 28,284 84,553 Weighted Average Rate 0.00% 0.05% 0.10% 0.12% 1.29% $ 219,989 0.46% $ 209,186 0.57% (Dollars in Thousands) Noninterest checking Interest bearing checking Passbook savings Money market accounts Time certificates of deposits $ (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Thereafter Total (Dollars in Thousands) Checking Passbook savings Money market accounts Time certificates of deposits $ 54,748 14,695 5,977 701 5,238 $ 81,359 Years Ended June 30, 2012 2011 $ $ 24 39 37 974 28 48 46 1,270 $ 1,074 $ 1,392 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 8: Premises and Equipment NOTE 9: Deposits NOTE 8: Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment follows: The composition of deposits is summarized as follows: A summary of the cost and accumulated depreciation of premises and equipment follows: (Dollars in Thousands) Land, buildings, and improvements Furniture and equipment Accumulated depreciation June 30, 2012 2011 $ 19,235 $ 4,052 23,287 (7,726) 19,189 4,246 23,435 (7,284) $ 15,561 $ 16,151 Depreciation expense totaled $760,000 and $739,000 for the years ended June 30, 2012 and 2011, respectively. June 30, 2012 Weighted Average Rate (Dollars in Thousands) Land, buildings, and improvements Furniture and equipment Balance Accumulated depreciation (Dollars in Thousands) Noninterest checking Interest bearing checking Passbook savings Money market accounts Time certificates of deposits $ 23,425 46,125 40,591 28,489 81,359 0.00% $ 0.05% 0.10% 0.14% 1.12% 2011 2012 June 30, Weighted Average $ Rate 19,235 4,052 23,287 (7,726) 15,561 $ Balance 19,052 40,352 36,945 $ 28,284 84,553 0.00% 0.05% 0.10% $ 0.12% 1.29% 2011 19,189 4,246 23,435 (7,284) 16,151 Depreciation expense totaled $760,000 and $739,000 for the years ended June 30, 2012 and 2011, respectively. 0.46% $ 219,989 209,186 0.57% $ EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 9: Deposits The composition of deposits is summarized as follows: June 30, 2012 2011 (Dollars in Thousands) Noninterest checking Interest bearing checking Passbook savings Money market accounts Time certificates of deposits $ Balance 23,425 46,125 40,591 28,489 81,359 Weighted Average Rate 0.00% $ 0.05% 0.10% 0.14% 1.12% Balance 19,052 40,352 36,945 28,284 84,553 Weighted Average Rate 0.00% 0.05% 0.10% 0.12% 1.29% $ 219,989 0.46% $ 209,186 0.57% Time certificates of deposits with balances of $100,000 and great was $26,356 and $25,463 at Time certificates of deposits with balances of $100,000 and greater was $26,356 and $25,463 at June 30, 2012 and 2011, respectively. June 30, 2012 and 2011, repectively. Time certificates of deposits with balances of $100,000 and great was $26,356 and $25,463 at Time certificates of deposits with balances of $100,000 and greater was $26,356 and $25,463 at June 30, 2012 and 2011, respectively. June 30, 2012 and 2011, repectively. At June 30, 2012, the scheduled maturities of time deposits are as follows: At June 30, 2012, the scheduled maturities of time deposits are as follows: (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Thereafter Total $ 54,748 14,695 5,977 701 5,238 $ 81,359 (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Thereafter Total Interest expense on deposits is summarized as follows: Interest expense on deposits is summarized as follows: (Dollars in Thousands) Checking Passbook savings Money market accounts Time certificates of deposits Years Ended June 30, 2012 2011 $ $ 24 39 37 974 28 48 46 1,270 $ 1,074 $ 1,392 (Dollars in Thousands) Checking Passbook savings Money market accounts Time certificates of deposits $ 54,748 14,695 5,977 701 5,238 $ 81,359 Years Ended June 30, 2012 2011 $ $ 24 39 37 974 28 48 46 1,270 $ 1,074 $ 1,392 -38- -39- -38- -39- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 9: Deposits – continued NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings – continued NOTE 9: Deposits – continued NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings – continued As of May 20, 2009 FDIC insurance covers deposits up to $250,000 through December 31, 2013. On July 21, 2010, this coverage was made permanent with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. At June 30, 2012 the Company held $12,335,000 in non-interest bearing deposit accounts that included balances of $250,000 or more. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. At June 30, 2012 the Company held $23,425,000, in noninterest bearing accounts. At June 30, 2012 and 2011, the Company reclassified $28,000 and $62,000, respectively, in overdrawn deposits as loans. Directors’ and senior officers’ deposit accounts at June 30, 2012 and 2011, were $577,000 and $266,000, respectively. NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings Advances from the Federal Home Loan Bank of Seattle and other borrowings mature as follows: (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Four to five years Thereafter Total Federal Home Loan Advances June 30, 2012 2011 $ $ 16,200 9,200 9,200 7,200 200 696 18,200 16,200 9,200 9,200 7,200 896 $ 42,696 $ 60,896 The advances are due at maturity. The advances are subject to prepayment penalties. The interest rates on these advances are fixed. The advances are collateralized by investment securities pledged to the FHLB of Seattle and a blanket pledge of the Bank’s 1-4 family residential mortgage portfolio. The carrying value of the securities collateralized for these advances was $10,000 as of June 30, 2012. At June 30, 2012 and 2011, the Company exceeded the collateral requirements of the FHLB. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding line available to the Company at June 30, 2012, was 30% of total Bank assets, or approximately $94.4 million. The balance of advances was $33,696,000 and $37,896,000 at June 30, 2012 and 2011, respectively. Other Borrowings The Bank had $9,000,000 in structured repurchase agreements with PNC Financial Service Group, Inc. (“PNC”) at June 30, 2012, and $23,000,000 at June 30, 2011. These agreements are collateralized by investment securities. The carrying value of these securities was $11,143,000 as of June 30, 2012. These agreements include terms, under certain conditions, which allow PNC to exercise a call option. -40- Federal Funds Purchased The Bank has a $7,000,000 Federal Funds line of credit with PNC. The balance was $0 as of June 30, 2012 and 2011. As of May 20, 2009 FDIC insurance covers deposits up to $250,000 through December 31, 2013. On July 21, 2010, this coverage was made permanent with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. At June 30, 2012 the Company held $12,335,000 in non-interest bearing deposit accounts that included balances of $250,000 or more. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. At June 30, 2012 the Company held $23,425,000, in noninterest bearing accounts. The Bank has a $10,000,000 Federal Funds line of credit with Zions Bank. The balance was $0 as of June 30, 2012 and 2011. At June 30, 2012 and 2011, the Company reclassified $28,000 and $62,000, respectively, in The Bank has a $7,000,000 Federal Funds line of credit with Stockman Bank. The balance was overdrawn deposits as loans. $0 as of June 30, 2012 and 2011. Federal Reserve Bank Discount Window Directors’ and senior officers’ deposit accounts at June 30, 2012 and 2011, were $577,000 and $266,000, respectively. NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings For additional liquidity sources, the Bank has a credit facility at the Federal Reserve Bank’s Discount Window. The amount available to the Bank is limited by various collateral requirements. The Bank has pledged one Agency security at the Federal Reserve Bank that had a total carrying value of $2,120,000 as of June 30, 2012. The account had $0 balance as of June 30, 2012 and 2011. Advances from the Federal Home Loan Bank of Seattle and other borrowings mature as follows: June 30, For all borrowings outstanding the weighted average interest rate for advances at June 30, 2012 and 2011 was 3.49% and 3.79%, respectively. The weighted average amount outstanding was $58,806,000 and $69,163,000 for the years ended June 30, 2012 and 2011, respectively. $ $ 2012 2011 The maximum amount outstanding at any month-end was $60,879,000 and $68,346,000 during the years ended June 30, 2012 and 2011, respectively. (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Four to five years Thereafter 16,200 9,200 9,200 7,200 200 696 18,200 16,200 9,200 9,200 7,200 896 NOTE 11: Subordinated Debentures $ $ Total 42,696 60,896 Federal Home Loan Advances On September 28, 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 on December 15, 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 15, 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 1.881% and 1.667% as of June 30, 2012, and 2011, 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 15, 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date to as early as December 15, 2010. The advances are due at maturity. The advances are subject to prepayment penalties. The interest rates on these advances are fixed. The advances are collateralized by investment securities pledged to the FHLB of Seattle and a blanket pledge of the Bank’s 1-4 family residential mortgage portfolio. The carrying value of the securities collateralized for these advances was $10,000 as of June 30, 2012. At June 30, 2012 and 2011, the Company exceeded the collateral requirements of the FHLB. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding line available to the Company at June 30, 2012, was 30% of total Bank assets, or approximately $94.4 million. The balance of advances was $33,696,000 and $37,896,000 at June 30, 2012 and 2011, respectively. For the years ended June 30, 2012 and June 30, 2011, interest expense on the subordinated debentures was $97,000 and $192,000, respectively. Other Borrowings Subordinated debt may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of subordinated debt is included in Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital. The Bank had $9,000,000 in structured repurchase agreements with PNC Financial Service Group, Inc. (“PNC”) at June 30, 2012, and $23,000,000 at June 30, 2011. These agreements are collateralized by investment securities. The carrying value of these securities was $11,143,000 as of June 30, 2012. These agreements include terms, under certain conditions, which allow PNC to exercise a call option. -41- -40- -41- Federal Funds Purchased June 30, 2012 and 2011. The Bank has a $7,000,000 Federal Funds line of credit with PNC. The balance was $0 as of The Bank has a $10,000,000 Federal Funds line of credit with Zions Bank. The balance was $0 as of June 30, 2012 and 2011. The Bank has a $7,000,000 Federal Funds line of credit with Stockman Bank. The balance was $0 as of June 30, 2012 and 2011. Federal Reserve Bank Discount Window For additional liquidity sources, the Bank has a credit facility at the Federal Reserve Bank’s Discount Window. The amount available to the Bank is limited by various collateral requirements. The Bank has pledged one Agency security at the Federal Reserve Bank that had a total carrying value of $2,120,000 as of June 30, 2012. The account had $0 balance as of June 30, 2012 and 2011. For all borrowings outstanding the weighted average interest rate for advances at June 30, 2012 and 2011 was 3.49% and 3.79%, respectively. The weighted average amount outstanding was $58,806,000 and $69,163,000 for the years ended June 30, 2012 and 2011, respectively. The maximum amount outstanding at any month-end was $60,879,000 and $68,346,000 during the years ended June 30, 2012 and 2011, respectively. On September 28, 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 on December 15, 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 15, 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 1.881% and 1.667% as of June 30, 2012, and 2011, 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 15, 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date to as early as December 15, 2010. For the years ended June 30, 2012 and June 30, 2011, interest expense on the subordinated debentures was $97,000 and $192,000, respectively. Subordinated debt may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of subordinated debt is included in Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital. NOTE 11: Subordinated Debentures EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 9: Deposits – continued NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings – continued NOTE 9: Deposits – continued NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings – continued As of May 20, 2009 FDIC insurance covers deposits up to $250,000 through December 31, 2013. On July 21, 2010, this coverage was made permanent with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. At June 30, 2012 the Company held $12,335,000 in non-interest bearing deposit accounts that included balances of $250,000 or more. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. At June 30, 2012 the Company held $23,425,000, in noninterest bearing accounts. overdrawn deposits as loans. $266,000, respectively. At June 30, 2012 and 2011, the Company reclassified $28,000 and $62,000, respectively, in Directors’ and senior officers’ deposit accounts at June 30, 2012 and 2011, were $577,000 and NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings Advances from the Federal Home Loan Bank of Seattle and other borrowings mature as follows: (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Four to five years Thereafter Total Federal Home Loan Advances June 30, 2012 2011 $ 16,200 $ 9,200 9,200 7,200 200 696 18,200 16,200 9,200 9,200 7,200 896 $ 42,696 $ 60,896 The advances are due at maturity. The advances are subject to prepayment penalties. The interest rates on these advances are fixed. The advances are collateralized by investment securities pledged to the FHLB of Seattle and a blanket pledge of the Bank’s 1-4 family residential mortgage portfolio. The carrying value of the securities collateralized for these advances was $10,000 as of June 30, 2012. At June 30, 2012 and 2011, the Company exceeded the collateral requirements of the FHLB. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding line available to the Company at June 30, 2012, was 30% of total Bank assets, or approximately $94.4 million. The balance of advances was $33,696,000 and $37,896,000 at June 30, 2012 and 2011, respectively. Other Borrowings The Bank had $9,000,000 in structured repurchase agreements with PNC Financial Service Group, Inc. (“PNC”) at June 30, 2012, and $23,000,000 at June 30, 2011. These agreements are collateralized by investment securities. The carrying value of these securities was $11,143,000 as of June 30, 2012. These agreements include terms, under certain conditions, which allow PNC to exercise a call option. -40- Federal Funds Purchased The Bank has a $7,000,000 Federal Funds line of credit with PNC. The balance was $0 as of June 30, 2012 and 2011. As of May 20, 2009 FDIC insurance covers deposits up to $250,000 through December 31, 2013. On July 21, 2010, this coverage was made permanent with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. At June 30, 2012 the Company held $12,335,000 in non-interest bearing deposit accounts that included balances of $250,000 or more. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. At June 30, 2012 the Company held $23,425,000, in noninterest bearing accounts. The Bank has a $10,000,000 Federal Funds line of credit with Zions Bank. The balance was $0 as of June 30, 2012 and 2011. At June 30, 2012 and 2011, the Company reclassified $28,000 and $62,000, respectively, in The Bank has a $7,000,000 Federal Funds line of credit with Stockman Bank. The balance was overdrawn deposits as loans. $0 as of June 30, 2012 and 2011. Federal Reserve Bank Discount Window Directors’ and senior officers’ deposit accounts at June 30, 2012 and 2011, were $577,000 and $266,000, respectively. NOTE 10: Advances from the Federal Home Loan Bank and Other Borrowings For additional liquidity sources, the Bank has a credit facility at the Federal Reserve Bank’s Discount Window. The amount available to the Bank is limited by various collateral requirements. The Bank has pledged one Agency security at the Federal Reserve Bank that had a total carrying value of $2,120,000 as of June 30, 2012. The account had $0 balance as of June 30, 2012 and 2011. Advances from the Federal Home Loan Bank of Seattle and other borrowings mature as follows: June 30, For all borrowings outstanding the weighted average interest rate for advances at June 30, 2012 and 2011 was 3.49% and 3.79%, respectively. The weighted average amount outstanding was $58,806,000 and $69,163,000 for the years ended June 30, 2012 and 2011, respectively. $ $ 2012 2011 The maximum amount outstanding at any month-end was $60,879,000 and $68,346,000 during the years ended June 30, 2012 and 2011, respectively. (Dollars in Thousands) Within one year One to two years Two to three years Three to four years Four to five years Thereafter 16,200 9,200 9,200 7,200 200 696 18,200 16,200 9,200 9,200 7,200 896 NOTE 11: Subordinated Debentures $ $ Total 42,696 60,896 Federal Home Loan Advances On September 28, 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 on December 15, 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 15, 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 1.881% and 1.667% as of June 30, 2012, and 2011, 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 15, 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date to as early as December 15, 2010. The advances are due at maturity. The advances are subject to prepayment penalties. The interest rates on these advances are fixed. The advances are collateralized by investment securities pledged to the FHLB of Seattle and a blanket pledge of the Bank’s 1-4 family residential mortgage portfolio. The carrying value of the securities collateralized for these advances was $10,000 as of June 30, 2012. At June 30, 2012 and 2011, the Company exceeded the collateral requirements of the FHLB. The Company’s investment in FHLB stock is also pledged as collateral on these advances. The total FHLB funding line available to the Company at June 30, 2012, was 30% of total Bank assets, or approximately $94.4 million. The balance of advances was $33,696,000 and $37,896,000 at June 30, 2012 and 2011, respectively. For the years ended June 30, 2012 and June 30, 2011, interest expense on the subordinated debentures was $97,000 and $192,000, respectively. Other Borrowings Subordinated debt may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of subordinated debt is included in Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital. The Bank had $9,000,000 in structured repurchase agreements with PNC Financial Service Group, Inc. (“PNC”) at June 30, 2012, and $23,000,000 at June 30, 2011. These agreements are collateralized by investment securities. The carrying value of these securities was $11,143,000 as of June 30, 2012. These agreements include terms, under certain conditions, which allow PNC to exercise a call option. Federal Funds Purchased The Bank has a $7,000,000 Federal Funds line of credit with PNC. The balance was $0 as of June 30, 2012 and 2011. The Bank has a $10,000,000 Federal Funds line of credit with Zions Bank. The balance was $0 as of June 30, 2012 and 2011. The Bank has a $7,000,000 Federal Funds line of credit with Stockman Bank. The balance was $0 as of June 30, 2012 and 2011. Federal Reserve Bank Discount Window For additional liquidity sources, the Bank has a credit facility at the Federal Reserve Bank’s Discount Window. The amount available to the Bank is limited by various collateral requirements. The Bank has pledged one Agency security at the Federal Reserve Bank that had a total carrying value of $2,120,000 as of June 30, 2012. The account had $0 balance as of June 30, 2012 and 2011. For all borrowings outstanding the weighted average interest rate for advances at June 30, 2012 and 2011 was 3.49% and 3.79%, respectively. The weighted average amount outstanding was $58,806,000 and $69,163,000 for the years ended June 30, 2012 and 2011, respectively. The maximum amount outstanding at any month-end was $60,879,000 and $68,346,000 during the years ended June 30, 2012 and 2011, respectively. NOTE 11: Subordinated Debentures On September 28, 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 on December 15, 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 15, 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate 1.881% and 1.667% as of June 30, 2012, and 2011, 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 15, 2035 unless the Company elects and obtains regulatory approval to accelerate the maturity date to as early as December 15, 2010. For the years ended June 30, 2012 and June 30, 2011, interest expense on the subordinated debentures was $97,000 and $192,000, respectively. Subordinated debt may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of subordinated debt is included in Tier II capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital. -41- -40- -41- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 12: Legal Contingencies NOTE 13: Income Taxes – continued NOTE 12: Legal Contingencies NOTE 13: Income Taxes – continued Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s financial statements. NOTE 13: Income Taxes The components of the Company’s income tax provision are as follows: Various legal claims also arise from time to time in the normal course of business which, in the A reconciliation of the Company’s effective income tax provision to the statutory federal income opinion of management, will have no material effect on the Company’s financial statements. tax rate is as follows: NOTE 13: Income Taxes Years Ended June 30, The components of the Company’s income tax provision are as follows: 2012 2011 (Dollars in Thousands) Current U.S. federal Montana Deferred U.S. federal Montana Total Years Ended June 30, 2012 2011 $ $ 579 115 694 102 (4) 98 1,436 389 1,825 (600) (169) (769) $ 792 $ 1,056 The nature and components of deferred tax assets and liabilities, which are a component of other liabilities in 2012 and 2011 in the accompanying statement of financial condition, are as follows: (Dollars in Thousands) Deferred tax assets: Deferred compensation Loans receivable Deferred loan fees Other Total deferred tax assets Deferred tax liabilities: Premises and equipment FHLB stock Securities available-for-sale Unrealized gain on hedging Total deferred tax liabilities $ June 30, 2012 2011 $ 422 373 102 299 1,196 965 529 1,485 78 3,057 345 402 69 311 1,127 852 474 823 5 2,154 Net deferred tax liability $ (1,861) $ (1,027) (Dollars in Thousands) Current (Dollars in Thousands) Federal income taxes at the statutory rate of 34% State income taxes Nontaxable income U.S. federal Other, net Montana $ 1,010 200 (646) $ 228 Years Ended June 30, $ 1,178 2012 235 (563) $ 206 2011 579 115 694 1,436 389 1,825 Income tax expense Deferred $ 792 $ 1,056 U.S. federal Effective tax rate Montana (600) (169) (769) Prior to January 1, 1987, the Company was allowed a special bad debt deduction limited generally in the current year to 32% (net of preference tax) of otherwise taxable income and 1,056 subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current corporate rate. Retained earnings include approximately $852,000 at both June 30, 2011 and 2010, for which federal income tax has not been provided. The nature and components of deferred tax assets and liabilities, which are a component of other liabilities in 2012 and 2011 in the accompanying statement of financial condition, are as follows: 102 30.5% (4) 98 26.7% Total 792 $ $ June 30, NOTE 14: Supplemental Cash Flow Information (Dollars in Thousands) Deferred tax assets: Deferred compensation Loans receivable Deferred loan fees (Dollars in Thousands) Other Supplemental Cash Flow Information Total deferred tax assets Cash paid during the year for interest Deferred tax liabilities: Cash paid during the year for income taxes Non-Cash Investing Activities Premises and equipment FHLB stock Increase in market Securities available-for-sale value of securities available for sale Unrealized gain on hedging Mortgage servicing rights capitalized Total deferred tax liabilities Loans transferred to real estate and other assets acquired in foreclosure Net deferred tax liability ESOP shares released $ $ 2012 2011 NOTE 14: Supplemental Cash Flow Information Years Ended June 30, $ 2012 $ 2011 422 373 102 299 1,196 $ 3,261 256 965 529 1,485 $ 78 3,057 898 705 345 402 69 311 1,127 852 474 823 5 2,154 4,108 881 909 963 1,741 $ 168 (1,861) $ 930 173 (1,027) The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance. The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance. -42- -43- -42- -43- A reconciliation of the Company’s effective income tax provision to the statutory federal income tax rate is as follows: Federal income taxes at the statutory rate of 34% $ 1,010 $ 1,178 Years Ended June 30, 2012 2011 200 (646) 228 235 (563) 206 $ 792 $ 1,056 26.7% 30.5% (Dollars in Thousands) State income taxes Nontaxable income Other, net Income tax expense Effective tax rate Prior to January 1, 1987, the Company was allowed a special bad debt deduction limited generally in the current year to 32% (net of preference tax) of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current corporate rate. Retained earnings include approximately $852,000 at both June 30, 2011 and 2010, for which federal income tax has not been provided. (Dollars in Thousands) Supplemental Cash Flow Information Cash paid during the year for interest Cash paid during the year for income taxes 3,261 $ 256 4,108 881 Non-Cash Investing Activities Increase in market value of securities available for sale Mortgage servicing rights capitalized Loans transferred to real estate and other assets acquired in foreclosure ESOP shares released Years Ended June 30, 2012 2011 $ $ $ 898 705 1,741 168 909 963 930 173 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 12: Legal Contingencies NOTE 13: Income Taxes – continued NOTE 12: Legal Contingencies NOTE 13: Income Taxes – continued Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s financial statements. NOTE 13: Income Taxes The components of the Company’s income tax provision are as follows: Various legal claims also arise from time to time in the normal course of business which, in the A reconciliation of the Company’s effective income tax provision to the statutory federal income opinion of management, will have no material effect on the Company’s financial statements. tax rate is as follows: NOTE 13: Income Taxes Years Ended June 30, The components of the Company’s income tax provision are as follows: 2012 2011 (Dollars in Thousands) Current (Dollars in Thousands) Federal income taxes at the statutory rate of 34% State income taxes Nontaxable income U.S. federal Other, net Montana $ 1,010 200 (646) $ 228 Years Ended June 30, $ 1,178 2012 235 (563) $ 206 2011 579 115 694 1,436 389 1,825 Income tax expense Deferred $ 792 $ 1,056 U.S. federal Effective tax rate Montana (600) (169) (769) Prior to January 1, 1987, the Company was allowed a special bad debt deduction limited generally in the current year to 32% (net of preference tax) of otherwise taxable income and 1,056 subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current corporate rate. Retained earnings include approximately $852,000 at both June 30, 2011 and 2010, for which federal income tax has not been provided. The nature and components of deferred tax assets and liabilities, which are a component of other liabilities in 2012 and 2011 in the accompanying statement of financial condition, are as follows: 102 30.5% (4) 98 26.7% Total 792 $ $ June 30, A reconciliation of the Company’s effective income tax provision to the statutory federal income tax rate is as follows: (Dollars in Thousands) Federal income taxes at the statutory rate of 34% State income taxes Nontaxable income Other, net Income tax expense Effective tax rate Years Ended June 30, 2012 2011 $ $ 1,010 200 (646) 228 1,178 235 (563) 206 $ 792 $ 1,056 26.7% 30.5% Prior to January 1, 1987, the Company was allowed a special bad debt deduction limited generally in the current year to 32% (net of preference tax) of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualified as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, they will be subject to federal income tax at the then current corporate rate. Retained earnings include approximately $852,000 at both June 30, 2011 and 2010, for which federal income tax has not been provided. NOTE 14: Supplemental Cash Flow Information (Dollars in Thousands) Deferred tax assets: Deferred compensation Loans receivable Deferred loan fees (Dollars in Thousands) Other Supplemental Cash Flow Information Total deferred tax assets Cash paid during the year for interest Deferred tax liabilities: Cash paid during the year for income taxes Non-Cash Investing Activities Premises and equipment FHLB stock Increase in market Securities available-for-sale value of securities available for sale Unrealized gain on hedging Mortgage servicing rights capitalized Total deferred tax liabilities Loans transferred to real estate and other assets acquired in foreclosure Net deferred tax liability ESOP shares released $ $ 2012 2011 NOTE 14: Supplemental Cash Flow Information Years Ended June 30, $ 2012 $ 2011 422 373 102 299 1,196 $ 3,261 256 965 529 1,485 $ 78 3,057 898 705 345 402 69 311 1,127 852 474 823 5 2,154 4,108 881 909 963 1,741 $ 168 (1,861) $ 930 173 (1,027) (Dollars in Thousands) Supplemental Cash Flow Information Cash paid during the year for interest Cash paid during the year for income taxes Non-Cash Investing Activities Increase in market value of securities available for sale Mortgage servicing rights capitalized Loans transferred to real estate and other assets acquired in foreclosure ESOP shares released Years Ended June 30, 2012 2011 $ $ $ $ 3,261 256 898 705 1,741 168 4,108 881 909 963 930 173 The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance. The Company believes, based upon the available evidence, that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance. -42- -43- -42- -43- The nature and components of deferred tax assets and liabilities, which are a component of other liabilities in 2012 and 2011 in the accompanying statement of financial condition, are as follows: (Dollars in Thousands) Current U.S. federal Montana Deferred U.S. federal Montana Total (Dollars in Thousands) Deferred tax assets: Deferred compensation Loans receivable Deferred loan fees Other Total deferred tax assets Deferred tax liabilities: Premises and equipment FHLB stock Securities available-for-sale Unrealized gain on hedging Total deferred tax liabilities Years Ended June 30, 2012 2011 $ $ 579 115 694 102 (4) 98 1,436 389 1,825 (600) (169) (769) $ 792 $ 1,056 June 30, 2012 2011 $ $ 1,196 1,127 422 373 102 299 965 529 1,485 78 3,057 345 402 69 311 852 474 823 5 2,154 Net deferred tax liability $ (1,861) $ (1,027) EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 15: Regulatory Capital Requirements NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements NOTE 15: Regulatory Capital Requirements – continued The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of June 30, 2012 and 2011, that the Bank meets all capital adequacy requirements to which it is subject. To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk- based ratios as set forth in the table below. The Bank’s actual capital amounts and ratios are presented in the table below: (Dollars in Thousands) The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Minimum Capital Requirement Amount Amount Amount Actual Ratio Ratio Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions June 30, 2012: $ 58,001 43,339 $ Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of June 30, 2012 and 2011, that the Bank meets all capital adequacy requirements to which it is subject. 8.00 % $ 8.00 28.85 % 21.91 N/A 19,779 16,082 15,823 N/A % 10.00 56,376 41,714 28.04 21.09 8,041 7,911 4.00 4.00 N/A 11,867 N/A 6.00 Tier I Capital to Risk Weighted Assets Consolidated Bank To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk- based ratios as set forth in the table below. The Bank’s actual capital amounts and ratios are presented in the table below: Total Risk-based Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank June 30, 2011: Total Risk-based Capital to Risk Weighted Assets 56,376 41,714 17.43 13.40 9,704 9,339 3.00 3.00 N/A 15,565 N/A 5.00 56,376 41,714 17.43 13.40 9,704 9,339 3.00 3.00 N/A 15,565 N/A 5.00 56,376 41,714 17.43 13.40 4,852 4,670 1.50 1.50 N/A N/A N/A N/A 56,376 41,714 17.43 13.40 4,852 4,670 1.50 1.50 N/A N/A N/A N/A Consolidated Bank $ 56,462 41,887 26.19 % 19.70 $ 17,248 17,007 8.00 % $ 8.00 N/A 21,259 N/A % 10.00 Consolidated Bank $ 56,462 26.19 % $ 17,248 8.00 % $ N/A N/A % 41,887 19.70 17,007 8.00 21,259 10.00 Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank 55,551 40,975 25.77 19.27 8,624 8,504 4.00 4.00 N/A 12,755 N/A 6.00 55,551 40,975 25.77 19.27 8,624 8,504 4.00 4.00 N/A 12,755 N/A 6.00 55,551 40,975 16.92 13.05 9,850 9,421 3.00 3.00 N/A 15,701 N/A 5.00 55,551 40,975 16.92 13.05 9,850 9,421 3.00 3.00 N/A 15,701 N/A 5.00 55,551 40,975 16.92 13.05 4,925 4,710 1.50 1.50 N/A N/A N/A N/A 55,551 40,975 16.92 13.05 4,925 4,710 1.50 1.50 N/A N/A N/A N/A -44- -45- -44- -45- (Dollars in Thousands) Actual June 30, 2012: Amount Ratio Amount Ratio Amount Ratio Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions $ 58,001 28.85 % $ 16,082 8.00 % $ N/A N/A % 43,339 21.91 15,823 8.00 19,779 10.00 56,376 41,714 28.04 21.09 8,041 7,911 4.00 4.00 N/A 11,867 N/A 6.00 Total Risk-based Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank June 30, 2011: Total Risk-based Capital to Risk Weighted Assets Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 15: Regulatory Capital Requirements NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements NOTE 15: Regulatory Capital Requirements – continued The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of June 30, 2012 and 2011, that the Bank meets all capital adequacy requirements to which it is subject. To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk- based ratios as set forth in the table below. The Bank’s actual capital amounts and ratios are presented in the table below: (Dollars in Thousands) The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Minimum Capital Requirement Amount Amount Amount Actual Ratio Ratio Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions June 30, 2012: $ 58,001 43,33 7 8.00 % $ Quantitative measuon to ensure capital adequacy require the Bank to 8.00 maintain minimum amounts an ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of June 30, 2012 and 2011, that the Bank meets all capital adequacy requirements to which it is subject. 28.85 % 21.91 N/A 19,779 16,082 15,823 N/A % 10.00 $ 56,376 41,714 28.04 21.09 8,041 7,911 4.00 4.00 N/A 11,867 N/A 6.00 Tier I Capital to Risk Weighted Assets Consolidated Bank To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk- based ratios as set forth in the table below. The Bank’s actual capital amounts and ratios are presented in the table below: Total Risk-based Capital to Risk Weighted Assets Consolidated Bank 56,376 41,714 17.43 13.40 9,704 9,339 3.00 3.00 N/A 15,565 N/A 5.00 56,376 41,714 17.43 13.40 4,852 4,670 1.50 1.50 N/A N/A N/A N/A Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank June 30, 2011: Total Risk-based Capital to Risk Weighted Assets (Dollars in Thousands) Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions June 30, 2012: Amount Ratio Amount Ratio Amount Ratio Total Risk-based Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank June 30, 2011: Total Risk-based Capital to Risk Weighted Assets $ 58,001 43,337 28.85 % 21.91 $ 16,082 15,823 8.00 % $ 8.00 N/A 19,779 N/A % 10.00 56,376 41,714 28.04 21.09 8,041 7,911 4.00 4.00 N/A 11,867 N/A 6.00 56,376 41,714 17.43 13.40 9,704 9,339 3.00 3.00 N/A 15,565 N/A 5.00 56,376 41,714 17.43 13.40 4,852 4,670 1.50 1.50 N/A N/A N/A N/A Consolidated Bank $ 56,462 41,887 26.19 % 19.70 $ 17,248 17,007 8.00 % $ 8.00 N/A 21,259 N/A % 10.00 Consolidated Bank $ 56,462 41,887 26.19 % 19.70 $ 17,248 17,007 8.00 % $ 8.00 N/A 21,259 N/A % 10.00 Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank 55,551 40,975 25.77 19.27 8,624 8,504 4.00 4.00 N/A 12,755 N/A 6.00 55,551 40,975 16.92 13.05 9,850 9,421 3.00 3.00 N/A 15,701 N/A 5.00 55,551 40,975 16.92 13.05 4,925 4,710 1.50 1.50 N/A N/A N/A N/A Tier I Capital to Risk Weighted Assets Consolidated Bank Tier I Capital to Adjusted Total Assets Consolidated Bank Tangible Capital to Adjusted Total Assets Consolidated Bank 55,551 40,975 25.77 19.27 8,624 8,504 4.00 4.00 N/A 12,755 N/A 6.00 55,551 40,975 16.92 13.05 9,850 9,421 3.00 3.00 N/A 15,701 N/A 5.00 55,551 40,975 16.92 13.05 4,925 4,710 1.50 1.50 N/A N/A N/A N/A -44- -45- -44- -45- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued A reconciliation of the Bank’s capital determined by generally accepted accounting principles to capital defined for regulatory purposes, is as follows: Liquidation Rights – continued A reconciliation of the Bank’s capital determined by generally accepted accounting principles to capital defined for regulatory purposes, is as follows: Liquidation Rights – continued June 30, 2012 2011 (Dollars in Thousands) Capital determined by generally accepted accounting principles Unrealized (gain) loss on securities available-for-sale Unrealized gain on forward delivery commitments Tier I (core) capital General allowance for loan losses $ $ 43,715 (1,887) (114) 41,714 1,623 42,744 (1,757) (12) 40,975 912 Total risk based capital $ 43,337 $ 41,887 Dividend Limitations Under OCC regulations that became effective April 1, 1999, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to net income for the current year plus net income retained for the two preceding years. Dividends in excess of such amount require OCC approval. The Bank has paid dividends totaling $1,766,000 and $2,053,000 to the Company during the years ended June 30, 2012, and 2011, respectively. The Company had paid quarterly dividends of $.07125 per share per quarter for the year ended June 30, 2012. The Company had paid quarterly dividends of $.07 per share to its shareholders for the year ended June 30, 2011. NOTE 16: Related Party Transactions After two years from the date of conversion and upon the written request of the OTS, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the OTS, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution. (Dollars in Thousands) Capital determined by generally June 30, 2012 2011 $ $ accepted accounting principles Unrealized (gain) loss on securities available-for-sale Unrealized gain on forward delivery commitments Tier I (core) capital General allowance for loan losses 43,715 (1,887) (114) 41,714 1,623 42,744 (1,757) (12) 40,975 912 The Bank has contracted with a subsidiary of a company which is partially owned by one of the Company’s directors. The Bank paid $31,000 during the year ended June 30, 2012 for support services, and an additional $29,000 for computer hardware and software used by the Bank for its computer network. For the year ended June 30, 2011, expenditures were $75,000 for support services and $45,000 for computer hardware and software. Total risk based capital 41,887 43,337 $ $ Dividend Limitations In 2007, the Bank also made a construction loan, in the normal course of lending, to this same affiliated entity for the construction of an office building. In fiscal 2008 the construction was completed and the loan was refinanced into $7,500,000 permanent financing. On July 9, 2008, 80 percent, or $6.0 million was sold to the Montana Board of Investments. As of June 30, 2012 this loan’s principal balance was $6,644,000 ($1,329,000 net of participation sold). The Bank maintains the servicing for this loan and the loan is current. Under OCC regulations that became effective April 1, 1999, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to net income for the current year plus net income retained for the two preceding years. Dividends in excess of such amount require OCC approval. The Bank has paid dividends totaling $1,766,000 and $2,053,000 to the Company during the years ended June 30, 2012, and 2011, respectively. The Company had paid quarterly dividends of $.07125 per share per quarter for the year ended June 30, 2012. The Company had paid quarterly dividends of $.07 per share to its shareholders for the year ended June 30, 2011. After two years from the date of conversion and upon the written request of the OTS, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the OTS, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution. NOTE 16: Related Party Transactions The Bank has contracted with a subsidiary of a company which is partially owned by one of the Company’s directors. The Bank paid $31,000 during the year ended June 30, 2012 for support services, and an additional $29,000 for computer hardware and software used by the Bank for its computer network. For the year ended June 30, 2011, expenditures were $75,000 for support services and $45,000 for computer hardware and software. In 2007, the Bank also made a construction loan, in the normal course of lending, to this same affiliated entity for the construction of an office building. In fiscal 2008 the construction was completed and the loan was refinanced into $7,500,000 permanent financing. On July 9, 2008, 80 percent, or $6.0 million was sold to the Montana Board of Investments. As of June 30, 2012 this loan’s principal balance was $6,644,000 ($1,329,000 net of participation sold). The Bank maintains the servicing for this loan and the loan is current. Liquidation Rights Liquidation Rights Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of American Federal Savings Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account. Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of American Federal Savings Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account. -46- -47- -46- -47- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued NOTE 15: Regulatory Capital Requirements – continued A reconciliation of the Bank’s capital determined by generally accepted accounting principles to capital defined for regulatory purposes, is as follows: Liquidation Rights – continued A reconciliation of the Bank’s capital determined by generally accepted accounting principles to capital defined for regulatory purposes, is as follows: Liquidation Rights – continued June 30, 2012 2011 (Dollars in Thousands) Capital determined by generally accepted accounting principles Unrealized (gain) loss on securities available-for-sale Unrealized gain on forward delivery commitments Tier I (core) capital General allowance for loan losses $ 43,715 $ (1,887) (114) 41,714 1,623 42,744 (1,757) (12) 40,975 912 Total risk based capital $ 43,337 $ 41,887 Dividend Limitations Under OCC regulations that became effective April 1, 1999, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to net income for the current year plus net income retained for the two preceding years. Dividends in excess of such amount require OCC approval. The Bank has paid dividends totaling $1,766,000 and $2,053,000 to the Company during the years ended June 30, 2012, and 2011, respectively. The Company had paid quarterly dividends of $.07125 per share per quarter for the year ended June 30, 2012. The Company had paid quarterly dividends of $.07 per share to its shareholders for the year ended June 30, 2011. Liquidation Rights Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of American Federal Savings Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account. NOTE 16: Related Party Transactions After two years from the date of conversion and upon the written request of the OTS, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the OTS, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution. (Dollars in Thousands) Capital determined by generally June 30, 2012 2011 $ $ accepted accounting principles Unrealized (gain) loss on securities available-for-sale Unrealized gain on forward delivery commitments Tier I (core) capital General allowance for loan losses 43,715 (1,887) (114) 41,714 1,623 42,744 (1,757) (12) 40,975 912 The Bank has contracted with a subsidiary of a company which is partially owned by one of the Company’s directors. The Bank paid $31,000 during the year ended June 30, 2012 for support services, and an additional $29,000 for computer hardware and software used by the Bank for its computer network. For the year ended June 30, 2011, expenditures were $75,000 for support services and $45,000 for computer hardware and software. Total risk based capital 43,337 41,887 $ $ Dividend Limitations In 2007, the Bank also made a construction loan, in the normal course of lending, to this same affiliated entity for the construction of an office building. In fiscal 2008 the construction was completed and the loan was refinanced into $7,500,000 permanent financing. On July 9, 2008, 80 percent, or $6.0 million was sold to the Montana Board of Investments. As of June 30, 2012 this loan’s principal balance was $6,644,000 ($1,329,000 net of participation sold). The Bank maintains the servicing for this loan and the loan is current. Under OCC regulations that became effective April 1, 1999, savings associations such as the Bank generally may declare annual cash dividends up to an amount equal to net income for the current year plus net income retained for the two preceding years. Dividends in excess of such amount require OCC approval. The Bank has paid dividends totaling $1,766,000 and $2,053,000 to the Company during the years ended June 30, 2012, and 2011, respectively. The Company had paid quarterly dividends of $.07125 per share per quarter for the year ended June 30, 2012. The Company had paid quarterly dividends of $.07 per share to its shareholders for the year ended June 30, 2011. Liquidation Rights Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of American Federal Savings Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund Eagle’s remaining obligations under the liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by Eagle would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation account” and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account. After two years from the date of conversion and upon the written request of the OTS, Eagle will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to Eagle’s creditors. Also, under the rules and regulations of the OTS, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which Eagle or the Bank is not the surviving institution would be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution. NOTE 16: Related Party Transactions The Bank has contracted with a subsidiary of a company which is partially owned by one of the Company’s directors. The Bank paid $31,000 during the year ended June 30, 2012 for support services, and an additional $29,000 for computer hardware and software used by the Bank for its computer network. For the year ended June 30, 2011, expenditures were $75,000 for support services and $45,000 for computer hardware and software. In 2007, the Bank also made a construction loan, in the normal course of lending, to this same affiliated entity for the construction of an office building. In fiscal 2008 the construction was completed and the loan was refinanced into $7,500,000 permanent financing. On July 9, 2008, 80 percent, or $6.0 million was sold to the Montana Board of Investments. As of June 30, 2012 this loan’s principal balance was $6,644,000 ($1,329,000 net of participation sold). The Bank maintains the servicing for this loan and the loan is current. -46- -47- -46- -47- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 17: Business Combination NOTE 17: Business Combination – continued NOTE 17: Business Combination NOTE 17: Business Combination – continued On June 29, 2012, the Company and Sterling Savings Bank, a Washington state-chartered bank (“Sterling”) entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Eagle agreed to purchase 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. The actual amount of deposits, loans and value of other assets and liabilities transferred to Eagle and the actual price paid will be determined at the time of the closing of the transaction, in accordance with the terms and conditions of the Agreement. The closing of the transaction is subject to the terms and conditions set forth in the Agreement, including the receipt of regulatory approval, but is currently expected to be completed by the end of the second quarter of fiscal 2013. As of June 30, 2012 the purchase price would have approximated $7.3 million and would have exceeded the estimated fair value of tangible net assets acquired by approximately $6.6 million, which will be recorded as goodwill. Cash flow information relative to the asset purchase agreement is as follows (in thousands): Fair value of net assets acquired Cash paid for deposit premium Liabilities assumed $ 195,634 (7,269) $ 188,365 The primary purpose of the acquisition is to expand the Company’s market share in southern Montana provide existing customers with added convenience and service and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment of a Montana-based community bank. Factors that contributed to a purchase price resulting in goodwill include the strategically important locations of Sterling’s branches, a historical record of earnings, capable employees and the Company’s ability to expand in the southern Montana market, which will complement with the Company’s existing growth strategy. Fair value adjustments and related goodwill will be recorded in the statement of financial condition of the Company. The following is a pro forma condensed balance sheet disclosing the estimated fair value amounts of the acquired branches of Sterling to the major consolidated asset and liability captions at the acquisition date (in thousands): On June 29, 2012, the Company and Sterling Savings Bank, a Washington state-chartered bank (“Sterling”) entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Eagle agreed to purchase 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. The actual amount of deposits, loans and value of other assets and liabilities transferred to Eagle and the actual price paid will be determined at the time of the closing of the transaction, in accordance with the terms and conditions of the Agreement. The closing of the transaction is subject to the terms and conditions set forth in the Agreement, including the receipt of regulatory approval, but is currently expected to be completed by the end of the second quarter of fiscal 2013. As of June 30, 2012 the purchase price would have approximated $7.3 million and would have exceeded the estimated fair value of tangible net assets acquired by approximately $6.6 million, which will be recorded as goodwill. 827 44,591 5,000 7,646 127,962 2,339 Cash flow information relative to the asset purchase agreement is as follows (in thousands): Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets $ ASSETS Total assets Fair value of net assets acquired Cash paid for deposit premium $ $ 188,365 195,634 (7,269) Liabilities assumed $ 188,365 LIABILITIES AND EQUITY LIABILITIES AND EQUITY Deposits Equity $ 188,365 - 188,365 $ Total liabilities and equity The primary purpose of the acquisition is to expand the Company’s market share in southern Montana provide existing customers with added convenience and service and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment of a Montana-based community bank. Factors that contributed to a purchase price resulting in goodwill include the strategically important locations of Sterling’s branches, a historical record of earnings, capable employees and the Company’s ability to expand in the southern Montana market, which will complement with the Company’s existing growth strategy. Fair value adjustments and related goodwill will be recorded in the statement of financial condition of the Company. We estimated the fair value for most loans to be acquired from Sterling by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There will be no carryover of Sterling’s allowance for loan losses associated with the loans we acquired as the loans will be initially recorded at fair value. The following is a pro forma condensed balance sheet disclosing the estimated fair value amounts of the acquired branches of Sterling to the major consolidated asset and liability captions at the acquisition date (in thousands): ASSETS Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Total assets Deposits Equity Total liabilities and equity $ 827 44,591 5,000 7,646 127,962 2,339 $ 188,365 $ 188,365 - $ 188,365 We estimated the fair value for most loans to be acquired from Sterling by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There will be no carryover of Sterling’s allowance for loan losses associated with the loans we acquired as the loans will be initially recorded at fair value. -48- -49- -48- -49- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 17: Business Combination NOTE 17: Business Combination – continued NOTE 17: Business Combination NOTE 17: Business Combination – continued On June 29, 2012, the Company and Sterling Savings Bank, a Washington state-chartered bank (“Sterling”) entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Eagle agreed to purchase 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. The actual amount of deposits, loans and value of other assets and liabilities transferred to Eagle and the actual price paid will be determined at the time of the closing of the transaction, in accordance with the terms and conditions of the Agreement. The closing of the transaction is subject to the terms and conditions set forth in the Agreement, including the receipt of regulatory approval, but is currently expected to be completed by the end of the second quarter of fiscal 2013. As of June 30, 2012 the purchase price would have approximated $7.3 million and would have exceeded the estimated fair value of tangible net assets acquired by approximately $6.6 million, which will be recorded as goodwill. Cash flow information relative to the asset purchase agreement is as follows (in thousands): Fair value of net assets acquired Cash paid for deposit premium Liabilities assumed $ 195,634 (7,269) $ 188,365 The primary purpose of the acquisition is to expand the Company’s market share in southern Montana provide existing customers with added convenience and service and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment of a Montana-based community bank. Factors that contributed to a purchase price resulting in goodwill include the strategically important locations of Sterling’s branches, a historical record of earnings, capable employees and the Company’s ability to expand in the southern Montana market, which will complement with the Company’s existing growth strategy. Fair value adjustments and related goodwill will be recorded in the statement of financial condition of the Company. The following is a pro forma condensed balance sheet disclosing the estimated fair value amounts of the acquired branches of Sterling to the major consolidated asset and liability captions at the acquisition date (in thousands): On June 29, 2012, the Company and Sterling Savings Bank, a Washington state-chartered bank (“Sterling”) entered into a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Eagle agreed to purchase 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. The actual amount of deposits, loans and value of other assets and liabilities transferred to Eagle and the actual price paid will be determined at the time of the closing of the transaction, in accordance with the terms and conditions of the Agreement. The closing of the transaction is subject to the terms and conditions set forth in the Agreement, including the receipt of regulatory approval, but is currently expected to be completed by the end of the second quarter of fiscal 2013. As of June 30, 2012 the purchase price would have approximated $7.3 million and would have exceeded the estimated fair value of tangible net assets acquired by approximately $6.6 million, which will be recorded as goodwill. 827 44,591 5,000 7,646 127,962 2,339 Cash flow information relative to the asset purchase agreement is as follows (in thousands): Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets $ ASSETS Total assets Fair value of net assets acquired Cash paid for deposit premium $ $ 188,365 195,634 (7,269) Liabilities assumed $ 188,365 LIABILITIES AND EQUITY Deposits Equity $ 188,365 - 188,365 $ Total liabilities and equity The primary purpose of the acquisition is to expand the Company’s market share in southern Montana provide existing customers with added convenience and service and to provide our new customers with the opportunity to enjoy the outstanding personalized service and commitment of a Montana-based community bank. Factors that contributed to a purchase price resulting in goodwill include the strategically important locations of Sterling’s branches, a historical record of earnings, capable employees and the Company’s ability to expand in the southern Montana market, which will complement with the Company’s existing growth strategy. Fair value adjustments and related goodwill will be recorded in the statement of financial condition of the Company. We estimated the fair value for most loans to be acquired from Sterling by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There will be no carryover of Sterling’s allowance for loan losses associated with the loans we acquired as the loans will be initially recorded at fair value. The following is a pro forma condensed balance sheet disclosing the estimated fair value amounts of the acquired branches of Sterling to the major consolidated asset and liability captions at the acquisition date (in thousands): ASSETS Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Total assets Deposits Equity Total liabilities and equity LIABILITIES AND EQUITY $ 827 44,591 5,000 7,646 127,962 2,339 $ 188,365 $ 188,365 - $ 188,365 We estimated the fair value for most loans to be acquired from Sterling by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There will be no carryover of Sterling’s allowance for loan losses associated with the loans we acquired as the loans will be initially recorded at fair value. -48- -49- -48- -49- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued Information about the Sterling loan portfolio to be acquired as of June 30, 2012 is as follows (in thousands): Contractually required principal and interest at acquisition Contractual cash flows not expected to be collected (nonaccretable discount) $ 46,404 (561) Expected cash flows at acquisition Interest component of expected cash flows (accretable discount) 45,843 (1,252) Fair value of acquired loans $ 44,591 The core deposit intangible asset that will be recognized as part of the business combination will amount to approximately $1.1 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes. The fair value of savings and transaction deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity. Direct costs related to the Sterling acquisition will be expensed as incurred in the year ended June 30, 2013. These merger and acquisition integration expenses will include salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. The following table presents an unaudited pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on June 30, 2012 (in thousands). The pro forma balance sheet does not necessarily reflect the combined balance sheet that will result as of the closing of the branch acquisition of the Sterling branches. 20,641 229,042 $ 20,561 7,646 219,397 18,377 46,404 (561) 45,843 (1,252) Information about the Sterling loan portfolio to be acquired as of June 30, 2012 is as follows (in thousands): ASSETS $ Contractually required principal and interest at acquisition Contractual cash flows not expected to be collected (nonaccretable discount) Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Expected cash flows at acquisition Interest component of expected cash flows (accretable discount) Total assets Fair value of acquired loans LIABILITIES AND SHAREHOLDERS' EQUITY $ 515,664 $ 44,591 Deposits Other liabilities Equity The core deposit intangible asset that will be recognized as part of the business combination will amount to approximately $1.1 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes. 408,354 53,660 53,650 $ Total liabilities and shareholders' equity $ 515,664 The fair value of savings and transaction deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity. The following table presents unaudited pro forma results of operations as if the acquisition of the Sterling branches had occurred on July 1, 2010 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. Merger and acquisition integration costs of $850 thousand that we expect to be incurred during the year ended June 30, 2013 are reflected in the unaudited pro forma amounts for the year ended June 30, 2011. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of the Sterling branches at July 1, 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the years ended June 30, 2012 and 2011. Direct costs related to the Sterling acquisition will be expensed as incurred in the year ended June 30, 2013. These merger and acquisition integration expenses will include salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. The following table presents an unaudited pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on June 30, 2012 (in thousands). The pro forma balance sheet does not necessarily reflect the combined balance sheet that will result as of the closing of the branch acquisition of the Sterling branches. Year Ended June 30, 2011 2012 Net interest income Noninterest income Noninterest expense Net income1) Pro forma earnings per share1) Basic Diluted $ 14,234 5,542 14,390 $ 14,697 5,991 15,302 3,990 3,850 $ 1.07 1.02 $ 0.99 0.99 1) Significant assumptions utilized the acquisition cost noted above, amortization/accretion of interest rate fair value adjustments, amortization of the core deposit intangible asset and a 25% effective tax rate. include -50- -51- -50- -51- ASSETS Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Total assets Deposits Other liabilities Equity LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,641 229,042 20,561 7,646 219,397 18,377 $ 515,664 $ 408,354 53,660 53,650 Total liabilities and shareholders' equity $ 515,664 The following table presents unaudited pro forma results of operations as if the acquisition of the Sterling branches had occurred on July 1, 2010 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. Merger and acquisition integration costs of $850 thousand that we expect to be incurred during the year ended June 30, 2013 are reflected in the unaudited pro forma amounts for the year ended June 30, 2011. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of the Sterling branches at July 1, 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the years ended June 30, 2012 and 2011. Net interest income Noninterest income Noninterest expense Net income1) Pro forma earnings per share1) Basic Diluted 1) Year Ended June 30, 2012 2011 $ 14,234 $ 14,697 5,542 14,390 3,990 5,991 15,302 3,850 $ 1.07 $ 0.99 1.02 0.99 Significant assumptions utilized include the acquisition cost noted above, amortization/accretion of interest rate fair value adjustments, amortization of the core deposit intangible asset and a 25% effective tax rate. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued NOTE 17: Business Combination – continued Information about the Sterling loan portfolio to be acquired as of June 30, 2012 is as follows (in thousands): Contractually required principal and interest at acquisition $ 46,404 Contractual cash flows not expected to be collected (nonaccretable discount) Expected cash flows at acquisition Interest component of expected cash flows (accretable discount) (561) 45,843 (1,252) Fair value of acquired loans $ 44,591 The core deposit intangible asset that will be recognized as part of the business combination will amount to approximately $1.1 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes. The fair value of savings and transaction deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity. Direct costs related to the Sterling acquisition will be expensed as incurred in the year ended June 30, 2013. These merger and acquisition integration expenses will include salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. The following table presents an unaudited pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on June 30, 2012 (in thousands). The pro forma balance sheet does not necessarily reflect the combined balance sheet that will result as of the closing of the branch acquisition of the Sterling branches. 20,641 229,042 $ 20,561 7,646 219,397 18,377 46,404 (561) 45,843 (1,252) Information about the Sterling loan portfolio to be acquired as of June 30, 2012 is as follows (in thousands): ASSETS $ Contractually required principal and interest at acquisition Contractual cash flows not expected to be collected (nonaccretable discount) Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Expected cash flows at acquisition Interest component of expected cash flows (accretable discount) Total assets Fair value of acquired loans LIABILITIES AND SHAREHOLDERS' EQUITY $ 515,664 $ 44,591 Deposits Other liabilities Equity The core deposit intangible asset that will be recognized as part of the business combination will amount to approximately $1.1 million and will be amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The goodwill, which will not be amortized for financial statement purposes, will be deductible for tax purposes. 408,354 53,660 53,650 $ Total liabilities and shareholders' equity $ 515,664 The fair value of savings and transaction deposit accounts acquired from Sterling was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity. The following table presents unaudited pro forma results of operations as if the acquisition of the Sterling branches had occurred on July 1, 2010 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. Merger and acquisition integration costs of $850 thousand that we expect to be incurred during the year ended June 30, 2013 are reflected in the unaudited pro forma amounts for the year ended June 30, 2011. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of the Sterling branches at July 1, 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the years ended June 30, 2012 and 2011. Direct costs related to the Sterling acquisition will be expensed as incurred in the year ended June 30, 2013. These merger and acquisition integration expenses will include salaries and benefits, technology and communications, occupancy and equipment, professional services and other noninterest expenses. The following table presents an unaudited pro forma balance sheet of the Company as if the acquisition of the Sterling branches had occurred on June 30, 2012 (in thousands). The pro forma balance sheet does not necessarily reflect the combined balance sheet that will result as of the closing of the branch acquisition of the Sterling branches. Year Ended June 30, 2012 2011 ASSETS Cash and cash equivalents Loans receivable Premises and equipment Goodwill and intangible assets Investment securities Other assets Total assets Deposits Other liabilities Equity LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities and shareholders' equity $ 20,641 229,042 20,561 7,646 219,397 18,377 $ 515,664 $ 408,354 53,660 53,650 $ 515,664 The following table presents unaudited pro forma results of operations as if the acquisition of the Sterling branches had occurred on July 1, 2010 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and amortization of the core deposit intangible asset. Merger and acquisition integration costs of $850 thousand that we expect to be incurred during the year ended June 30, 2013 are reflected in the unaudited pro forma amounts for the year ended June 30, 2011. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company purchased and assumed the assets and liabilities of the Sterling branches at July 1, 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the years ended June 30, 2012 and 2011. Year Ended June 30, 2012 2011 $ 14,234 5,542 14,390 $ 14,697 5,991 15,302 3,990 3,850 $ 1.07 1.02 $ 0.99 0.99 Net interest income Noninterest income Noninterest expense Net income1) Pro forma earnings per share1) Basic Diluted $ 14,234 5,542 14,390 $ 14,697 5,991 15,302 3,990 3,850 $ 1.07 1.02 $ 0.99 0.99 Net interest income Noninterest income Noninterest expense Net income1) Pro forma earnings per share1) Basic Diluted -50- -51- -50- -51- 1) Significant assumptions utilized the acquisition cost noted above, amortization/accretion of interest rate fair value adjustments, amortization of the core deposit intangible asset and a 25% effective tax rate. include 1) Significant assumptions utilized the acquisition cost noted above, amortization/accretion of interest rate fair value adjustments, amortization of the core deposit intangible asset and a 25% effective tax rate. include EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 18: Employee Benefits Profit Sharing Plan NOTE 18: Employee Benefits – continued NOTE 18: Employee Benefits Employee Stock Ownership Plan Profit Sharing Plan NOTE 18: Employee Benefits – continued Employee Stock Ownership Plan The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution, limited to a maximum of 15% of qualified employees’ salaries, is determined by the Board of Directors. Profit sharing expense was $158,000 and $162,000 for the years ended June 30, 2012 and 2011, respectively. The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board of Directors, the Company may match up to 50% of participants’ contributions up to a maximum of 4% of participants’ salaries. For the years ended June 30, 2012 and 2011, the Company’s match totaled $54,000 and $53,000, respectively. Deferred Compensation Plans The Company has entered into deferred compensation contracts with current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended June 30, 2012 and 2011, the total expense was $184,000 and $104,000, respectively. The Company has recorded a liability for the deferred compensation plan of $1,045,000 and $946,000 at June 30, 2012 and 2011, respectively, which is included in the balance of accrued expenses and other liabilities. The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution, limited to a maximum of 15% of qualified employees’ salaries, is determined by the Board of Directors. Profit sharing expense was $158,000 and $162,000 for the years ended June 30, 2012 and 2011, respectively. The Company has established an ESOP for eligible employees who meet certain age and service requirements. At inception, in April 2000, the ESOP borrowed $368,000 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock, at $8 per share, in the initial offering. This borrowing was fully paid on December 31, 2009. Again, in conjunction with the subsequent offering in April 2010, the ESOP borrowed $1,971,420 from Eagle Bancorp Montana, Inc. and used the funds to purchase 197,142 shares of common stock, at $10 per share. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a twelve-year term and bears interest at 8%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan. The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board of Directors, the Company may match up to 50% of participants’ contributions up to a maximum of 4% of participants’ salaries. For the years ended June 30, 2012 and 2011, the Company’s match totaled $54,000 and $53,000, respectively. Deferred Compensation Plans Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. The Company has entered into deferred compensation contracts with current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended June 30, 2012 and 2011, the total expense was $184,000 and $104,000, respectively. The Company has recorded a liability for the deferred compensation plan of $1,045,000 and $946,000 at June 30, 2012 and 2011, respectively, which is included in the balance of accrued expenses and other liabilities. Total ESOP expenses of $120,000 and $121,000 were recognized in fiscal 2012 and 2011, respectively. 16,616 shares were released and allocated to participants during the year ended June 30, 2012. The cost of the 155,601 ESOP shares ($1,556,000 at June 30, 2012) that have not yet been allocated or committed to be released to participants is deducted from stockholders’ equity. The fair value of these shares was approximately $1,556,010 at that date. Stock Incentive Plan Stock Incentive Plan The Company adopted the Stock Incentive Plan (“the Plan”) on November 1, 2011. The Plan provides for different types of awards including stock options, restricted stock and performance shares. Under the Plan, 98,571 shares of restricted stock were granted to directors and certain officers during fiscal 2012. The Company expects the total expense over the five year vesting period to approximate $984,000. $131,000 was recognized as an expense during the fiscal year 2012 and is included in salaries and employee benefits in the consolidated statements of income. The remaining expense of approximately $853,000 will be fully recognized by November 1, 2016. These shares of restricted stock vest in equal installments over five years beginning one year from the grant date, November 1, 2011. There were no stock options granted under the Plan during fiscal 2011. NOTE 19: Financial Instruments and Off-Balance-Sheet Activities NOTE 19: Financial Instruments and Off-Balance-Sheet Activities All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market. Commitments to extend credit – In response to marketplace demands, the Company routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Company becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor. All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market. Commitments to extend credit – In response to marketplace demands, the Company routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Company becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor. -52- -53- -52- -53- The Company has established an ESOP for eligible employees who meet certain age and service requirements. At inception, in April 2000, the ESOP borrowed $368,000 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock, at $8 per share, in the initial offering. This borrowing was fully paid on December 31, 2009. Again, in conjunction with the subsequent offering in April 2010, the ESOP borrowed $1,971,420 from Eagle Bancorp Montana, Inc. and used the funds to purchase 197,142 shares of common stock, at $10 per share. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a twelve-year term and bears interest at 8%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan. Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. Total ESOP expenses of $120,000 and $121,000 were recognized in fiscal 2012 and 2011, respectively. 16,616 shares were released and allocated to participants during the year ended June 30, 2012. The cost of the 155,601 ESOP shares ($1,556,000 at June 30, 2012) that have not yet been allocated or committed to be released to participants is deducted from stockholders’ equity. The fair value of these shares was approximately $1,556,010 at that date. The Company adopted the Stock Incentive Plan (“the Plan”) on November 1, 2011. The Plan provides for different types of awards including stock options, restricted stock and performance shares. Under the Plan, 98,571 shares of restricted stock were granted to directors and certain officers during fiscal 2012. The Company expects the total expense over the five year vesting period to approximate $984,000. $131,000 was recognized as an expense during the fiscal year 2012 and is included in salaries and employee benefits in the consolidated statements of income. The remaining expense of approximately $853,000 will be fully recognized by November 1, 2016. These shares of restricted stock vest in equal installments over five years beginning one year from the grant date, November 1, 2011. There were no stock options granted under the Plan during fiscal 2011. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 18: Employee Benefits Profit Sharing Plan NOTE 18: Employee Benefits – continued NOTE 18: Employee Benefits Employee Stock Ownership Plan Profit Sharing Plan NOTE 18: Employee Benefits – continued Employee Stock Ownership Plan The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution, limited to a maximum of 15% of qualified employees’ salaries, is determined by the Board of Directors. Profit sharing expense was $158,000 and $162,000 for the years ended June 30, 2012 and 2011, respectively. The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board of Directors, the Company may match up to 50% of participants’ contributions up to a maximum of 4% of participants’ salaries. For the years ended June 30, 2012 and 2011, the Company’s match totaled $54,000 and $53,000, respectively. Deferred Compensation Plans The Company has entered into deferred compensation contracts with current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended June 30, 2012 and 2011, the total expense was $184,000 and $104,000, respectively. The Company has recorded a liability for the deferred compensation plan of $1,045,000 and $946,000 at June 30, 2012 and 2011, respectively, which is included in the balance of accrued expenses and other liabilities. The Company provides a noncontributory profit sharing plan for eligible employees who have completed one year of service. The amount of the Company’s annual contribution, limited to a maximum of 15% of qualified employees’ salaries, is determined by the Board of Directors. Profit sharing expense was $158,000 and $162,000 for the years ended June 30, 2012 and 2011, respectively. The Company has established an ESOP for eligible employees who meet certain age and service requirements. At inception, in April 2000, the ESOP borrowed $368,000 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock, at $8 per share, in the initial offering. This borrowing was fully paid on December 31, 2009. Again, in conjunction with the subsequent offering in April 2010, the ESOP borrowed $1,971,420 from Eagle Bancorp Montana, Inc. and used the funds to purchase 197,142 shares of common stock, at $10 per share. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a twelve-year term and bears interest at 8%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan. The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board of Directors, the Company may match up to 50% of participants’ contributions up to a maximum of 4% of participants’ salaries. For the years ended June 30, 2012 and 2011, the Company’s match totaled $54,000 and $53,000, respectively. Deferred Compensation Plans Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. The Company has entered into deferred compensation contracts with current key employees. The contracts provide fixed benefits payable in equal annual installments upon retirement. The Company purchased life insurance contracts that may be used to fund the payments. The charge to expense is based on the present value computations of anticipated liabilities. For the years ended June 30, 2012 and 2011, the total expense was $184,000 and $104,000, respectively. The Company has recorded a liability for the deferred compensation plan of $1,045,000 and $946,000 at June 30, 2012 and 2011, respectively, which is included in the balance of accrued expenses and other liabilities. Total ESOP expenses of $120,000 and $121,000 were recognized in fiscal 2012 and 2011, respectively. 16,616 shares were released and allocated to participants during the year ended June 30, 2012. The cost of the 155,601 ESOP shares ($1,556,000 at June 30, 2012) that have not yet been allocated or committed to be released to participants is deducted from stockholders’ equity. The fair value of these shares was approximately $1,556,010 at that date. The Company has established an ESOP for eligible employees who meet certain age and service requirements. At inception, in April 2000, the ESOP borrowed $368,000 from Eagle Bancorp and used the funds to purchase 46,006 shares of common stock, at $8 per share, in the initial offering. This borrowing was fully paid on December 31, 2009. Again, in conjunction with the subsequent offering in April 2010, the ESOP borrowed $1,971,420 from Eagle Bancorp Montana, Inc. and used the funds to purchase 197,142 shares of common stock, at $10 per share. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan that has a twelve-year term and bears interest at 8%. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan. Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated to other participants in the same proportion as contributions. Total ESOP expenses of $120,000 and $121,000 were recognized in fiscal 2012 and 2011, respectively. 16,616 shares were released and allocated to participants during the year ended June 30, 2012. The cost of the 155,601 ESOP shares ($1,556,000 at June 30, 2012) that have not yet been allocated or committed to be released to participants is deducted from stockholders’ equity. The fair value of these shares was approximately $1,556,010 at that date. Stock Incentive Plan Stock Incentive Plan The Company adopted the Stock Incentive Plan (“the Plan”) on November 1, 2011. The Plan provides for different types of awards including stock options, restricted stock and performance shares. Under the Plan, 98,571 shares of restricted stock were granted to directors and certain officers during fiscal 2012. The Company expects the total expense over the five year vesting period to approximate $984,000. $131,000 was recognized as an expense during the fiscal year 2012 and is included in salaries and employee benefits in the consolidated statements of income. The remaining expense of approximately $853,000 will be fully recognized by November 1, 2016. These shares of restricted stock vest in equal installments over five years beginning one year from the grant date, November 1, 2011. There were no stock options granted under the Plan during fiscal 2011. The Company adopted the Stock Incentive Plan (“the Plan”) on November 1, 2011. The Plan provides for different types of awards including stock options, restricted stock and performance shares. Under the Plan, 98,571 shares of restricted stock were granted to directors and certain officers during fiscal 2012. The Company expects the total expense over the five year vesting period to approximate $984,000. $131,000 was recognized as an expense during the fiscal year 2012 and is included in salaries and employee benefits in the consolidated statements of income. The remaining expense of approximately $853,000 will be fully recognized by November 1, 2016. These shares of restricted stock vest in equal installments over five years beginning one year from the grant date, November 1, 2011. There were no stock options granted under the Plan during fiscal 2011. NOTE 19: Financial Instruments and Off-Balance-Sheet Activities NOTE 19: Financial Instruments and Off-Balance-Sheet Activities All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market. Commitments to extend credit – In response to marketplace demands, the Company routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Company becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor. All financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and forward delivery commitments for the sale of whole loans to the secondary market. Commitments to extend credit – In response to marketplace demands, the Company routinely makes commitments to extend credit for fixed rate and variable rate loans with or without rate lock guarantees. When rate lock guarantees are made to customers, the Company becomes subject to market risk for changes in interest rates that occur between the rate lock date and the date that a firm commitment to purchase the loan is made by a secondary market investor. -52- -53- -52- -53- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 19: Financial Instruments and Off-Balance-Sheet Activities – continued NOTE 20: Derivatives and Hedging Activities NOTE 19: Financial Instruments and Off-Balance-Sheet Activities – continued NOTE 20: Derivatives and Hedging Activities Generally, as interest rates increase, the market value of the loan commitment goes down. The Interest rate contracts Generally, as interest rates increase, the market value of the loan commitment goes down. The Interest rate contracts opposite effect takes place when interest rates decline. Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Company’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Company’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months. The notional amounts of the Company’s commitments to extend credit at fixed and variable interest rates were approximately $6,482,000 and $5,016,000 at June 30, 2012 and 2011, respectively. Fixed rate commitments are extended at rates ranging from 2.50% to 6.63% and 3.75% to 6.75% at June 30, 2012 and 2011, respectively. The Company has lines of credit representing credit risk of approximately $59,972,000 and $66,460,000 at June 30, 2012 and 2011, respectively, of which approximately $27,052,000 and $34,406,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has credit cards issued representing credit risk of approximately $832,000 and $652,000 at June 30, 2012 and 2011, respectively, of which approximately $41,000 and $43,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has letters of credits issued representing credit risk of approximately $2,712,000 and $5,365,000 at June 30, 2012 and 2011, respectively. Derivative 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. 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 $6,482,000 and $4,076,000 at June 30, 2012 and 2011, 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. opposite effect takes place when interest rates decline. The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. The derivatives and hedging accounting guidance (FASB ASC 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge. Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Company’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Company’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers. The notional amounts of the Company’s commitments to extend credit at fixed and variable interest rates were approximately $6,482,000 and $5,016,000 at June 30, 2012 and 2011, respectively. Fixed rate commitments are extended at rates ranging from 2.50% to 6.63% and 3.75% to 6.75% at June 30, 2012 and 2011, respectively. The Company has lines of credit representing credit risk of approximately $59,972,000 and $66,460,000 at June 30, 2012 and 2011, respectively, of which approximately $27,052,000 and $34,406,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has credit cards issued representing credit risk of approximately $832,000 and $652,000 at June 30, 2012 and 2011, respectively, of which approximately $41,000 and $43,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has letters of credits issued representing credit risk of approximately $2,712,000 and $5,365,000 at June 30, 2012 and 2011, respectively. If certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. The hedge documentation specifies the terms of the hedged item and the interest rate swap. The documentation also indicates that the derivative is hedging a fixed-rate item, that the hedge exposure is to the changes in the fair value of the hedged item, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments. Derivative 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. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap. The fixed rate loan hedged has an original maturity of 20 years and is not callable. This loan is hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At June 30, 2012, the loan had an outstanding principal balance of $11,536,000, and the interest rate swap had a notional value of $11,536,000. 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 $6,482,000 and $4,076,000 at June 30, 2012 and 2011, 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. The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. The derivatives and hedging accounting guidance (FASB ASC 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers. If certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. The hedge documentation specifies the terms of the hedged item and the interest rate swap. The documentation also indicates that the derivative is hedging a fixed-rate item, that the hedge exposure is to the changes in the fair value of the hedged item, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap. The fixed rate loan hedged has an original maturity of 20 years and is not callable. This loan is hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At June 30, 2012, the loan had an outstanding principal balance of $11,536,000, and the interest rate swap had a notional value of $11,536,000. -54- -55- -54- -55- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 19: Financial Instruments and Off-Balance-Sheet Activities – continued NOTE 20: Derivatives and Hedging Activities NOTE 19: Financial Instruments and Off-Balance-Sheet Activities – continued NOTE 20: Derivatives and Hedging Activities Generally, as interest rates increase, the market value of the loan commitment goes down. The Interest rate contracts Generally, as interest rates increase, the market value of the loan commitment goes down. The Interest rate contracts opposite effect takes place when interest rates decline. Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Company’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Company’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months. The notional amounts of the Company’s commitments to extend credit at fixed and variable interest rates were approximately $6,482,000 and $5,016,000 at June 30, 2012 and 2011, respectively. Fixed rate commitments are extended at rates ranging from 2.50% to 6.63% and 3.75% to 6.75% at June 30, 2012 and 2011, respectively. The Company has lines of credit representing credit risk of approximately $59,972,000 and $66,460,000 at June 30, 2012 and 2011, respectively, of which approximately $27,052,000 and $34,406,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has credit cards issued representing credit risk of approximately $832,000 and $652,000 at June 30, 2012 and 2011, respectively, of which approximately $41,000 and $43,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has letters of credits issued representing credit risk of approximately $2,712,000 and $5,365,000 at June 30, 2012 and 2011, respectively. Derivative 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. 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 $6,482,000 and $4,076,000 at June 30, 2012 and 2011, 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. opposite effect takes place when interest rates decline. The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. The derivatives and hedging accounting guidance (FASB ASC 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge. Commitments to extend credit are agreements to lend to a customer as long as the borrower satisfies the Company’s underwriting standards and related provisions of the borrowing agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Collateral is required for substantially all loans, and normally consists of real property. The Company’s experience has been that substantially all loan commitments are completed or terminated by the borrower within 3 to 12 months. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers. The notional amounts of the Company’s commitments to extend credit at fixed and variable interest rates were approximately $6,482,000 and $5,016,000 at June 30, 2012 and 2011, respectively. Fixed rate commitments are extended at rates ranging from 2.50% to 6.63% and 3.75% to 6.75% at June 30, 2012 and 2011, respectively. The Company has lines of credit representing credit risk of approximately $59,972,000 and $66,460,000 at June 30, 2012 and 2011, respectively, of which approximately $27,052,000 and $34,406,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has credit cards issued representing credit risk of approximately $832,000 and $652,000 at June 30, 2012 and 2011, respectively, of which approximately $41,000 and $43,000 had been drawn at June 30, 2012 and 2011, respectively. The Company has letters of credits issued representing credit risk of approximately $2,712,000 and $5,365,000 at June 30, 2012 and 2011, respectively. If certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. The hedge documentation specifies the terms of the hedged item and the interest rate swap. The documentation also indicates that the derivative is hedging a fixed-rate item, that the hedge exposure is to the changes in the fair value of the hedged item, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments. Derivative 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. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap. The fixed rate loan hedged has an original maturity of 20 years and is not callable. This loan is hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At June 30, 2012, the loan had an outstanding principal balance of $11,536,000, and the interest rate swap had a notional value of $11,536,000. 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 $6,482,000 and $4,076,000 at June 30, 2012 and 2011, 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. The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company entered into an interest rate swap agreement on August 27, 2010 with a third party to manage interest rate risk associated with a fixed-rate loan. The interest rate swap agreement effectively converted the loan’s fixed rate into a variable rate. The derivatives and hedging accounting guidance (FASB ASC 815-10) requires that the Company recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with this guidance, the Company designates the interest rate swap on this fixed-rate loan as a fair value hedge. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers. If certain hedging criteria specified in derivatives and hedging accounting guidance are met, including testing for hedge effectiveness, hedge accounting may be applied. The hedge effectiveness assessment methodologies for similar hedges are performed in a similar manner and are used consistently throughout the hedging relationships. The hedge documentation specifies the terms of the hedged item and the interest rate swap. The documentation also indicates that the derivative is hedging a fixed-rate item, that the hedge exposure is to the changes in the fair value of the hedged item, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to variable-rate interest payments. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items in the same line item—noninterest income—as the offsetting loss or gain on the related interest rate swap. The fixed rate loan hedged has an original maturity of 20 years and is not callable. This loan is hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount, maturity, and fixed rate coupons. The swap is not callable. At June 30, 2012, the loan had an outstanding principal balance of $11,536,000, and the interest rate swap had a notional value of $11,536,000. -54- -55- -54- -55- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 20: Derivatives and Hedging Activities – continued Interest rate contracts – continued Effect of Derivative Instruments on Statement of Financial Condition Fair Value of Derivative Instruments Asset Derivatives Liability Derivatives NOTE 20: Derivatives and Hedging Activities – continued NOTE 20: Derivatives and Hedging Activities – continued Interest rate contracts – continued Forward delivery commitments – continued Refer to Note 19 for additional information regarding the Company’s use of derivative loan commitments. These derivative instruments are not designated as hedging instruments. Asset Derivatives Liability Derivatives Effect of Derivative Instruments on Statement of Financial Condition Fair Value of Derivative Instruments (In Thousands) June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011 (In Thousands) June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designed as fair value hedging instruments under ASC 815 Interest rate contracts $ - Other Assets $ 650 Other Liabilities $ 1,054 n/a $ - Change in fair value of financial instrument being hedged under ASC 815 Interest rate contracts (In Thousands) Loans $ 836 Loans $ (452) n/a $ - n/a $ - Effect of Derivative Instruments on Statement of Income For the Twelve Months Ended June 30, 2012 and 2011 Derivatives Designated as Hedging Instruments Under ASC 815 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative 2012 2011 Interest rate contracts Noninterest income $ (417) $ 198 Forward delivery commitments The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to interest-rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses in the items hedged are deferred and recognized in other comprehensive income until the commitments are completed. At the completion of the commitments the gains and losses are recognized in the Company’s income statement. As of June 30, 2012 and 2011, the Company had entered into commitments to deliver approximately $10,505,000 and $1,779,000 respectively, in loans to various investors, all at fixed interest rates ranging from 2.63% to 3.88 % and 3.50% to 4.75% at June 30, 2012 and 2011, respectively. The Company had approximately $192,000 and $18,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2012 and 2011, respectively. The fair value of such commitments is insignificant. The Company did not have any gains or losses reclassified into earnings as a result of the ineffectiveness of its hedging activities. The Company considers its hedging activities to be highly effective. The Company did not have any gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time frame as of June 30, 2012. -56- NOTE 21: Fair Value Disclosures Fair Value Fair Value Fair Value Balance Sheet Location Balance Sheet Location Balance Sheet Location Derivatives designed as fair value hedging instruments under ASC 815 Interest rate contracts Balance Sheet Location 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 Other principal market for the asset or liability or, in the absence of a principal market, the most Assets 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 Loans 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. Change in fair value of financial instrument being hedged under ASC 815 Interest rate contracts Effect of Derivative Instruments on Statement of Income For the Twelve Months Ended June 30, 2012 and 2011 Other Liabilities $ - $ - $ $ Loans 1,054 $ (452) $ 836 650 n/a n/a n/a Fair Value $ - $ - 198 2011 (417) $ $ (In Thousands) Noninterest income Interest rate contracts Forward delivery commitments Derivatives Designated as Hedging Instruments Under ASC 815 Location of Gain or (Loss) Recognized in Income on Derivative Amount of FASB ASC 820 requires the use of valuation techniques that are consistent with the market Gain or (Loss) approach, the income approach and/or the cost approach. The market approach uses prices and Recognized in other relevant information generated by market transactions involving identical or comparable Income on Derivative assets and liabilities. The income approach uses valuation techniques to convert future amounts, 2012 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. As of June 30, 2012 and 2011, the Company had entered into commitments to deliver approximately $10,505,000 and $1,779,000 respectively, in loans to various investors, all at fixed interest rates ranging from 2.63% to 3.88 % and 3.50% to 4.75% at June 30, 2012 and 2011, respectively. The Company had approximately $192,000 and $18,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2012 and 2011, that the reporting entity has the ability to access at the measurement date. respectively. The fair value of such commitments is insignificant. The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to interest-rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses in the items hedged are deferred and recognized in other comprehensive income until the commitments are completed. At the completion of the commitments the gains and losses are recognized in the Company’s income statement. Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities 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 The Company did not have any gains or losses reclassified into earnings as a result of the assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities ineffectiveness of its hedging activities. The Company considers its hedging activities to be in markets that are not active, inputs other than quoted prices that are observable for the asset highly effective. 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 The Company did not have any gains or losses reclassified into earnings as a result of the observable market data by correlation or other means. discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time frame as of June 30, market participants would use in pricing the assets or liabilities. 2012. Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that The fair value hierarchy is as follows: -57- -56- -57- NOTE 20: Derivatives and Hedging Activities – continued Forward delivery commitments – continued Refer to Note 19 for additional information regarding the Company’s use of derivative loan commitments. These derivative instruments are not designated as hedging instruments. NOTE 21: 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. 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. Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 20: Derivatives and Hedging Activities – continued Interest rate contracts – continued NOTE 20: Derivatives and Hedging Activities – continued NOTE 20: Derivatives and Hedging Activities – continued Interest rate contracts – continued Forward delivery commitments – continued (In Thousands) June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011 (In Thousands) June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011 Refer to Note 19 for additional information regarding the Company’s use of derivative loan commitments. These derivative instruments are not designated as hedging instruments. Asset Derivatives Liability Derivatives Effect of Derivative Instruments on Statement of Financial Condition Fair Value of Derivative Instruments NOTE 21: Fair Value Disclosures Fair Value Fair Value Fair Value Balance Sheet Location Balance Sheet Location Balance Sheet Location Derivatives designed as fair value hedging instruments under ASC 815 Interest rate contracts Balance Sheet Location 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 Other principal market for the asset or liability or, in the absence of a principal market, the most Assets 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 Loans 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. Change in fair value of financial instrument being hedged under ASC 815 Interest rate contracts Effect of Derivative Instruments on Statement of Income For the Twelve Months Ended June 30, 2012 and 2011 Other Liabilities $ - $ - $ $ Loans 1,054 $ (452) $ 836 650 n/a n/a n/a Fair Value $ - $ - 198 2011 (417) $ $ (In Thousands) Noninterest income Interest rate contracts Forward delivery commitments Derivatives Designated as Hedging Instruments Under ASC 815 Location of Gain or (Loss) Recognized in Income on Derivative Amount of FASB ASC 820 requires the use of valuation techniques that are consistent with the market Gain or (Loss) approach, the income approach and/or the cost approach. The market approach uses prices and Recognized in other relevant information generated by market transactions involving identical or comparable Income on Derivative assets and liabilities. The income approach uses valuation techniques to convert future amounts, 2012 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. As of June 30, 2012 and 2011, the Company had entered into commitments to deliver approximately $10,505,000 and $1,779,000 respectively, in loans to various investors, all at fixed interest rates ranging from 2.63% to 3.88 % and 3.50% to 4.75% at June 30, 2012 and 2011, respectively. The Company had approximately $192,000 and $18,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2012 and 2011, that the reporting entity has the ability to access at the measurement date. respectively. The fair value of such commitments is insignificant. The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to interest-rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses in the items hedged are deferred and recognized in other comprehensive income until the commitments are completed. At the completion of the commitments the gains and losses are recognized in the Company’s income statement. Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities 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 The Company did not have any gains or losses reclassified into earnings as a result of the assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities ineffectiveness of its hedging activities. The Company considers its hedging activities to be in markets that are not active, inputs other than quoted prices that are observable for the asset highly effective. 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 The Company did not have any gains or losses reclassified into earnings as a result of the observable market data by correlation or other means. discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time frame as of June 30, market participants would use in pricing the assets or liabilities. 2012. Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that The fair value hierarchy is as follows: Effect of Derivative Instruments on Statement of Financial Condition Fair Value of Derivative Instruments Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value $ - $ 650 Liabilities $ 1,054 n/a $ - Other Assets Other Derivatives designed as fair value hedging instruments under ASC 815 Interest rate contracts Change in fair value of financial instrument being hedged under ASC 815 (In Thousands) Interest rate contracts Loans $ 836 Loans $ (452) n/a $ - n/a $ - Effect of Derivative Instruments on Statement of Income For the Twelve Months Ended June 30, 2012 and 2011 Derivatives Designated as Hedging Instruments Under ASC 815 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative 2012 2011 Interest rate contracts Noninterest income $ (417) $ 198 Forward delivery commitments The Company uses mandatory sell forward delivery commitments to sell whole loans. These commitments are also used as a hedge against exposure to interest-rate risks resulting from rate locked loan origination commitments on certain mortgage loans held-for-sale. Gains and losses in the items hedged are deferred and recognized in other comprehensive income until the commitments are completed. At the completion of the commitments the gains and losses are recognized in the Company’s income statement. As of June 30, 2012 and 2011, the Company had entered into commitments to deliver approximately $10,505,000 and $1,779,000 respectively, in loans to various investors, all at fixed interest rates ranging from 2.63% to 3.88 % and 3.50% to 4.75% at June 30, 2012 and 2011, respectively. The Company had approximately $192,000 and $18,000 of gains deferred as a result of the forward delivery commitments entered into as of June 30, 2012 and 2011, respectively. The fair value of such commitments is insignificant. The Company did not have any gains or losses reclassified into earnings as a result of the ineffectiveness of its hedging activities. The Company considers its hedging activities to be highly effective. 2012. The Company did not have any gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur by the end of the originally specified time frame as of June 30, NOTE 20: Derivatives and Hedging Activities – continued Forward delivery commitments – continued Refer to Note 19 for additional information regarding the Company’s use of derivative loan commitments. These derivative instruments are not designated as hedging instruments. NOTE 21: 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. 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. Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. -56- -57- -56- -57- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued 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. Loan Subject to Fair Value Hedge – The Company has one loan that is carried at fair value subject to a fair value hedge. Fair value is determined utilizing valuation models that consider the scheduled cash flows through anticipated maturity and is considered a Level 3 input. Derivative financial instruments – Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. These instruments are valued using Level 3 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. the reasonableness of its prices and valuation techniques, there is not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. the Company utilizes counterparties’ valuations Although to assess NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): 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. June 30, 2012 Financial Assets: Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value 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 Available for sale securities 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. U.S. Government and agency $ Municipal obligations Corporate obligations Available for Sale Securities – Securities classified as available for sale are reported at fair value Mortgage-backed securities utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value government backed measurements from an independent pricing service. The fair value measurements consider Private lable CMOs observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury CMOs - government backed yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things. Loan subject to fair value hedge Loans held-for-sale 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 Derivative financial instruments inputs based on internally customized discounting criteria. 21,055 42,060 3,945 - 6,847 169 15,201 12,372 10,613 6,847 169 15,201 - 10,613 - - - 12,372 - 21,055 42,060 3,945 - - - - - 1,054 1,054 - - - - - - $ $ - - Financial Liabilities: 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. June 30, 2011 Total Fair Value Level 3 Inputs Level 2 Inputs Level 1 Inputs Financial Assets: $ $ Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset Available for sale securities 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. - U.S. Government and agency $ - Municipal obligations - Corporate obligations - Mortgage-backed securities - government backed - Private lable CMOs - CMOs - government backed Loan Subject to Fair Value Hedge – The Company has one loan that is carried at fair value Loan subject to fair value hedge - subject to a fair value hedge. Fair value is determined utilizing valuation models that consider the scheduled cash flows through anticipated maturity and is considered a Level 3 input. - Loans held-for-sale - Derivative financial instruments Derivative financial instruments – Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. These instruments are valued using Level 3 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. the reasonableness of its prices and valuation techniques, there is not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. 26,208 39,186 6,216 - 6,372 291 24,427 - 1,784 - - - - - - - - 11,405 - 650 26,208 39,186 6,216 - 6,372 291 24,427 11,405 1,784 650 the Company utilizes counterparties’ valuations Although to assess EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): Financial Assets: Available for sale securities U.S. Government and agency $ Municipal obligations Corporate obligations Mortgage-backed securities government backed Private lable CMOs CMOs - government backed Loan subject to fair value hedge Loans held-for-sale Financial Liabilities: Financial Assets: Available for sale securities U.S. Government and agency $ Municipal obligations Corporate obligations Mortgage-backed securities government backed Private lable CMOs CMOs - government backed Loan subject to fair value hedge Loans held-for-sale Derivative financial instruments June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value - - - - - - - - - - - - - - - - - - - 21,055 $ 42,060 3,945 6,847 169 15,201 10,613 26,208 $ 39,186 6,216 6,372 291 24,427 1,784 - - - - - $ $ - - - - - - - - - - - - - - - 12,372 11,405 650 21,055 42,060 3,945 - 6,847 169 15,201 12,372 10,613 26,208 39,186 6,216 - 6,372 291 24,427 11,405 1,784 650 Derivative financial instruments 1,054 1,054 June 30, 2011 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value -58- -59- -58- -59- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): 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. June 30, 2012 Financial Assets: Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value 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 Available for sale securities 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. U.S. Government and agency $ Municipal obligations Corporate obligations Available for Sale Securities – Securities classified as available for sale are reported at fair value Mortgage-backed securities utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value government backed measurements from an independent pricing service. The fair value measurements consider Private lable CMOs observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury CMOs - government backed yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things. Loan subject to fair value hedge Loans held-for-sale 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 Derivative financial instruments inputs based on internally customized discounting criteria. 21,055 42,060 3,945 - 6,847 169 15,201 12,372 10,613 6,847 169 15,201 - 10,613 - - - 12,372 - 21,055 42,060 3,945 - - - - - 1,054 1,054 - - - - - - $ $ - - Financial Liabilities: 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. June 30, 2011 Total Fair Value Level 2 Inputs Level 3 Inputs Level 1 Inputs Financial Assets: $ $ Repossessed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset Available for sale securities 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. - U.S. Government and agency $ - Municipal obligations - Corporate obligations - Mortgage-backed securities - government backed - Private lable CMOs - CMOs - government backed Loan Subject to Fair Value Hedge – The Company has one loan that is carried at fair value Loan subject to fair value hedge - subject to a fair value hedge. Fair value is determined utilizing valuation models that consider the scheduled cash flows through anticipated maturity and is considered a Level 3 input. - Loans held-for-sale - Derivative financial instruments Derivative financial instruments – Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. These instruments are valued using Level 3 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. the reasonableness of its prices and valuation techniques, there is not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. 26,208 39,186 6,216 - 6,372 291 24,427 - 1,784 - - - - - - - - 11,405 - 650 26,208 39,186 6,216 - 6,372 291 24,427 11,405 1,784 650 the Company utilizes counterparties’ valuations Although to assess NOTE 21: Fair Value Disclosures – continued 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. Loan Subject to Fair Value Hedge – The Company has one loan that is carried at fair value subject to a fair value hedge. Fair value is determined utilizing valuation models that consider the scheduled cash flows through anticipated maturity and is considered a Level 3 input. Derivative financial instruments – Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. These instruments are valued using Level 3 inputs utilizing valuation models that consider: (a) time value, (b) volatility factors and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Although the Company utilizes counterparties’ valuations to assess the reasonableness of its prices and valuation techniques, there is not sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): Financial Assets: Available for sale securities U.S. Government and agency $ Municipal obligations Corporate obligations Mortgage-backed securities government backed Private lable CMOs CMOs - government backed Loan subject to fair value hedge Loans held-for-sale Financial Liabilities: Derivative financial instruments Financial Assets: Available for sale securities U.S. Government and agency $ Municipal obligations Corporate obligations Mortgage-backed securities government backed Private lable CMOs CMOs - government backed Loan subject to fair value hedge Loans held-for-sale Derivative financial instruments June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value - - - - - - - - - $ 21,055 42,060 3,945 $ - - - 6,847 169 15,201 - 10,613 - - - 12,372 - 21,055 42,060 3,945 - 6,847 169 15,201 12,372 10,613 - 1,054 1,054 June 30, 2011 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value - - - - - - - - - - $ 26,208 39,186 6,216 - 6,372 291 24,427 - 1,784 - $ - - - - - - - 11,405 - 650 26,208 39,186 6,216 - 6,372 291 24,427 11,405 1,784 650 -58- -59- -58- -59- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements June 30, 2012 and 2011 June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued The following tables present, for the years ended June 30, 2012 and 2011, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis. Year Ended June 30, 2012 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net (In thousands) Balance as of July 1, 2011 Balance as of June 30, 2012 Financial Assets (Liabilities): Loan subject to fair value hedge Derivative financial instruments $ 11,405 650 $ 1,287 (1,704) $ (320) - $ 12,372 (1,054) Year Ended June 30, 2011 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net (In thousands) Balance as of July 1, 2010 Balance as of June 30, 2011 Financial Assets: Loan subject to fair value hedge $ Derivative financial instruments - $ $ (452) 650 11,857 - $ 11,405 650 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 as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): Impaired loans Repossessed assets Impaired loans Repossessed assets June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value $ - - $ - 2,361 - 2,361 June 30, 2011 Level 2 Inputs Level 3 Inputs Total Fair Value $ - - $ 1,004 1,181 1,004 1,181 $ $ $ $ - - Level 1 Inputs - - -60- The following tables present, for the years ended June 30, 2012 and 2011, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis. During the year ended June 30, 2012, 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 $2,000 were reduced by specific valuation allowance allocations totaling $2,000 to a total reported fair value of $0 based on collateral valuations utilizing Level 3 valuation inputs. Year Ended June 30, 2012 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net FASB ASC Topic 825 requires disclosure of the fair value of financial instruments, both assets Balance and liabilities recognized and not recognized in the statement of financial position, for which it is as of practicable to estimate fair value. Below is a table that summarizes the fair market values of all July 1, 2011 financial instruments of the Company at June 30, 2012 and 2011, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments. 11,405 $ 650 Financial Assets (Liabilities): Loan subject to fair value hedge Derivative financial instruments 1,287 (1,704) (In thousands) (320) - $ $ $ The estimated 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 Balance assumptions and/or estimation methodologies may have a material effect on the estimated fair as of value amounts. July 1, 2010 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net Year Ended June 30, 2011 Balance as of June 30, 2012 12,372 (1,054) Balance as of June 30, 2011 Financial Assets: Loan subject to fair value hedge $ Level 1 Derivative financial instruments Inputs (Dollars in Thousands) (In thousands) - $ Level 2 Inputs June 30, 2012 (452) Level 3 650 Inputs $ Total 11,857 Estimated - Fair Value $ 11,405 Carrying 650 Amount 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). $ $ $ $ - 2,003 183,830 19,814 2,003 183,830 19,814 2,003 173,839 19,814 - - - - - The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation - inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): - 1,371 - 1,371 2,424 1,371 2,218 - 2,424 Financial Assets: Cash and cash equivalents FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other liabilities Advances from the FHLB & other borrowings Subordinated debentures Off-balance-sheet instruments Impaired loans Repossessed assets Forward loan sales commitments Commitments to extend credit Impaired loans Rate lock commitments Repossessed assets - - June 30, 2012 9,101 9,101 9,172 Level 2 - Inputs 82,613 - $ - - Level 3 Inputs 138,630 82,613 $ 5,809 - 2,361 44,310 4,196 June 30, 2011 44,310 4,196 Total Fair Value 138,630 81,359 - 2,361 5,809 42,696 5,155 Level 2 Inputs - - - - - $ Level 3 Inputs - - $ - 1,004 1,181 Total Fair Value 1,004 1,181 - - - 138,630 - $ 5,809 - - - - $ Level 1 - Inputs - - - - - Level 1 - Inputs - - - - $ $ -61- -60- During the year ended June 30, 2012, 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 $2,000 were reduced by specific valuation allowance allocations totaling $2,000 to a total reported fair value of $0 based on collateral valuations utilizing Level 3 valuation inputs. 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 June 30, 2012 and 2011, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments. The estimated 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. June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Estimated Fair Value Carrying Amount Cash and cash equivalents $ 19,814 $ $ - $ 19,814 $ (Dollars in Thousands) Financial Assets: FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other Advances from the FHLB & other liabilities borrowings Subordinated debentures Off-balance-sheet instruments Forward loan sales commitments Commitments to extend credit Rate lock commitments 1,371 138,630 5,809 - - - - - - - - - -61- - - - - - - - - - - - - - 2,003 183,830 2,003 183,830 - 2,424 9,101 82,613 44,310 4,196 - - - - - 1,371 2,424 9,101 138,630 82,613 5,809 44,310 4,196 - - - 19,814 2,003 173,839 1,371 2,218 9,172 138,630 81,359 5,809 42,696 5,155 - - - EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements June 30, 2012 and 2011 June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued The following tables present, for the years ended June 30, 2012 and 2011, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis. Year Ended June 30, 2012 Total Realized/ Unrealized Gains Purchases, Balance (Losses) Included Sales, as of in Noninterest July 1, 2011 Income Issuances, and Settlements, net Balance as of June 30, 2012 (In thousands) Financial Assets (Liabilities): Loan subject to fair value hedge $ 11,405 $ 1,287 $ (320) $ 12,372 Derivative financial instruments 650 (1,704) - (1,054) Year Ended June 30, 2011 Total Realized/ Unrealized Gains Purchases, Balance (Losses) Included Sales, as of in Noninterest Issuances, and Balance as of July 1, 2010 Income Settlements, net June 30, 2011 (In thousands) Financial Assets: Loan subject to fair value hedge $ - $ (452) $ 11,857 $ Derivative financial instruments 650 - 11,405 650 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 as of June 30, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): Impaired loans Repossessed assets Impaired loans Repossessed assets June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value $ - $ 2,361 - 2,361 June 30, 2011 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value $ 1,004 $ 1,181 1,004 1,181 - - - - $ $ $ $ - - - - -60- The following tables present, for the years ended June 30, 2012 and 2011, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis. During the year ended June 30, 2012, 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 $2,000 were reduced by specific valuation allowance allocations totaling $2,000 to a total reported fair value of $0 based on collateral valuations utilizing Level 3 valuation inputs. Year Ended June 30, 2012 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net FASB ASC Topic 825 requires disclosure of the fair value of financial instruments, both assets Balance and liabilities recognized and not recognized in the statement of financial position, for which it is as of practicable to estimate fair value. Below is a table that summarizes the fair market values of all July 1, 2011 financial instruments of the Company at June 30, 2012 and 2011, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments. 11,405 $ 650 Financial Assets (Liabilities): Loan subject to fair value hedge Derivative financial instruments 1,287 (1,704) (In thousands) (320) - $ $ $ The estimated 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 Balance assumptions and/or estimation methodologies may have a material effect on the estimated fair as of value amounts. July 1, 2010 Total Realized/ Unrealized Gains (Losses) Included in Noninterest Income Purchases, Sales, Issuances, and Settlements, net Year Ended June 30, 2011 Balance as of June 30, 2012 12,372 (1,054) Balance as of June 30, 2011 Financial Assets: Loan subject to fair value hedge $ Level 1 Derivative financial instruments Inputs (Dollars in Thousands) (In thousands) - $ Level 2 Inputs June 30, 2012 (452) Level 3 650 Inputs $ Total 11,857 Estimated - Fair Value $ 11,405 Carrying 650 Amount 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). $ $ $ $ - 2,003 183,830 19,814 2,003 183,830 19,814 2,003 173,839 19,814 - - - - - The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of June 30, 2012 and 2011, segregated by the level of the valuation - inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands): - 1,371 - 1,371 2,424 1,371 2,218 - 2,424 Financial Assets: Cash and cash equivalents FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other liabilities Advances from the FHLB & other borrowings Subordinated debentures Off-balance-sheet instruments Impaired loans Repossessed assets Forward loan sales commitments Commitments to extend credit Impaired loans Rate lock commitments Repossessed assets - - June 30, 2012 9,101 9,101 9,172 Level 2 - Inputs 82,613 - $ - - Level 3 Inputs 138,630 82,613 Total Fair Value 138,630 81,359 - 2,361 $ 5,809 - 2,361 44,310 4,196 June 30, 2011 44,310 4,196 Level 2 Inputs - - - - - $ Level 3 Inputs - - $ - 1,004 1,181 Total Fair Value 1,004 1,181 - - - 5,809 42,696 5,155 138,630 - $ 5,809 - - - - $ Level 1 - Inputs - - - - - Level 1 - Inputs - - - - $ $ -61- -60- During the year ended June 30, 2012, 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 $2,000 were reduced by specific valuation allowance allocations totaling $2,000 to a total reported fair value of $0 based on collateral valuations utilizing Level 3 valuation inputs. 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 June 30, 2012 and 2011, followed by methods and assumptions that were used by the Company in estimating the fair value of the classes of financial instruments. The estimated 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. June 30, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Estimated Fair Value Carrying Amount (Dollars in Thousands) Financial Assets: Cash and cash equivalents FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other liabilities Advances from the FHLB & other borrowings Subordinated debentures Off-balance-sheet instruments Forward loan sales commitments Commitments to extend credit Rate lock commitments $ $ 19,814 - - 1,371 - - 138,630 - 5,809 - - - - -61- - - - - - - - - - - - - - $ $ - 2,003 183,830 $ 19,814 2,003 183,830 19,814 2,003 173,839 - 2,424 9,101 - 82,613 - 44,310 4,196 - - - 1,371 2,424 9,101 138,630 82,613 5,809 44,310 4,196 - - - 1,371 2,218 9,172 138,630 81,359 5,809 42,696 5,155 - - - EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued (Dollars in Thousands) Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Estimated Fair Value Carrying Amount June 30, 2011 Financial Assets: $ Cash and cash equivalents FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other liabilities Advances from the FHLB & other borrowings Subordinated debentures Off-balance-sheet instruments Forward loan sales commitments Commitments to extend credit Rate lock commitments $ 9,540 - - 1,558 - - 124,633 - 3,371 - - - - - - - - - - - - - - - - - $ $ - 2,003 192,361 $ 9,540 2,003 192,361 - 2,871 6,900 - 85,719 - 63,612 3,779 - - - 1,558 2,871 6,900 124,633 85,719 3,371 63,612 3,779 - - - 9,540 2,003 185,471 1,558 2,142 6,900 124,633 84,553 3,371 60,896 5,155 - - - The following methods and assumptions were used by the Company in estimating the fair value of the following classes of 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. Securities held to maturity – Securities classified as held to maturity are reported at amortized cost. 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. June 30, 2011 Level 2 Inputs Level 1 Inputs Level 3 Inputs Financial Assets: (Dollars in Thousands) Total Estimated Fair 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 Cash and cash equivalents generally reprice within the short term. FHLB stock Loans receivable, net Fair values are adjusted for credit risk based on assessment of risk identified with specific loans, Accrued interest on dividends and risk adjustments on the remaining portfolio based on credit loss experience. receivable Mortage servicing rights Assumptions regarding credit risk are judgmentally determined using specific borrower Cash surrender value of information, internal credit quality analysis, and historical information on segmented loan life insurance categories for non-specific borrowers. Financial Liabilities: 9,540 2,003 192,361 - 2,003 192,361 9,540 - - 1,558 2,871 - 2,871 1,558 - 6,900 6,900 - - - - - $ $ $ $ $ - - 9,540 2,003 185,471 1,558 2,142 6,900 Carrying Amount 124,633 - Deposits Cash surrender value of life insurance – The carrying amount for cash surrender value of life Time certificates of deposit insurance approximates fair value as policies are recorded at redemption value. Accrued expenses and other liabilities Mortgage servicing rights – The fair value of servicing rights was determined using discount Advances from the FHLB & rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, other borrowings depending on stratification of the specific right. The fair value was also adjusted for the affect of Subordinated debentures potential past dues and foreclosures. Off-balance-sheet instruments 124,633 85,719 63,612 3,779 - 85,719 63,612 3,779 3,371 3,371 - - - - - - 124,633 84,553 3,371 60,896 5,155 Forward loan sales commitments Deposits and time certificates of deposit – The fair value of deposits with no stated maturity, Commitments to extend credit such as checking, passbook, and money market, is equal to the amount payable on demand. The Rate lock commitments 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. - - - - - - - - - - - - The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. Advances from the FHLB & 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 June 30, 2012 and 2011, respectively if the borrowings repriced according to their stated terms. 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. - - - 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. Securities held to maturity – Securities classified as held to maturity are reported at amortized cost. 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. 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. 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. Mortgage servicing rights – The fair value of servicing rights was determined using discount rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. 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 & 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 June 30, 2012 and 2011, 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. Stock in the FHLB – The fair value of stock in the FHLB approximates redemption value. Stock in the FHLB – The fair value of stock in the FHLB approximates redemption value. -62- -63- -62- -63- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued NOTE 21: Fair Value Disclosures – continued Carrying Amount June 30, 2011 Level 2 Inputs Level 1 Inputs Level 3 Inputs Financial Assets: (Dollars in Thousands) Total Estimated Fair 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 Cash and cash equivalents generally reprice within the short term. FHLB stock Loans receivable, net Fair values are adjusted for credit risk based on assessment of risk identified with specific loans, Accrued interest on dividends and risk adjustments on the remaining portfolio based on credit loss experience. receivable Mortage servicing rights Assumptions regarding credit risk are judgmentally determined using specific borrower Cash surrender value of information, internal credit quality analysis, and historical information on segmented loan life insurance categories for non-specific borrowers. Financial Liabilities: 9,540 2,003 192,361 - 2,003 192,361 9,540 - - 1,558 2,871 - 2,871 1,558 - 6,900 6,900 - - - - - $ $ $ $ $ - - June 30, 2011 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Estimated Fair Value Carrying Amount Cash and cash equivalents $ 9,540 $ $ - $ 9,540 $ (Dollars in Thousands) Financial Assets: FHLB stock Loans receivable, net Accrued interest on dividends receivable Mortage servicing rights Cash surrender value of life insurance Financial Liabilities: Deposits Time certificates of deposit Accrued expenses and other liabilities Advances from the FHLB & other borrowings Subordinated debentures Off-balance-sheet instruments Forward loan sales commitments Commitments to extend credit Rate lock commitments 1,558 124,633 3,371 - - - - - - - - - - - - - - - - - - - - - - 2,003 192,361 2,003 192,361 - 2,871 6,900 85,719 63,612 3,779 - - - - - 1,558 2,871 6,900 124,633 85,719 3,371 63,612 3,779 - - - 9,540 2,003 185,471 1,558 2,142 6,900 124,633 84,553 3,371 60,896 5,155 - - - The following methods and assumptions were used by the Company in estimating the fair value of the following classes of 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. Securities held to maturity – Securities classified as held to maturity are reported at amortized cost. 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. 124,633 - Deposits Cash surrender value of life insurance – The carrying amount for cash surrender value of life Time certificates of deposit insurance approximates fair value as policies are recorded at redemption value. Accrued expenses and other liabilities Mortgage servicing rights – The fair value of servicing rights was determined using discount Advances from the FHLB & rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, other borrowings depending on stratification of the specific right. The fair value was also adjusted for the affect of Subordinated debentures potential past dues and foreclosures. Off-balance-sheet instruments 124,633 85,719 - 85,719 63,612 3,779 63,612 3,779 3,371 3,371 - - - - - - 124,633 84,553 3,371 60,896 5,155 Forward loan sales commitments Deposits and time certificates of deposit – The fair value of deposits with no stated maturity, Commitments to extend credit such as checking, passbook, and money market, is equal to the amount payable on demand. The Rate lock commitments 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. - - - - - - - - - - - - The following methods and assumptions were used by the Company in estimating the fair value of the following classes of financial instruments. Advances from the FHLB & 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 June 30, 2012 and 2011, respectively if the borrowings repriced according to their stated terms. 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 FHLB – The fair value of stock in the FHLB approximates redemption value. Stock in the FHLB – The fair value of stock in the FHLB approximates redemption value. 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. Securities held to maturity – Securities classified as held to maturity are reported at amortized cost. 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. 9,540 2,003 185,471 1,558 2,142 6,900 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. 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. Mortgage servicing rights – The fair value of servicing rights was determined using discount rates ranging from 9.0% to 20.0%, prepayment speeds ranging from 140% to 324% PSA, depending on stratification of the specific right. The fair value was also adjusted for the affect of potential past dues and foreclosures. 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 & 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 June 30, 2012 and 2011, 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. -62- -63- -62- -63- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 22: Condensed Parent Company Financial Statements NOTE 22: Condensed Parent Company Financial Statements – continued NOTE 22: Condensed Parent Company Financial Statements NOTE 22: Condensed Parent Company Financial Statements – continued Set forth below is the condensed statements of financial condition as of June 30, 2012 and 2011, of Eagle Bancorp Montana, Inc. together with the related condensed statements of income and cash flows for the years ended June 30, 2012 and 2011. Condensed Statements of Financial Condition (Dollars in Thousands) Assets Cash and cash equivalents Securities available for sale Investment in Eagle Bancorp Statutory Trust I Investment in American Federal Savings Bank Other assets Total assets 2012 2011 $ $ 2,500 12,290 155 43,714 341 337 14,230 155 42,744 253 $ 59,000 $ 57,719 Liabilities and stockholders' equity Accounts payable and accrued expenses Long-term subordinated debt Stockholders' Equity 195 5,155 53,650 79 5,155 52,485 Total liabilities and stockholders' equity $ 59,000 $ 57,719 Condensed Statements of Income (Dollars in Thousands) Interest income Interest expense Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributed earnings of American Federal Savings Bank Equity in undistributed earnings of American Federal Savings Bank Net income $ 2012 2011 $ 430 (96) (778) (444) (117) (327) 467 (191) (389) (113) (35) (78) 2,505 2,488 $ 2,178 $ 2,410 Set forth below is the condensed statements of financial condition as of June 30, 2012 and 2011, Condensed Statements of Cash Flow of Eagle Bancorp Montana, Inc. together with the related condensed statements of income and (Dollars in Thousands) cash flows for the years ended June 30, 2012 and 2011. 2012 2011 Condensed Statements of Financial Condition (Dollars in Thousands) $ 2,178 $ 2012 2,410 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of American Federal Savings Bank Cash and cash equivalents Other adjustments, net Securities available for sale Net cash used in operating activities Assets Investment in Eagle Bancorp Statutory Trust I Cash flows from investing activities Investment in American Federal Savings Bank Other assets Cash contribution from American Federal Savings Bank Cash contribution to American Federal Savings Bank Total assets Activity in available for sale securities Liabilities and stockholders' equity Sales Maturities, prepayments and calls Accounts payable and accrued expenses Purchases Long-term subordinated debt Net cash provided by investing activities Stockholders' Equity Condensed Statements of Income (Dollars in Thousands) Total liabilities and stockholders' equity Cash flows from financing activities ESOP payments and dividends Payments to purchase treasury stock Dividends paid Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Interest income Interest expense Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributed earnings of American Federal Savings Bank Equity in undistributed earnings of American Federal Savings Bank $ $ $ $ $ $ (2,505) 2,500 (92) 12,290 (419) 155 43,714 341 1,766 - 59,000 351 1,806 195 - 5,155 3,923 53,650 59,000 179 (414) (1,106) (1,341) (2,488) 337 16 14,230 (62) 155 42,744 253 2,053 - 57,719 1,552 3,581 79 (4,311) 5,155 2,875 52,485 57,719 163 (1,796) (1,144) (2,777) $ $ 2012 2,163 337 2011 36 301 $ $ 430 2,500 (96) (778) (444) (117) 467 337 (191) (389) (113) (35) (327) (78) 2,505 2,488 Net income $ 2,178 $ 2,410 Condensed Statements of Cash Flow (Dollars in Thousands) 2012 2011 $ 2,178 $ 2,410 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of American Federal Savings Bank Other adjustments, net Net cash used in operating activities Cash flows from investing activities Cash contribution from American Federal Savings Bank Cash contribution to American Federal Savings Bank Activity in available for sale securities Sales Purchases Maturities, prepayments and calls Net cash provided by investing activities Cash flows from financing activities ESOP payments and dividends Payments to purchase treasury stock Dividends paid Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period (2,505) (92) (419) 1,766 - 351 1,806 - 3,923 179 (414) (1,106) (1,341) 2,163 337 (2,488) 16 (62) 2,053 - 1,552 3,581 (4,311) 2,875 163 (1,796) (1,144) (2,777) 36 301 337 Cash and cash equivalents at end of period $ 2,500 $ -64- -65- -64- -65- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 22: Condensed Parent Company Financial Statements NOTE 22: Condensed Parent Company Financial Statements – continued NOTE 22: Condensed Parent Company Financial Statements NOTE 22: Condensed Parent Company Financial Statements – continued Set forth below is the condensed statements of financial condition as of June 30, 2012 and 2011, of Eagle Bancorp Montana, Inc. together with the related condensed statements of income and cash flows for the years ended June 30, 2012 and 2011. Condensed Statements of Financial Condition (Dollars in Thousands) Assets Cash and cash equivalents Securities available for sale Investment in Eagle Bancorp Statutory Trust I Investment in American Federal Savings Bank Other assets Total assets 2012 2011 $ 2,500 $ 12,290 155 43,714 341 337 14,230 155 42,744 253 $ 59,000 $ 57,719 Liabilities and stockholders' equity Accounts payable and accrued expenses Long-term subordinated debt Stockholders' Equity 195 5,155 53,650 79 5,155 52,485 Total liabilities and stockholders' equity $ 59,000 $ 57,719 Condensed Statements of Income (Dollars in Thousands) Interest income Interest expense Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributed earnings of American Federal Savings Bank Equity in undistributed earnings of American Federal Savings Bank Net income 2012 2011 $ 430 $ (96) (778) (444) (117) (327) 467 (191) (389) (113) (35) (78) 2,505 2,488 $ 2,178 $ 2,410 Set forth below is the condensed statements of financial condition as of June 30, 2012 and 2011, Condensed Statements of Cash Flow of Eagle Bancorp Montana, Inc. together with the related condensed statements of income and (Dollars in Thousands) cash flows for the years ended June 30, 2012 and 2011. 2012 2011 Condensed Statements of Financial Condition (Dollars in Thousands) $ 2,178 $ 2012 2,410 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of American Federal Savings Bank Cash and cash equivalents Other adjustments, net Securities available for sale Net cash used in operating activities Assets Investment in Eagle Bancorp Statutory Trust I Cash flows from investing activities Investment in American Federal Savings Bank Other assets Cash contribution from American Federal Savings Bank Cash contribution to American Federal Savings Bank Total assets Activity in available for sale securities Liabilities and stockholders' equity Sales Maturities, prepayments and calls Accounts payable and accrued expenses Purchases Long-term subordinated debt Net cash provided by investing activities Stockholders' Equity Condensed Statements of Income (Dollars in Thousands) Total liabilities and stockholders' equity Cash flows from financing activities ESOP payments and dividends Payments to purchase treasury stock Dividends paid Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Interest income Interest expense Noninterest expense Loss before income taxes Income tax benefit Loss before equity in undistributed earnings of American Federal Savings Bank Equity in undistributed earnings of American Federal Savings Bank $ $ $ $ $ $ (2,505) 2,500 (92) 12,290 (419) 155 43,714 341 1,766 - 59,000 351 1,806 195 - 5,155 3,923 53,650 59,000 179 (414) (1,106) (1,341) (2,488) 337 16 14,230 (62) 155 42,744 253 2,053 - 57,719 1,552 3,581 79 (4,311) 5,155 2,875 52,485 57,719 163 (1,796) (1,144) (2,777) $ $ 2012 2,163 337 2011 36 301 $ $ 430 2,500 (96) (778) (444) (117) 467 337 (191) (389) (113) (35) (327) (78) 2,505 2,488 Condensed Statements of Cash Flow (Dollars in Thousands) 2012 2011 $ 2,178 $ 2,410 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of American Federal Savings Bank Other adjustments, net Net cash used in operating activities Cash flows from investing activities Cash contribution from American Federal Savings Bank Cash contribution to American Federal Savings Bank Activity in available for sale securities Sales Maturities, prepayments and calls Purchases Net cash provided by investing activities Cash flows from financing activities ESOP payments and dividends Payments to purchase treasury stock Dividends paid Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period (2,505) (92) (419) 1,766 - 351 1,806 - 3,923 179 (414) (1,106) (1,341) 2,163 337 (2,488) 16 (62) 2,053 - 1,552 3,581 (4,311) 2,875 163 (1,796) (1,144) (2,777) 36 301 337 Cash and cash equivalents at end of period $ 2,500 $ -64- -65- -64- -65- Net income $ 2,178 $ 2,410 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 23: Quarterly Results of Operations (Unaudited) NOTE 23: Quarterly Results of Operations (Unaudited) The following is a condensed summary of quarterly results of operations for the years ended June 30, 2012 and 2011: The following is a condensed summary of quarterly results of operations for the years ended June 30, 2012 and 2011: Year ended June 30, 2012 First Quarter Second Quarter Third Quarter Fourth Quarter Year ended June 30, 2012 First Quarter Second Quarter Third Quarter Fourth Quarter (Dollars in Thousands, except per share data) (Dollars in Thousands, except per share data) Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share $ $ $ $ $ $ $ $ $ $ 3,653 894 2,759 258 2,501 569 2,455 615 187 428 $ $ 905 $ 0.11 $ 0.11 $ 3,775 1,117 2,658 283 2,375 1,496 2,626 1,245 369 876 $ $ 3,660 828 2,832 325 2,507 1,075 2,880 702 215 487 $ $ (230) $ 0.13 $ 0.12 $ 3,526 766 2,760 258 2,502 1,304 2,906 900 242 658 $ $ (153) $ 0.18 $ 0.17 $ Year ended June 30, 2011 3,721 1,078 2,643 234 2,409 1,397 2,880 926 282 644 $ $ 3,773 974 2,799 276 2,523 944 2,863 604 196 408 $ $ $ 19 0.11 $ 0.11 $ 1,189 $ 0.22 $ 0.22 $ (1,884) $ 0.17 $ 0.17 $ 3,257 677 2,580 260 2,320 1,226 2,793 753 148 605 (183) 0.17 0.16 3,690 917 2,773 155 2,618 786 2,713 691 209 482 1,086 0.12 0.12 Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share $ $ $ $ $ $ $ $ $ $ 3,653 894 2,759 258 2,501 569 2,455 615 187 428 $ $ 905 $ 0.11 $ 0.11 $ 3,775 1,117 2,658 283 2,375 1,496 2,626 1,245 369 876 $ $ 3,660 828 2,832 325 2,507 1,075 2,880 702 215 487 $ $ (230) $ 0.13 $ 0.12 $ 3,526 766 2,760 258 2,502 1,304 2,906 900 242 658 $ $ (153) $ 0.18 $ 0.17 $ Year ended June 30, 2011 3,721 1,078 2,643 234 2,409 1,397 2,880 926 282 644 $ $ 3,773 974 2,799 276 2,523 944 2,863 604 196 408 $ $ 19 $ 0.11 $ 0.11 $ 1,189 $ 0.22 $ 0.22 $ (1,884) $ 0.17 $ 0.17 $ 3,257 677 2,580 260 2,320 1,226 2,793 753 148 605 (183) 0.17 0.16 3,690 917 2,773 155 2,618 786 2,713 691 209 482 1,086 0.12 0.12 -66- -66- EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements June 30, 2012 and 2011 NOTE 23: Quarterly Results of Operations (Unaudited) NOTE 23: Quarterly Results of Operations (Unaudited) The following is a condensed summary of quarterly results of operations for the years ended June 30, 2012 and 2011: The following is a condensed summary of quarterly results of operations for the years ended June 30, 2012 and 2011: Year ended June 30, 2012 First Quarter Second Quarter Third Quarter Fourth Quarter (Dollars in Thousands, except per share data) Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income $ $ 3,653 894 2,759 258 2,501 569 2,455 615 187 428 $ $ [ This Page Intentionally Left Blank ] $ $ $ 905 $ 0.11 $ 0.11 $ Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share 3,660 828 2,832 325 2,507 1,075 2,880 702 215 487 $ $ (230) $ 0.13 $ 0.12 $ 3,526 766 2,760 258 2,502 1,304 2,906 900 242 658 $ $ (153) $ 0.18 $ 0.17 $ Year ended June 30, 2011 Year ended June 30, 2011 Interest and dividend income Interest expense Net interest income Loan loss provision Net interest income after loan loss provision Non interest income Non interest expense Income before income tax expense Income tax expense Net income Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share $ $ $ $ $ 3,775 1,117 2,658 283 2,375 1,496 2,626 1,245 369 876 $ $ 3,721 1,078 2,643 234 2,409 1,397 2,880 926 282 644 $ $ 1,189 $ 0.22 $ 0.22 $ (1,884) $ 0.17 $ 0.17 $ 3,773 974 2,799 276 2,523 944 2,863 604 196 408 $ $ 19 $ 0.11 $ 0.11 $ -66- -66- [ This Page Intentionally Left Blank ] 3,257 677 2,580 260 2,320 1,226 2,793 753 148 605 (183) 0.17 0.16 3,690 917 2,773 155 2,618 786 2,713 691 209 482 1,086 0.12 0.12 Year ended June 30, 2012 First Quarter Second Quarter Third Quarter Fourth Quarter (Dollars in Thousands, except per share data) Interest and dividend income $ 3,653 $ 3,660 $ 3,526 $ Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share 905 $ 0.11 $ 0.11 $ (230) $ 0.13 $ 0.12 $ (153) $ 0.18 $ 0.17 $ (183) 0.17 0.16 Net interest income after loan loss Interest expense Net interest income Loan loss provision provision Non interest income Non interest expense Income tax expense Net income Income before income tax expense Net interest income after loan loss Interest expense Net interest income Loan loss provision provision Non interest income Non interest expense Income tax expense Net income Income before income tax expense 894 2,759 258 2,501 569 2,455 615 187 428 3,775 1,117 2,658 283 2,375 1,496 2,626 1,245 369 876 1,189 $ $ $ $ $ $ $ $ $ $ $ $ $ 828 2,832 325 2,507 1,075 2,880 702 215 487 766 2,760 258 2,502 1,304 2,906 900 242 658 $ $ 3,721 1,078 2,643 234 2,409 1,397 2,880 926 282 644 $ (1,884) $ 0.17 $ 0.17 $ 974 2,799 276 2,523 944 2,863 604 196 408 19 $ $ 3,257 677 2,580 260 2,320 1,226 2,793 753 148 605 3,690 917 2,773 155 2,618 786 2,713 691 209 482 1,086 Comprehensive income (loss) Basic earnings per common share Diluted earnings per common share 0.22 $ 0.22 $ 0.11 $ 0.11 $ 0.12 0.12 Interest and dividend income $ 3,773 $ EaglE Bancorp Montana, Inc. is the stock holding company of american Federal Savings Bank. american Federal was founded in 1922 in Helena, Montana as a Montana chartered building and loan association. In 1975, the Bank adopted a federal thrift charter. the Bank still maintains its headquarters and two other branches in Helena, with additional branches in Bozeman, Butte and townsend, Montana. the Bank’s market area is concentrated in south central Montana, to which it offers commercial, residential and consumer loans. the Bank’s principal business is accepting deposits and, together with funds generated from operations and borrowings, investing in various types of loans and securities. FInancIal HIgHlIgHtS For the Years Ended June 30 (Dollars in thousands) 2012 2011 2010 2009 2008 SElEctED FInancIal conDItIon Data total assets net loans total Securities total Deposits total Shareholders’ Equity $327,299 173,839 89,277 219,989 53,650 $331,093 185,471 102,700 209,186 52,485 $325,739 169,502 114,653 197,939 52,432 $289,709 167,197 82,663 187,199 27,792 $279,907 168,149 80,435 178,851 25,634 SElEctED opEratIng Data net Interest Income provision for loan losses non-interest Income non-interest Expense $10,931 1,101 4,174 11,034 $10,873 948 4,623 11,082 $9,802 715 3,593 9,231 $9,233 257 2,999 8,563 $7,436 (175) 2,224 7,063 nEt IncoME $2,178 $2,410 $2,414 $ 2,388 $2,110 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% NON-PERFORMING ASSETS TO TOTAL ASSETS Peer Median Eagle Bancorp Montana, Inc. 6.03% 5.77% 5.22% 6.41% 5.99% 7.33% 6.91% 6.78% 7.01% 6.81% 1.04% 1.02% 1.16% 1.09% 0.39% 1.94% 1.24% 1.69% 1.62% 1.70% 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 Source: SNL Financial SHareHolDer InForMatIon InDepenDent regIStereD puBlIc accountIng FIrM Davis, kinard & co., p.c. 400 pine Street, Suite 600 abilene, tX 79601 325.672.4000 www.dkcpa.com corporate HeaDQuarterS 1400 prospect avenue Helena, Mt 59601 406.442.3080 SHareHolDer contact charles Berger, corporate Secretary american Federal Savings Bank p.o. Box 4999 Helena, Mt 59604-4999 406.442.3080 fax: 406.457.4013 cberger@amfedsb.com corporate counSel nixon peabody, llp 401 9th Street, n.w. Suite 900 washington, Dc 20004 202.585.8000 www.nixonpeabody.com Stock lIStIng Symbol: eBMt naSDaQ global SHareHolDer ServIceS agent registrar and transfer company 10 commerce Drive cranford, nJ 07106-3572 800.368.5948 www.rtco.com InveStor InForMatIon copies of reports filed with the Securities and exchange commission are available without charge through the Internet at www.sec.gov or the Investor relations section of our website at www.americanfederalsavingsbank.com photo: BrIDger range, ©John lambing, 2012 cover photo: gallatIn rIver anD BrIDgerS, ©John lambing, 2012 E a g l E B a n c o r p M o n t a n a , I n c . 2 0 1 2 a n n u a l r e p o r t 1400 proSpect avenue Helena, Mt 59601 2012 annual report
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