1400 PROSPECT AVENUEHELENA, MT 59601EBMTSTRATEGIC DECISIONS LEADING TOLONG-TERM, POSITIVE RESULTS2014 ANNUAL REPORT1400 PROSPECT AVENUEHELENA, MT 59601EBMTEAGLE BANCORP MONTANA, INC.2014 ANNUAL REPORTYellowstone River 6.61% 6.22% 4.43% 3.81% 4.00% 3.36% 3.35% 2.44% 1.90% 1.90% 1.62% 1.30% 1.32% 0.53% 0.40% 0.26% 0.30% 0.27% 0.21% 0.21% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 3/31/12 6/30/12 9/30/12 12/31/12 3/31/13 6/30/13 9/30/13 12/31/13 3/31/14 6/30/14 NPAs/Assets Peer Median EBMT EAGLE BANCORP MONTANA, INC. (NASDAQ: EBMT) is the stock holding company of American Federal Savings Bank. Founded in 1922 in Helena, Montana, as a Montana chartered building and loan association, American Federal will become a Montana State Chartered bank in 2014 known as Opportunity Bank of Montana, having operated under a federal thrift charter since 1975. The Bank is the sixth largest bank headquartered in Montana. The Bank maintains its headquarters and two other branches in Helena, with additional branches in Billings, Big Timber, Bozeman, Butte, Hamilton, Livingston, Missoula and Townsend, Montana. The Bank has mortgage lending offices in Bozeman and Missoula, as well as Wealth Management locations in Bozeman, Helena, Livingston, and Missoula. The Bank’s market area is now state-wide in 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.NON-PERFORMING ASSETS TO TOTAL ASSETSFINANCIAL HIGHLIGHTSFor the Years Ended June 30 (Dollars in thousands)20142013201220112010SELECTED FINANCIAL CONDITION DATA:Total Assets........................................... $538,658$510,534$327,299$331,093$325,739Net Loans............................................. 273,991 214,677 173,839 185,471 169,502Total Securities...................................... 189,553 218,963 89,277 102,700 114,653Total Deposits........................................ 427,045 417,751 219,989 209,186 197,939Total Shareholders’ Equity...................... 51,255 49,232 53,650 52,485 52,432SELECTED OPERATING DATA:Net Interest Income ..............................$15,236$12,551$10,931$10,873$9,802Provision for Loan Losses ...................... 608 678 1,101 948 715Non-interest Income ............................. 10,041 10,314 4,174 4,623 3,593Non-interest Expense ............................ 22,908 20,864 11,034 11,082 9,231NET INCOME$1,661$1,973$2,178$2,410$2,414Source: SNL FinancialPeer Median6.61%1.62%1.30%1.32%0.53%0.40%0.26%0.30%0.27%0.21%0.21%6.22%4.43%3.81%4.00%3.36%3.35%2.44%1.90%1.90%Eagle Bancorp Montana, Inc. Stock PriceTotal Assets6/30/002.1875153.0316/30/013.052631579167.1236/30/025.263157895184.5816/30/037.368421053203.0586/30/048.5203.0136/30/20057.894736842206.4146/30/068.315789474226.1786/30/078.605263158244.6866/30/20087.105263158279.9076/30/20097.368421053289.7096/30/20109.75325.7396/30/201110.69331.0936/30/201210327.2996/30/201310.67510.5346/30/201410.5538.6586 7 8 9 10 11 6/30/2010 6/30/2011 6/30/2012 6/30/2013 6/30/2014 Dollars Stock Price at June 30 adjusted for exchange ratio Stock Price 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Dollars EPS (basic) adjusted for exchange ratio EPS (basic) Dividends per shareFY 20010.0736842EPS (basic)FY 20020.1052632FY 20010.2736842FY 20030.1368421FY 20020.4421053FY 20040.1684211FY 20030.4184211FY 20050.1894737FY 20040.4631579FY 20060.2105263FY 20050.4078947FY 20070.2315789FY 20060.4368421FY 20080.2526316FY 20070.4368421FY 20090.2684211FY 20080.5184211FY 20100.2736842FY 20090.59FY 20110.28FY 20100.6FY 20120.285FY 20110.62FY 20130.28625FY 20120.59FY 20140.29FY 20130.53FY 20140.42200 250 300 350 400 450 500 550 600 in millions Total Assets at June 30 Total Assets 0.265 0.27 0.275 0.28 0.285 0.29 0.295 Dollars Dividends per share adjusted for exchange ratio Dividends per share STOCK PRICEin dollarsDIVIDENDSdollars per shareEPSbasic in dollarsTOTAL ASSETSdollars in millionsadjusted for exchange ratioadjusted for exchange ratioFULL SERVICE BRANCHESHELENA — MAIN 1400 Prospect Avenue Helena, MT 59601HELENA — DOWNTOWN 28 Neill Avenue Helena, MT 59601HELENA — SKYWAY 2090 Cromwell Dixon Lane Helena, MT 59602BIG TIMBER 101 McLeod Street Big Timber, MT 59011BILLINGS 455 S. 24th Street West Billings, MT 59102BOZEMAN — MENDENHALL 5 W. Mendenhall Street Bozeman, MT 59715BOZEMAN — OAK 1455 W. Oak Street Bozeman, MT 59715BUTTE 3401 Harrison Avenue Butte, MT 59701HAMILTON 711 S. First Street Hamilton, MT 59840LIVINGSTON 123 S. Main Street Livingston, MT 59047MISSOULA — DOWNTOWN 200 N. Higgins Avenue Missoula, MT 59802MISSOULA — RESERVE 1510 S. Reserve Street Missoula, MT 59801TOWNSEND 416 Broadway Townsend, MT 59644MORTGAGE LENDING BRANCHESBOZEMAN 1006 W Main Street Bozeman, MT 59715MISSOULA 2800 S. Reserve Street Missoula, MT 59801FINANCIAL SERVICES BRANCHESBOZEMAN 1455 W. Oak Street Bozeman, MT 59715HELENA 1400 Prospect Avenue Helena, MT 59601LIVINGSTON 123 S. Main Street Livingston, MT 59047MISSOULA 1510 S. Reserve Street Missoula, MT 598012EAGLE BANCORP MT, INC.adjusted for exchange ratio SEPTEMBER 18, 2014TO OUR STOCKHOLDERS, CUSTOMERS, AND FRIENDS: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, 2014. The environment for community banks continues to be a challenging one, but the Company marked another successful year, with increases in three important categories: earnings per share, book value and an increased cash dividend. Net income of $2.1 million was up approximately 7% from the previous year and enabled basic earnings per share to increase from $0.51 to $0.54. Book value per share increased to $11.22 at year end compared to $10.62 for the previous year. In July we announced an increase to our cash dividend of 3.4%, the fourteenth consecutive year of dividend increases.Mortgage loan origination activity experienced a slowdown from the previous year, which had seen record volumes of refinancing due to extremely low interest rates. The net gain on sale of loans decreased from $5.4 million last year to $4.6 million this year. On a positive note, we have seen a significant increase in home purchase financing in the most recent quarter.Our asset quality remains strong as non-performing loans remained very low. Non-performing assets decreased slightly, to 0.18% of assets, compared to 0.26% at the end of last year, and remain well below peer averages, as reported by SNL Financial. We have continued to add to our allowance for loan losses over the past year. Our provisions for loan and other real estate owned losses were slightly lower in fiscal year 2014 than the previous year. Montana’s economy is projected to have slightly higher growth over the next few years than the national economy, according to the Bureau of Business and Economic Research at the University of Montana.The integration of the branches that were acquired in December 2012 is virtually complete and we are now beginning to enjoy the benefits of increased scale and a wider retail footprint. With that accomplished the focus of the Company this past year has been on three strategic goals. The first goal was to increase our loan portfolio White Cliffs of the Missouri River through the addition of commercial lenders and increased outreach by lenders in our communities. Just a few years ago, we had only four commercial lenders, and now have increased that number to ten. The result has been a 27% growth rate in our loan portfolio, with over half of the dollar increase in commercial loans (both commercial and industrial and commercial real estate). Much of this growth was funded by the continued decline in our investment portfolio. The combination of these was a major driver in the increase in our net interest margin of four basis points from last year’s margin of 3.23%. What is especially encouraging is the margin in the fourth quarter of our fiscal year of 3.32%, with an expectation of a slowly growing margin over the coming year. The second strategic goal was to lower the Company’s efficiency ratio. While our ratio did not change from the previous year, we have put into place a number of initiatives that are designed to improve the ratio over the coming year. The first, as mentioned above, is to increase our net interest margin through continued growth of the loan portfolio. Secondly, we have engaged consultants who have assisted us with our staffing models as well as preparing the Company to move to a new core processing platform in mid-2015. Thirdly, we have performed a review of our fee income and operating expense line items to find ways to enhance non-interest income and reduce expenses to further improve our efficiency ratio.The third strategic goal was to complete the transition of the Company to a state commercial bank charter. We believe this charter will better enable us to continue our mission of serving the small businesses in our communities. We filed our application with the State of Montana and federal bank regulatory agencies in late April and expect regulatory approval by the time you read this letter. We plan on making the official switch to the bank’s new name, Opportunity Bank of Montana, in mid-October, assuming all pending approvals have been provided. Along with our charter change, our fiscal year will switch to a calendar year, effective December 2014.We also continue to update our branch facilities. Our Hamilton, Livingston and Big Timber offices had significant interior remodels. The reaction of our customers in those markets has been very positive, and we appreciate the patience of our employees and customers during the construction phase. The regulatory environment for community banks continues to be challenging, with this past year seeing the new mortgage lending rules issued by the Consumer Financial Protection Bureau and continued discussion of new capital guidelines. Our Company’s officers are spending significant time implementing the new regulatory guidance while also retaining our commitment to develop new products and services to better serve our customers.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/CEO4EAGLE BANCORP MT, INC.Bridger Mountains 5EAGLE BANCORP MT, INC.BOARD OF DIRECTORS & EXECUTIVE TEAMDIRECTORSLYNN E. DICKEY RetiredLARRY A. DREYER Chairman of the BoardRICK F. HAYS RetiredPETER 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 CollegeMAUREEN J. RUDE Operations Director of the Montana Homeownership Network / Neighbor Works MontanaEXECUTIVE OFFICERSPETER J. JOHNSON President / Chief Executive Officer Eagle Bancorp Montana, Inc.MICHAEL C. MUNDT Executive Vice President / Community Banking OfficerTRACY A. ZEPEDA Senior Vice President / Chief Retail OfficerDALE F. FIELD Senior Vice President/Chief Credit OfficerLAURA F. CLARK Senior Vice President/Chief Financial OfficerRACHEL R. AMDAHL Senior Vice President / Chief Operations OfficerCORPORATE SECRETARYCHANTELLE R. NASH Senior Vice President / Chief Risk Officer FORM 10-K UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
June 30, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission file number
1-34682
Eagle Bancorp Montana, Inc.
(Exact name of 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.)
59601
(Zip Code)
Registrant’s telephone number, including area code
406-442-3080
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $0.01
The NASDAQ Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
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 not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:133) Yes (cid:95) No
(cid:133) Yes (cid:95) 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.
(cid:95) Yes (cid:134) 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).
(cid:95) Yes (cid:134) 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.
(cid:134)
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 (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)
Smaller reporting company (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(cid:133) Yes (cid:95) 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, 2013 was $35,234,000. The outstanding number of shares of common stock of
Eagle as of August 1, 2014, was 3,916,233.
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.
TABLE OF CONTENTS
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
Page
PART I
DESCRIPTION OF BUSINESS. ...................................................................................................... 2
RISK FACTORS ............................................................................................................................ 29
UNRESOLVED STAFF COMMENTS. ......................................................................................... 34
PROPERTIES. ................................................................................................................................ 34
LEGAL PROCEEDINGS. .............................................................................................................. 35
MINE SAFETY DISCLOSURES. .................................................................................................. 35
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ....................................... 36
SELECTED FINANCIAL DATA. ................................................................................................. 36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ...................................................................................................... 36
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .............. 45
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ............................................... 45
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. ............................................................................................... 45
CONTROLS AND PROCEDURES. .............................................................................................. 46
OTHER INFORMATION. ............................................................................................................. 46
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ....................... 47
EXECUTIVE COMPENSATION. ................................................................................................. 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE. ......................................................................................................................... 48
PRINCIPAL ACCOUNTING FEES AND SERVICES. ................................................................ 48
EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ............................................................. 48
CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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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;
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.
1
PART I
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 13 full service
offices. We also have seven automated teller machines located in our market area and we participate in the Money Pass®
ATM network. Investor information for the Company may be found at www.americanfederalsavingsbank.com. The
contents on or accessible through, our website are not incorporated into this report.
The Bank has equity investments in Certified Development Entities which have received allocations of New Markets Tax
Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of
the Treasury. The NMTC program is aimed at stimulating economic and community development and job creation in
low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period.
The federal tax credit benefits were $380,000 for the years ended June 30, 2014 and 2013.
Recent Developments
On November 30, 2012, the Company completed a significant transaction with Sterling Financial Corporation of Spokane,
Washington in which the Company purchased all of Sterling’s retail bank branches in Montana. As a result of this
transaction, the Bank’s assets grew to over $500 million and the retail branch network grew from six to 13 branches, with
six branches in new markets. As a result of the transaction, total Bank assets increased by 56.0% and the Bank’s loan
portfolio grew by 23.5%. As of June 30, 2014, the Bank was the 6th largest retail bank headquartered in Montana in terms
of assets. The acquisition also included the addition of a wealth management division with over $100 million in managed
assets and a mortgage banking operation that should increase opportunities for additional origination and fee income.
On May 8, 2014, the Company announced that it has applied to the State of Montana to form an interim bank for the
purpose of facilitating the conversion of the Company's wholly-owned subsidiary, American Federal Savings Bank, from a
federally chartered savings bank to a Montana chartered commercial bank. If the new charter is approved, the bank plans
to rename itself "Opportunity Bank of Montana."
On August 28, 2014, the Board of Directors (the “Board”) of Eagle approved a change in the Company’s fiscal year end
from June 30 to December 31 of each year. The fiscal year change is effective beginning with the Company’s 2015 fiscal
year, which will now begin on January 1, 2015 and end on December 31, 2015.
Business Strategy
The Company’s principal strategy is to manage its principal asset, American Federal Savings Bank, in a profitable manner.
The Company seeks 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.
2
The following are the key elements of our business strategy:
(cid:120) 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 45.7%
of total loans;
(cid:120) Continue to emphasize the attraction and retention of lower cost long-term core deposits;
(cid:120) Seek opportunities where presented to acquire other institutions or expand our branch structure;
(cid:120) Maintain our high asset quality levels; and
(cid:120) 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.
Market Area
From our headquarters in Helena, Montana, we operate thirteen 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 – Oak (opened 1980, relocated 2009), Butte (opened 1979) and Townsend (opened 1979), Montana. The
Sterling Bank Montana branch acquisition that was completed November 30, 2012 included retail banking offices in:
Bozeman, Big Timber, Livingston, Billings, Missoula and Hamilton. The acquisition also included three mortgage loan
origination locations in Bozeman, Missoula and Kalispell. The Kalispell location was closed in fiscal 2014.
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 (1,015,165 estimated for 2013). 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 65,338 and is located within 120 miles of four of Montana’s other five largest cities: Missoula, Great Falls,
Bozeman and Butte. Helena 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 94,720. 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.
Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a
population of approximately 34,523. Butte’s economy was historically reliant on the mining industry and fluctuations in
metal and mineral commodity prices have had a corresponding impact on the local economy.
Townsend, Montana is approximately 34 miles southeast of Helena It has a population of approximately 1,970. Townsend
is located in Broadwater County which has a population of approximately 5,692. Many of its residents commute to other
Montana locations for work, particularly Helena. Other employment in Townsend is primarily in agriculture and services.
Billings, Montana is approximately 293 miles east of Helena. Billings and the surrounding Yellowstone County have a
population of approximately 154,162. Billings is a significant trade center for eastern Montana. Select manufacturing is
also a significant contributing portion of its economy.
3
Missoula, Montana is approximately 116 miles west of Helena. Missoula and the surrounding Missoula County have a
population of approximately 111,807. The University of Montana is located in Missoula and the local economy is reliant
on the University and the corresponding trade and services resulting from the University’s presence.
Hamilton, Montana is approximately 161 miles southwest of Helena in Ravalli County. Ravalli County has a population of
approximately 40,823. Hamilton is a relatively short distance from Missoula with a number of persons working in
Missoula, residing in Hamilton. Medical research and the wood products industry are significant contributors to Ravalli
County’s economy.
Livingston, Montana is approximately 124 miles east of Helena. Livingston and the surrounding Park County have a
population of approximately 15,682. Livingston’s economy is somewhat reliant on the wood products and tourism
industry.
Big Timber, Montana is approximately 158 miles east of Helena. Big Timber and the surrounding Sweet Grass County
have a population of approximately 3,669. Big Timber’s economy is somewhat reliant on the wood products, agriculture,
and tourism industries.
Competition
We face strong competition in our primary market area for 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
1,015,000 people, there are 57 credit unions in Montana as well as 2 federally chartered thrift institutions and 62
commercial banks as of June 30, 2014. 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.
4
Loan Portfolio Composition.
The following table includes the composition of the Bank’s loan portfolio by loan category:
At June 30,
2014
Amount
Percent of
Total
Amount
(Dollars in thousands)
2013
Percent of
Total
Real estate loans:
Residential mortgage (one- to four-family) (1)
Commercial real estate
Real estate construction
Total real estate loans
$
92,321
92,043
6,923
191,287
33.39% $
33.29%
2.50%
69.18%
70,453
74,395
2,738
147,586
32.50%
34.32%
1.26%
68.08%
16.45%
5.43%
10.04%
31.92%
37,866
12,964
34,412
85,242
13.69%
4.69%
12.44%
30.82%
35,660
11,773
21,775
69,208
276,529
100.00%
216,794
100.00%
Other loans:
Home equity
Consumer
Commercial
Total other loans
Total loans
Deferred loan fees
Allowance for loan losses
413
2,125
117
2,000
Total loans, net
$
273,991
$
214,677
(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 $1.37 million and $1.02 million for the years ended June 30, 2014
and 2013, respectively. Other loan related fee income for contract collections, late charges, credit life commissions and
credit card fees were $164,000 and $95,000 for the years ended June 30, 2014 and 2013, respectively.
Loan Maturity Schedule.
The following table sets forth the estimated maturity of the loan portfolio of the Bank at June 30, 2014. 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.
5
Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due
within six months.
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
$
2
5,261
4,391
1,203
509
10,121
$
539
1,030
2,532
2,124
603
4,742
$
49
1,732
-
2,844
1,480
1,949
$
2,598
9,821
-
5,047
6,623
7,301
$
106,378
74,199
-
26,648
3,749
10,299
Total
109,566
92,043
6,923
37,866
12,964
34,412
Total loans (1)
$
21,487
$
11,570
$
8,054
$
31,390
$
221,273
$
293,774
(1) Includes loans held for sale.
The following table includes loans by fixed or adjustable rates at June 30, 2014:
$
Due after June 30, 2015:
Residential mortgage (one- to four-family) (1)
Commercial real estate and land
Real estate construction
Home equity
Consumer
Commercial
Total (1)
Fixed
Adjustable
Total
(Dollars in Thousands)
$
79,801
58,518
-
12,734
10,224
12,271
173,548
$
29,224
27,234
-
21,805
1,628
7,278
87,169
109,025
85,752
-
34,539
11,852
19,549
260,717
Due in less than one year
30,243
2,814
33,057
Total Loans (1)
Percent of total
(1) Includes loans held for sale
$
203,791
$
89,983
$
293,774
69.37%
30.63%
100.00%
6
The following table sets forth information with respect to our loan originations, purchases and sales activity:
Years Ended June 30,
2014
2013
(In Thousands)
Net loans receivable at beginning of period (1)
$
235,484
$
184,452
Loans originated:
Residential mortgage (one- to four-family)
Commercial real estate and land
Real estate construction
Home equity
Consumer
Commercial
212,761
41,425
10,267
12,921
8,230
12,179
250,066
17,007
8,189
9,853
7,063
10,143
Total loans originated
297,783
302,321
Loans purchased in acquistion:
Residential mortgage (one- to four-family)
Commercial real estate and land
Real estate construction
Home equity
Consumer
Commercial
Total loans purchased
Loans sold:
Whole loans
-
-
-
-
-
-
-
12,469
10,235
-
15,028
2,364
1,227
41,323
182,038
228,919
Principal repayments and loan refinancings
60,414
63,365
Deferred loan fees increase (decrease)
Allowance for losses increase
296
125
(47)
375
Net loan increase
55,752
51,032
Net loans receivable at end of period (1)
$
291,236
$
235,484
(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 33.4% of the Bank’s loans as of June 30, 2014 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.
7
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 $1.37 million for the year
ended June 30, 2014. At June 30, 2014, American Federal Savings Bank had $548.49 million in residential mortgage loans
and $12.44 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. 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, refinancing 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, 2014, $37.87
million or 13.7% 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.
Home equity loans are secured by real estate but they have historically carried 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 not more than 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 33.3% of the
Bank’s total loan portfolio, or $92.04 million at June 30, 2014. 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 $271,000 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 commercial real estate loans that we originate 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 $10.83 million ($9.75 million is guaranteed by Rural Development of the
U.S. Department of Agriculture, leaving approximately $1.08 million unguaranteed) on June 30, 2014, 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 $6.92 million or 2.5% of the Bank’s loan portfolio at
June 30, 2014.
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,
2014, consumer loans totaled $12.96 million or 4.7% 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
8
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.
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
2013 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 $34.41 million, or 12.4% of the Bank’s total loan portfolio at June 30, 2014.
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. Within the commercial loan category, $3.88 million and $707,000 were in loans originated through a
syndication program where the business resides outside of Montana, at June 30, 2014 and 2013, respectively.
While the commercial business loan portfolio amounted to only 12.4% of the total portfolio at June 30, 2014, American
Federal intends to continue 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 such as the Bank have, subject to certain exemptions, been required to limit credit
concentrations to single borrowers to an amount equal to the greater of $500,000 or 15% of the institution’s unimpaired
capital and surplus. As of June 30, 2014, our largest aggregation of loans to one borrower was approximately $20.34
million. This consisted of three loans: two commercial real estate loans secured by two separate detention facilities and a
commercial real estate loan secured by a chemical dependency treatment facility. The first commercial real estate loan had
a principal balance of $5.17 million, but 90% of that amount, or $4.65 million was sold to the Montana Board of
Investments, leaving a net principal balance payable to the Bank of $517,000. As of June 30, 2014, the principal balance
on the second commercial real estate loan was $10.83 million. However, 90% of this loan is guaranteed by the USDA
Rural Development. Thus, 90% of the loan, or $9.75 million, is not required to be included in the Bank’s limitations to a
single borrower under applicable banking regulations. This leaves approximately $1.08 million subject to the lending limit
described above. 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. The third commercial real estate loan had a principal
balance of $4.34 million as of June 30, 2014. As a result, the total amount subject to the lending limit at June 30, 2014 was
$5.94 million. At June 30, 2014, these loans were performing in accordance with their terms. The Bank maintains the
servicing for 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.
9
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
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, 2014, was approximately $5.24 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, 2014, American Federal Savings Bank had $458,000 of real estate owned.
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, 2014, we had $342,000 ($276,000 net of
specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status.
10
Delinquent Loans.
The following table provides information regarding the Bank’s loans that are delinquent 30 to 89:
At June 30, 2014
Number
Amount
Percentage of
Total
Delinquent
Loans
(Dollars in Thousands)
$
5
3
-
11
29
4
701
294
-
583
97
79
39.97%
16.76%
0.00%
33.24%
5.53%
4.50%
Loan type:
Residential mortgage (one- to four-family)
Commercial real estate and land
Real estate construction
Home equity
Consumer
Commercial business
Total
52
$
1,754
100.00%
Nonperforming Assets.
The following table sets forth information regarding nonperforming assets:
Non-accrual loans
Real estate loans:
Residential mortgage (one- to four-family)
$
Home equity
Consumer
Commercial business
Accruing loans delinquent 90 days or more
Restructured loans:
Commercial real estate and land
Home equity
Total nonperforming loans
Real estate owned and other repossed property, net
Total nonperforming assets
$
At June 30,
2014
2013
(Dollars in Thousands)
50
142
43
107
-
130
50
522
458
980
$
$
58
305
41
66
-
303
-
773
550
1,323
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
0.19%
0.10%
407.09%
0.18%
0.36%
0.15%
258.73%
0.26%
11
During the year ended June 30, 2014, the Bank had three foreclosed real estate property and other repossessed assets
resulting in a loss of $50,000 upon sale. One other foreclosed real estate property had a write-down of $10,000 based on
fair value less cost to sell. During the year ended June 30, 2014, 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:
12
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
At June 30,
2014
2013
(In Thousands)
$
$
-
660
-
-
-
280
-
-
-
-
-
-
-
257
-
31
-
74
7
20
-
300
-
15
-
-
-
-
-
315
-
-
715
-
-
-
-
-
-
-
-
626
-
153
-
62
10
6
-
121
-
-
-
-
-
-
Real estate owned/repossessed property
458
550
Total classified loans and real estate owned
$
2,102
$
2,558
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 based
on estimated losses on specific loans 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. Real estate owned is evaluated annually and recorded at fair value.
Provisions for, or adjustments to, estimated losses are included in earnings in the period they are established. At June 30,
2014, we had $2.13 million in allowances for loan losses.
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.
14
The following table includes information for allowance for loan losses:
For the Years Ended
June 30,
2014
2013
(Dollars in Thousands)
Beginning balance, July 1, 2013
$
2,000
$
1,625
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
608
-
(199)
-
(73)
(88)
(144)
-
17
-
-
4
(483)
678
(73)
(35)
-
(190)
(66)
(1)
-
-
-
-
6
56
(303)
Ending balance, June 30, 2014
$
2,125
$
2,000
Allowance for loan losses to total loans
Allowance for loan losses to total non-performing
loans
Net charge-offs to average loans
outstanding during the period
0.77%
0.92%
407.09%
258.73%
0.19%
0.15%
15
The following table presents allocation of the allowance for loan losses by loan category and the percentage of loans in
each category to total loans:
June 30,
2014
Percentage
of
Allowance
to Total
Allowance
Loan
Category
to Total
Loans
Amount
2013
Percentage
of
Allowance
to Total
Allowance
Loan
Category
to Total
Loans
(Dollars in Thousands)
33.39% $
33.29%
2.50%
69.18%
423
952
15
1,390
13.69%
4.69%
12.44%
30.82%
290
40
280
610
22.82%
45.84%
1.41%
70.07%
14.07%
2.31%
13.55%
29.93%
21.15%
47.60%
0.75%
69.50%
14.50%
2.00%
14.00%
30.50%
32.50%
34.32%
1.26%
68.08%
16.45%
5.43%
10.04%
31.92%
Amount
485
974
30
1,489
299
49
288
636
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
$
2,125
100.00%
100.00% $
2,000
100.00%
100.00%
Historical loss averages have decreased, as a result of lower charge-offs within the past three years, and impacted the
allowance adequacy calculation as a percent of loans.
16
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, 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. 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.
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 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. Our investment securities include 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. There were no held-to-maturity investment securities included in the investment portfolio at June 30,
2014 and 2013. All investment securities included in the investment portfolio are currently available-for-sale. 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 & Poor’s. It will, however, continue to monitor developments. Eagle
also has interest-bearing deposits in other banks and stock in the FHLB of Seattle.
17
The following table summarizes investment securities:
At June 30,
2014
2013
Fair Value
Percentage
of Total
Fair Value
Percentage
of Total
Securities available-for-sale:
U.S. Government and agency obligations
Corporate obligations
Municipal obligations
Collateralized mortgage obligations
Mortgage-backed securities
$
41,306
5,964
80,364
32,761
29,158
(Dollars in Thousands)
21.51% $
3.11%
41.85%
17.06%
15.18%
50,931
9,061
84,436
47,633
26,902
Total securities available-for-sale
189,553
98.70%
218,963
Interest-bearing deposits
FHLB capital stock, at cost
611
1,878
0.32%
0.98%
2,385
1,931
22.81%
4.06%
37.82%
21.33%
12.05%
98.07%
1.07%
0.86%
Total
$
192,042
100.00% $
223,279
100.00%
18
The following table sets forth information regarding the values, weighted average yields and maturities of investment securities:
One Year or Less
One to Five Years
Five to Ten Years
More than Ten Years
Total Investment Securities
At June 30, 2014
Annualized
Weighted
Average Yield
Fair Value
Annualized
Weighted
Average Yield
Annualized
Weighted
Average Yield
Fair Value
Fair Value
Annualized
Weighted
Average Yield
Fair Value
Fair Value
Approximate
Market Value
Annualized
Weighted
Average Yield
Securities available-for-sale:
U.S. government and agency
obligations
Corporate obligations
Municipal obligations
Private collateralized mortgage obligations
Collateralized mortgage obligations
Mortgage-backed securities
Total securities available-for-sale
Interest-bearing deposits
Federal funds sold
FHLB capital stock
518
$
-
1,013
%
2.38
-
4.82
$
4,411
2,003
1,355
-
-
-
1,531
611
-
-
-
-
-
3.99
0.51
-
-
-
4,584
10
12,363
-
-
-
(Dollars in Thousands)
1.61
1.60
2.19
-
1.42
5.10
1.60
-
-
-
%
$
1,909
3,961
10,941
-
12,054
3,923
32,788
-
-
2.07
1.73
3.03
-
2.00
1.52
2.26
-
-
1,878
0.10
%
$
34,468
-
67,055
-
16,123
25,225
142,871
-
-
-
2.17
-
3.84
-
2.45
3.34
3.19
-
-
-
%
$
41,306
5,964
80,364
$
41,306
5,964
80,364
-
32,761
29,158
-
32,761
29,158
189,553
189,553
611
-
611
-
1,878
1,878
%
2.11
1.69
3.71
-
2.14
3.10
2.93
0.51
-
0.10
Total
$
2,142
3.00
%
$
12,363
1.60
%
$
34,666
2.14
%
$
142,871
3.19
%
$
192,042
$
192,042
2.90
%
19
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, Townsend, Billings, Missoula, Livingston, Big
Timber and Hamilton. 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 $310.82 million or 72.8% of the Bank’s deposits at June 30, 2014 (this amount would be $274.85 million or
64.4% if IRA certificates of deposit are excluded). The presence of a high percentage of core deposits and, in particular,
transaction accounts reflects in part 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.
20
The following table includes deposit accounts and the associated weighted average interest rates for each category of
deposits:
2014
Percent
of Total
13.68%
14.17%
15.93%
20.58%
At June 30,
Weighted
Average
Rate
Amount
(Dollars in Thousands)
0.00%
0.05%
$
52,972
56,051
0.03%
0.12%
65,876
85,361
2013
Percent
of Total
12.68%
13.42%
15.77%
20.43%
Weighted
Average
Rate
0.00%
0.05%
0.04%
0.13%
Amount
$
58,432
60,493
68,033
87,892
274,850
64.36%
0.06%
260,260
62.30%
0.07%
35,967
4,195
112,033
152,195
8.42%
0.98%
26.23%
35.64%
1.08%
1.80%
0.85%
0.93%
37,141
-
120,350
157,491
8.89%
0.00%
28.81%
37.70%
1.14%
0.00%
0.98%
1.02%
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
$
427,045
100.00%
0.37%
$
417,751
100.00%
0.42%
The following table includes amounts and maturities of certificates of deposits as of June 30, 2014, 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,
2015
June 30,
2016
June 30,
2017
$
56,031
15,136
10,680
7,190
601
754
7,912
$
1,427
4,568
5,231
4,694
801
1,806
4,638
$
-
879
6,517
728
712
4,082
1,336
After
June 30,
2017
$
-
-
698
5,414
6,045
4,315
-
Total
$
57,458
20,583
23,126
18,026
8,159
10,957
13,886
Total
$
98,304
$
23,165
$
14,254
$
16,472
$
152,195
21
The following table shows the amount of certificates of deposit with balances of $100,000 to $250,000 and greater than
$250,000 by time remaining until maturity as of June 30, 2014:
Balance
Greater
than $250
(In Thousands)
$
917
4,087
4,841
10,596
$100 - $250
$
8,479
5,298
13,381
16,252
Total
$
9,396
9,385
18,222
26,848
3 months or less
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
$
43,410
$
20,441
$
63,851
The following table includes net changes in deposit accounts:
Years Ended June 30,
2014
2013
(Dollars in thousands)
Beginning balance, July 1, 2013
Deposits, net
Acquired deposits in branch acquisition
Interest credited
$
417,751
7,694
-
1,600
$
219,989
14,170
182,463
1,129
Ending balance, June 30, 2014
$
427,045
$
417,751
Net increase
Percent increase
Weighted average cost of
deposits during the period
Weighted average cost of
deposits at end of period
$
9,294
$
197,762
2.22%
89.90%
0.35%
0.41%
0.37%
0.42%
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
22
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, 2014 the rate was 1.651%.
The following table includes information related to concerning borrowings from the FHLB of Seattle and PNC:
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
Years Ended June 30,
2014
2013
(Dollars in Thousands)
$
28,692
49,404
49,404
2.24%
1.20%
$
31,962
41,249
33,996
2.73%
2.23%
-
$
-
-
0.00%
0.00%
$
1,668
5,000
-
4.89%
0.00%
$
3,926
12,070
2,050
0.51%
0.65%
$
505
865
865
1.00%
1.00%
$
32,618
51,454
51,454
2.04%
1.17%
$
33,626
41,249
34,861
2.70%
2.20%
SUBSIDIARY ACTIVITY
We are permitted to invest in the capital stock of, or originate secured or unsecured loans to, subsidiary corporations. The
following are subsidiaries of the Company: American Federal Savings Bank, Eagle Bancorp Statutory Trust I, and AFSB
NMTC Investment Fund, LLC, which is a subsidiary of the Bank.
Personnel
As of June 30, 2014, we had 167 full-time employees and 10 part-time employees. The employees are not represented by a
collective bargaining unit. We believe our relationship with our employees to be good.
23
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, is required to file certain reports with, is
subject to examination by, and otherwise comply with the rules and regulations of Federal Reserve Board. 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 has significantly changed the bank regulatory structure and affected the lending,
investment, trading and operating activities of financial institutions and their holding companies. One important change
was 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. Many of the provisions of the Dodd-Frank Act
are subject to delayed effective dates and/or require the issuance of implementing regulations. This effect on operations
cannot yet be assessed fully. However, there is a significant possibility that the Dodd-Frank Act will, in the long run,
increase regulatory burden, compliance cost and interest expense for Eagle and the Bank.
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.
24
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
June 30, 2014, and a description of certain historical regulatory aspects.
Office of the Comptroller of the Currency. The Office of the Comptroller of the Currency, as a result of the Dodd-Frank
Act, has assumed regulatory oversight over the Bank since the elimination of the Office of Thrift Supervision as a separate
regulatory agency. American Federal is required to file periodic reports with the Office of the Comptroller of the
Currency and is subject to periodic examinations. The Office of the Comptroller of the Currency has extensive
enforcement authority over national banks and savings institutions such as the Bank. Authority over Eagle, which formerly
resided with the Office of Thrift Supervision, 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 the Comptroller of the Currency. Federal savings institutions are generally authorized to branch
nationwide. American Federal is in compliance with the noted restrictions.
American Federal pays 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. An additional amount may be lent, equal to 10% of unimpaired capital and unimpaired
surplus, if the loan is fully secured by certain readily marketable collateral, which is defined to include certain financial
instruments and bullion, but generally does not include real estate.
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. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an
acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the
deficiencies.
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 a specified amount of shares of capital 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
25
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.
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.
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.
Minimum Reserve Ratios. The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio for the DIF. 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.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an
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.
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.
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
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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.
On June 6, 2012, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a
series of proposed rules to revise their risk-based and leverage capital requirements and their method for calculating risk-
weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking
Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”).
The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated
assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other
things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1
capital requirement, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on
non-accrual status and certain commercial real estate facilities that finance the acquisition, development or construction of
real property. The proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus
payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of
common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.
Adoption of the final rules has been delayed by the federal bank regulatory agencies based upon the volume of comments
received on the proposed rules.
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, 2014, 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
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requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain
approval from the Comptroller of the Currency 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. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement
action for a violation of law. As of June 30, 2014, 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.
Our authority to extend credit to executive officers, directors and 10% or greater shareholders (“insiders”), as well as
entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its
implementing regulation, Federal Reserve Board Regulation O. Among other things, loans to insiders must be made on
terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of
repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation
O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the
institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to
executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At June 30,
2014, we were in compliance with these regulations.
Holding Company Regulation
General. Eagle is a unitary savings and loan holding company subject to regulatory oversight of the Federal Reserve
Board which became the principal federal bank regulatory agency for Eagle during the previous fiscal year. 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
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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.
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 may not successfully integrate the assets, operations and customers of Sterling in a manner which proves
profitable in the near term.
Although we believe we carefully evaluated the acquisition of the seven branches of Sterling Bank in fiscal year 2013, we
may not be able to achieve reasonable returns on our investment as quickly as we desire or at projected levels. In addition,
although we have made every effort to ensure that our new customers who were formerly customers of Sterling continue
banking relationships with us, we may not be able to retain all of these customers. We also may have acquired loans
which, despite current levels of acceptable performance, may not continue to perform in this manner in the future. Further,
the assumption of a significant amount of assets and liabilities, which resulted in a level of growth significantly greater
than we have been historically able to achieve through organic means, may provide challenges in the areas of compliance
and risk management that will require additional staff or outside advisors which could increase operating expense.
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We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to
be either partially or fully impaired in the future, our earnings and the book values of these assets would decrease.
As a result of the branch acquisition from Sterling Bank in fiscal year 2013, we recorded goodwill in the amount of $6.89
million in the second quarter of 2013. Final valuation adjustments were recorded in the second quarter of 2014 for
$144,000 and impacted goodwill. The final goodwill recorded related to the acquisition was $7.03 million. We are
required to test our goodwill for impairment on a periodic basis. The impairment testing process considers a variety of
factors, including the current market price of our common shares, the estimated net present value of our assets and
liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. It is
possible that future impairment testing could result in a partial or full impairment of the value of our goodwill. If an
impairment determination is made in a future reporting period, our earnings and the book value of goodwill will be reduced
by the amount of the impairment.
Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer
relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or
limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be
adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our
products and services. Although we rely on security systems to provide security and authentication necessary to effect the
secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers
encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for
transactions could be affected, and our business operations could be adversely affected. Threats to information security
also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss
of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and
possible financial liability. Any of these events could have a material adverse effect on our financial condition and results
of operations.
Changes in the structure of Fannie Mae and Freddie Mac (“GSEs”) and the relationship among the GSEs, the
federal government and the private markets, or the conversion of the current conservatorship of the GSEs into
receivership, could result in significant changes to our securities portfolio.
The GSEs are currently in conservatorship, with their primary regulator, the Federal Housing Finance Agency, acting as
conservator. We cannot predict if, when or how the conservatorships will end, or any associated changes to the GSEs’
business structure that could result. There are several proposed approaches, including possible legislative changes in
discussion in both the House Financial Services Committee and the Senate Banking Committee which, if enacted, could
change the nature of government participation in the private mortgage market or alternatively the structure of the GSEs, the
relationship among the GSEs, the government and the private markets, including the trading markets for agency
conforming mortgage loans and markets for mortgage-related securities in which we participate. We cannot predict the
prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of any of
these approaches. Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they
will continue to exist in their current form. GSE reform, if enacted, could result in a significant change and adversely
impact our business operations, particularly as to our residential mortgage lending activities.
We cannot accurately predict the effect of the recent economic downturn on our future results of operations or
market price of our stock.
The national economy and the financial services sector, while improving somewhat, continue to face challenges. We
cannot accurately predict whether the economic downturn, which adversely impacted the markets we serve, will continue
to abate or whether further downturns may occur. Any renewed 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. A fragile recovery or another
recession could continue to present risks for some time for the financial services industry and our company.
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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.
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 deteriorates
and there is limited liquidity for these securities.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial
condition and results of operations.
Our accounting policies are essential to understanding our financial results and condition. Some of these policies require
the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our
accounting policies are critical because they require management to make difficult, subjective, and complex judgments
about matters that are inherently uncertain and because it is likely that materially different amounts would be reported
under different conditions or using different assumptions. If such estimates or assumptions underlying our financial
statements are incorrect, we may experience material losses.
From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the
financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our
financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we
report our results of operations and financial condition. We could also be required to apply a new or revised standard
retroactively, resulting in our restating prior period financial statements in material amounts.
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 2015. 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.
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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.
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
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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 has significantly changed the bank regulatory structure and affected 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 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.
The Federal Reserve Board is required 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 are required to
be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.
There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital
requirements will apply to savings and loan holding companies.
33
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 shareholders’
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, 2014 was $XXX 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 shareholders’ 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 adopted, we
could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
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 16 offices, which are located in Helena, Bozeman, Butte, Billings, Big Timber, Livingston, Missoula, Hamilton
and Townsend, Montana, and one operation center located in Helena. Its principal banking office in Helena also serves as
its executive headquarters. This headquarters houses approximately 30.0% of American Federal’s full-time employees.
The following table includes 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 equipment and furniture. The square footage at each location
is also presented.
34
Location
Address
Opened
Helena Main Office
Helena Neill Avenue Branch
Helena Skyway Branch
Butte Office
Bozeman Branch
Townsend Office
Bozeman - Mendenhall
Livingston
Big Timber
Billings
Missoula - Higgins
Missoula - Reserve
Hamilton - Bank
Helena Operations Center
Bozeman Home Loan
Missoula Home Loan
* Leased location
1400 Prospect Ave.
Helena, MT 59601
28 Neill Ave.
Helena, MT 59601
2090 Cromwell Dixon
Helena, MT 59602
3401 Harrison Ave.
Butte, MT 59701
1455 Oak St
Bozeman, MT 59715
416 Broadway
Townsend, MT 59644
5 W Mendenhall St.
Bozeman, MT 59715
123 S Main St
Livingston, MT 59047
101 McLeod St.
Big Timber, MT 59011
455 S 24th St. West
Billings, MT 59102
200 N Higgins -
Missoula, MT 59802
1510 S Reserve St
Missoula, MT 59801
711 S First Street
Hamilton, MT 59840
3210 Euclid Ave
3203 Broadwater Ave.
1006 W Main St
Bozeman, MT 59715
2800 S Reserve St
Missoula, MT 59801
1997
1987
2009
1979
2009
1979
2012
2012
2012
2012
2012
2012
2012
2012
2012
2012
Value At
June 30, 2014
(In Thousands)
Square
Footage
$
3,651
32,304
$
928
$
2,069
$
439
1,391
4,643
3,890
$
7,185
19,818
$
175
$
1,188
1,973
7,109
*
$
851
11,072
$
819
$
124
$
238
$
77
$
1,818
$
452
$
45
$
42
*
*
*
*
*
2,004
3,778
3,079
4,320
4,870
6,758
2,981
2,965
As of June 30, 2014, the net book value of land, buildings, furniture and equipment owned by American Federal, less
accumulated depreciation, totaled $20.10 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, 2014.
ITEM 4.
Not applicable.
MINE SAFETY DISCLOSURES.
35
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, 2014, there were 3,916,233 shares of common stock outstanding, held by approximately 930 shareholders of record.
The closing price of the common stock on June 30, 2014, was $10.50 per share. The following table includes the range of
high and low closing prices for our common stock during each quarter of the two fiscal years ended June 30, 2014 and
2013:
Quarter Ended
High Close
Low Close
Fiscal Year 2014:
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
Fiscal Year 2013:
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
$
$
$
$
11.37
11.15
11.05
12.03
$
$
$
$
11.07
10.99
10.79
10.85
$
$
$
$
10.45
10.60
10.75
10.66
$
$
$
$
10.52
10.26
10.11
10.00
Dividends
Paid
$
$
$
$
0.07250
0.07250
0.07250
0.07250
$
$
$
$
0.07250
0.07125
0.07125
0.07125
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.
On July 1, 2013, the Company announced that its Board of Directors authorized a common stock repurchase program for
150,000 shares of common stock, effective July 1, 2013. The program was intended to be implemented through purchases
made from time to time in the open market or through private transactions. The Company did not purchase any shares of
our common stock during the fiscal year ended June 30, 2014. The repurchase program expired on June 30, 2014.
On July 1, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to 200,000 shares
of its common stock, representing approximately 5.1% of outstanding shares. Under the plan, shares may be purchased by
the company on the open market or in privately negotiated transactions. The extent to which the company repurchases its
shares and the timing of such repurchase will depend upon market conditions and other corporate considerations.
ITEM 6.
SELECTED FINANCIAL DATA.
This item has been omitted based on Eagle’s status as a smaller reporting company.
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
36
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, 2014, commercial real estate and land loans and commercial business loans
represented 33.3% and 12.4% of the total loan portfolio, 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. With the
acquisition of the Sterling Bank branches, the investment portfolio grew substantially during the prior fiscal year. As such,
management is also focused on decreasing the investment portfolio as a percentage of total assets and offsetting this with
growth in the loan portfolio. 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, 2014, we had mortgage servicing rights, net of $3.76 million compared to
$3.19 million as of June 30, 2013. Gain on sale of loans also provides significant fee income or noninterest income in
periods of high mortgage loan origination volumes. Such income will be adversely affected in periods of lower mortgage
activity. 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.
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 steady, it may become more difficult to maintain due to
significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes.
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. The Federal Open Market Committee
(“FOMC”) did not change the federal funds target rate which remained at 0.25% during the year ended June 30, 2014.
From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of
organic growth. On June 29, 2012, the Bank entered into a definitive agreement with Sterling Savings Bank, a Washington
37
state-chartered bank, to acquire Sterling’s banking operations in the state of Montana, including seven branch locations,
certain deposit liabilities, loans and other assets and liabilities associated with such branch locations. As a result of this
acquisition, which closed on November 30, 2012, the Bank acquired approximately $182.5 million in additional assets,
including approximately $41.3 million of pass-rated performing loans and assumed $181.6 million in new deposits. The
Bank has experienced an increase in mortgage loan originations due to the Sterling acquisition. Deposit fee income has
also increased due to the increase in the number of accounts. Operating expenses, primarily salaries and employee benefits
have increased as a result of the acquisition. The Bank is currently engaged in a review of staffing and other efficiency
measures which it expects will reduce operating expenses in the upcoming fiscal year. The Bank received approximately
$130.0 million in cash in the transaction, which may not be able to be immediately used to fund loans. While a substantial
amount of the cash has been invested in securities, it may require additional time to deploy all of the proceeds to fund
loans.
The branch acquisition complements the Bank’s existing growth strategy by expanding into the southern Montana market
and more than doubling the Bank’s retail branch network from six to 13 locations. Of the seven acquired branches six are
in new markets for the Bank, including two in Missoula, one in Billings, and one each in Hamilton, Livingston and Big
Timber. The seventh is in Bozeman where the Bank already has a presence. After the acquisition, the Bank became the
sixth largest Montana-based banking institution.
In addition, the transaction also strengthens the Bank’s mortgage origination franchise and adds a wealth management
business headquartered in Bozeman, Montana. The addition of Sterling’s Montana mortgage banking unit has more than
doubled the Bank’s mortgage banking business. This increase in the mortgage banking business and the addition of a
wealth management business has increased the Bank’s noninterest income and furthered the Bank’s strategy to increase fee
income to complement its margin.
Recent Accounting Pronouncements
In January 2014, the FASB issued Accounting Standards Update No. 2014-4, Receivables – Troubled Debt Restructuring
by Creditors (Subtopic 310-40) related to residential real estate to clarify that an in substance repossession or foreclosure
occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon
completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to
satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the
amendment requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held
by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate
property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The new
guidance is effective for the Company on January 1, 2015 and is not expected to have a significant impact to the
Company’s financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-9, Revenue from Contracts with Customers (Topic
606). This guidance is a comprehensive new revenue recognition standard that will supersede substantially all existing
revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more
estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation. The new standard will be effective in the first quarter of 2017 and is not expected to have a
significant impact to the Company’s financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-14, Receivables—Troubled Debt Restructuring
by Creditors (Subtopic 310-40) — Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure: (a
consensus of the FASB Emerging Issues Task Force. The amendment changes the accounting for foreclosed home loans
with government backed guarantees. The amendment requires lenders to measure the unpaid principal and interest they
expect to recover through the loan guarantee. The loan should be removed from the lender's asset total and added to the
balance sheet as a new receivable. The amendments will become effective for public companies for fiscal years that begin
after December 15, 2014. The Company does not expect this guidance to have a significant 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.
38
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 shareholders’ 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.
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.
39
Financial Condition
Introduction.
Total assets increased $28.58 million, or 5.6%, to $539.11 million at June 30, 2014, from $510.53 million at June 30, 2013.
The loan portfolio increased $59.31 million or 27.6%, to $273.99 million at June 30, 2014. Securities available-for-sale
decreased $29.41 million or 13.4%, to $189.55 million at June 30, 2014. Total liabilities increased by $26.10 million, or
5.7%, to $487.40 million at June 30, 2014, from $461.30 million at June 30, 2013. Total deposits increased $9.30 million
or 2.2%, to $427.05 million at June 30, 2014. Federal Home Loan Bank (FHLB) advances and other borrowings increased
$16.59 million or 47.6%, to $51.45 million at June 30, 2014.
Balance Sheet Details.
Almost all categories of securities available-for-sale decreased during the period with the largest decrease in collateralized
mortgage obligations of $14.87 million or 31.2%. The only increase during the period was in mortgage-backed securities
which increased $2.23 million or 8.4%.
The main components of the increase in loans receivable of $59.31 million were residential mortgage loans which
increased by $21.87 million, commercial real estate loans increasing by $17.64 million and commercial loans increasing by
$12.63 million. Home equity, consumer loans and construction loans also increased. Total loan originations were $297.78
million for the year ended June 30, 2014, with single family mortgages accounting for $212.76 million of the total. Home
equity and construction loan originations totaled $12.92 million and $10.27 million, respectively, for the same period.
Commercial real estate and land loan originations totaled $41.42 million. Consumer loans originated totaled $8.23 million.
Commercial loans originated totaled $12.18 million, with $3.34 million originating from loan syndication programs with
borrowers residing outside of Montana. Loans held-for-sale decreased $3.56 million, to $17.25 million at June 30, 2014
from $20.81 million at June 30, 2013. One of the chief objectives of the Sterling branch acquisition was to expand the
Bank’s footprint across southern Montana. The amount of loans acquired was relatively small in comparison to the
deposits acquired. As a result, the Bank’s loan to deposit ratio declined substantially. The Bank’s strategy has been to
actively market and solicit commercial and commercial real estate loans while using investment portfolio proceeds to help
fund the loan growth.
Growth occurred across most deposit products with the exception of time certificates of deposits which decreased slightly
during the period. Noninterest checking increased $5.46 million or 10.3%, to $58.43 million at June 30, 2014, and money
market accounts increased $2.53 million, or 3.0%. Interest bearing checking accounts increased $2.16 million, or 3.3%, to
$68.03 million at June 30, 2014. Management attributes the organic increase in deposits to increased marketing of
checking accounts as well as customers’ preference for placing funds in secure, federally insured accounts. Certificates of
deposits decreased $5.30 million, or 3.4%, to $152.20 million at June 30, 2014.
Advances from the FHLB and other borrowings increased $16.59 million primarily due to the use of short-term FHLB
advances to fund the Bank’s mortgage banking operations during the quarter ended June 30, 2014.
Total stockholders’ equity increased $2.48 million or 5.0%, to $51.71 million at June 30, 2014 from $49.23 million at June
30, 2013. This was primarily a result of net income of $2.11 million and a decrease in accumulated other comprehensive
loss of $1.13 million (mainly due to a decrease in net unrealized losses on securities available-for-sale) partially offset by
dividends paid of $1.14 million.
Analysis of Net Interest Income
The Bank’s earnings have historically depended primarily upon net interest income, which is the difference between
interest income earned on loans and investments and interest paid on deposits and any borrowed funds. It is the single
largest component of Eagle’s operating income. Net interest income is affected by (i) the difference between rates of
interest earned on loans and investments and rates paid on interest-bearing deposits and borrowings (the “interest rate
spread”) and (ii) the relative amounts of loans and investments and interest-bearing deposits and borrowings.
The following table includes average balances for balance sheet items, as well as, interest and dividends and average yields
related to the average balances.. All average balances are daily average balances. Non-accrual loans were included in the
computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields include the
effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense.
40
Average
Daily
Balance
2014
Interest
and
Dividends
For the Years Ended June 30,
Yield/
Cost(3)
Average
Daily
Balance
(Dollars in Thousands)
2013
Interest
and
Dividends
Yield/
Cost(3)
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
$
1,901
$
2
12,985
4,283
8
17,278
260,825
200,226
3,106
466,058
49,415
$
515,473
$
89,590
$
78
33
28
1,156
748
2,043
58,782
67,688
154,845
36,908
407,813
57,771
753
466,337
49,136
0.00%
5.37%
2.14%
0.24%
3.80%
0.14%
0.08%
0.05%
0.83%
2.70%
0.68%
0.10%
4.98%
2.14%
0.26%
3.71%
0.09%
0.06%
0.04%
0.75%
2.03%
0.50%
$
1,972
$
-
11,200
3,568
30
14,798
208,638
167,118
11,359
389,087
42,978
$
432,065
$
63,138
$
87
37
28
1,046
1,049
2,247
48,058
55,305
125,327
38,781
330,609
42,305
5,365
378,279
53,786
Total liabilities and equity
$
515,473
$
432,065
Net interest income/interest rate spread(1)
$
15,235
3.21%
$
12,551
3.12%
Net interest margin(2)
Total interest-earning assets to interest-bearing liabilities
3.27%
114.28%
3.23%
117.69%
(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.
41
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the old rate; (2) changes
in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume,
which have been allocated proportionately to the change due to volume and the change due to rate.
For the Years Ended June 30,
2014 vs 2013
Due to
Rate
Volume
2013 vs 2012
Due to
Rate
Net
Net
Volume
(In Thousands)
$
2,801
707
(20)
-
3,488
$
(1,016)
8
1
2
(1,005)
$
1,785
715
(19)
2
2,483
$
1,163
2,253
5
-
3,421
$
(847)
(1,877)
5
-
(2,719)
$
316
376
10
-
702
51
247
(51)
247
(65)
(137)
(247)
(449)
(14)
110
(298)
(202)
63
508
(711)
(140)
(11)
(436)
(331)
(778)
52
72
(1,042)
(918)
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
$
3,241
$
(556)
$
2,685
$
3,561
$
(1,941)
$
1,620
Comparison of Operating Results for the Years Ended June 30, 2014 and 2013
Net Income.
Eagle’s net income increased slightly to $2.11 million for the year ended June 30, 2014 from $1.97 million for the year
ended June 30, 2013, an increase of $138,000. This increase was the result of an increase in net interest income of $2.69
million and a reduction in provision for loan losses of $70,000, offset by a decrease in noninterest income of $273,000 and
an increase in noninterest expense of $2.05 million. Eagles’ tax benefit was also $300,000 lower in fiscal year 2014. Basic
earnings per share for the year ended June 30, 2014 were $0.54, compared to $0.51 for the year ended June 30, 2013.
Diluted earnings per share were $0.53 and $0.50 for 2014 and 2013, respectively.
Net Interest Income.
Net interest income increased to $15.24 million for the year ended June 30, 2014, from $12.55 million for the previous
year. This increase of $2.69 million, or 21.4%, was the result of an increase in interest income of $2.48 million and a
decrease in interest expense of $202,000. As shown in the “Rate/Volume Analysis,” this increase was mainly attributable
to larger balances of loans and a decrease in rates on all liabilities partially offset by lower rates on interest earning assets
and larger balances on deposits.
Interest and Dividend Income.
Total interest and dividend income was $17.28 million for the year ended June 30, 2014, compared to $14.80 million for
the year ended June 30, 2013, an increase of $2.48 million, or 16.8%. Interest and fees on loans increased to $12.99
million for 2014 from $11.20 million for 2013. The increase of $1.79, or 16.0%, was due to an increase in the average
balances on loans receivable partially offset by the decrease in average rates for the year ended June 30, 2014.
Specifically, the average interest rate earned on loans receivable decreased by 39 basis points to 4.98% from 5.37% for the
prior year. Average balances for loans receivable, including loans held-for-sale, net, for the year ended June 30, 2014 were
$260.83 million, compared to $208.64 million for the previous year. This represents an increase of $52.18 million, or
25.0%. Interest and dividends on investment securities available-for-sale also increased to $4.29 million for the year ended
June 30, 2014 from $3.57 million for the year ended June 30, 2013, an increase of $717,000, or 20.1%. This increase was
42
the result of higher average balances for the available-for-sale portfolio during the year. Average balances for investment
securities was $200.23 million for the year ended June 30, 2014 compared to $167.12 million for the year ended June 30,
2013. Interest earned from deposits at other banks decreased for the year ended June 30, 2014 due to smaller average
balances.
Interest Expense.
Total interest expense decreased to $2.04 million for the year ended June 30, 2014 from $2.24 million for the year ended
June 30, 2013, a decrease of $202,000, or 9.0%. The decrease was attributable to a decrease in interest on borrowings
partially offset by an increase in expense on deposits. Interest on deposits increased to $1.29 million for the year ended
June 30, 2014 from $1.20 million for the year ended June 30, 2013. This increase of $96,000, or 8.0%, was due to an
increase in average balances partially offset by a decrease in average rates. Average balances for interest bearing deposits
increased from $291.83 million to $370.91 million, a total increase of $79.07 million, or 27.1%. All deposit categories
experienced increases in average balances in 2014. The average cost of deposits decreased 6 basis points, to 0.35% in 2014
from 0.41% in 2013. All deposit categories experienced decreases in average rates in 2014. 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 $751,000 for the year ended June 30, 2014 from $1.05 million for the year ended June 30, 2013. The
average balance of borrowings decreased by $1.87 million to $36.91 million for the year ended June 30, 2014, compared to
$38.78 million for the year ended June 30, 2013 and resulted from decreases in average FHLB borrowings and other
borrowings stemming from inflows of retail deposits as funding sources. The average rate paid on borrowings decreased to
2.03% in 2014 from 2.70% in 2013.
Provision for Loan Losses.
Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered
adequate by 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 $608,000 was made for the year ended
June 30, 2014 while a provision of $678,000 million was made for the year ended June 30, 2013. The decrease from 2013
is based on an analysis of a variety of factors including delinquencies within the loan portfolio. Management believes the
level of total allowances is adequate. Total classified assets decreased to $2.10 million at June 30, 2014 from $2.56 million
at June 30, 2013. Total nonperforming loans as a percentage of the total loan portfolio decreased to 0.19% at June 30,
2014, from 0.36% at June 30, 2013. As of June 30, 2014, American Federal Savings Bank had $458,000 in other real
estate owned, a decrease of $92,000 from $550,000 held at June 30, 2013.
Noninterest Income.
Total noninterest income decreased to $10.04 million for the year ended June 30, 2014, from $10.31 million for the year
ended June 30, 2013, a decrease of $273,000 or 2.6%. The decrease was primarily due to a decrease in net gain on sale of
loans of $831,000 and a net decrease of $267,000 in the value of the fair-value-hedge interest rate swap implemented in
August 2010. Net gain on sale of available-for-sale securities also decreased $188,000. These decreases were partially
offset by increases in mortgage loan servicing fees and service charges on deposit accounts. Mortgage loan servicing fees
increased $348,000 primarily due to higher balances of residential mortgage loans serviced by the Company. Service
charges on deposit accounts increased $212,000 due to an increased number of deposit accounts as a result of the Sterling
branch acquisition. Other noninterest income also increased $477,000 largely due to increased income of $316,000 from
our wealth management division.
Noninterest Expense.
Noninterest expense increased by $2.05 million or 9.8% to $22.91 million for the year ended June 30, 2014 from $20.86
million for the year ended June 30, 2013. This increase was primarily due to increases in salaries and employee benefits of
$2.48 million resulting from the increase in staff from the Sterling branch acquisition. Occupancy and equipment expense
and data processing also increased by $1.08 million as the result of the Sterling branch acquisition and now operating a
larger entity. There were no acquisition costs for the year ended June 30, 2014 compared to $1.92 for the same period last
year as the acquisition was fully completed by the third quarter of fiscal year 2013. Consulting fees increased $404,000
due to an on-going review of staffing and efficiency measures in fiscal 2014.
Income Tax.
Eagle’s income tax benefit was $350,000 for the year ended June 30, 2014, compared to $650,000 for the year ended
June 30, 2013. The effective tax rate was negative 19.88% for the year ended June 30, 2014 and negative 49.13% for the
year ended June 30, 2013. Though pretax income is higher in the current period the percent of tax free municipal bond
income and Bank owned life insurance income to total income increased, thus reducing the effective tax rate. The effective
tax rate was further reduced by a tax credit investment entered into by the Company in 2013. The Company made an
investment in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”).
43
Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the
NMTC program is aimed at stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The federal
tax credit benefits were $380,000 for the year ended June 30, 2014. In addition, the deductibility for tax purposes of
goodwill resulting from the Sterling acquisition has helped reduce the Company’s effective tax rate.
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
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, 2014 and 2013.
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 by the Company’s operating activities, which is primarily comprised of cash transactions affecting net
income, was $9.60 million for the year ended June 30, 2014 compared to net cash used in operating activities of $6.87
million for the year ended June 30, 2013. Net cash provided by operating activities for fiscal 2014 was primarily a result of
a decrease in the amount of loans held-for-sale. Net cash used in operating activities for fiscal 2013 was primarily due to
an increase in the amount of loans held-for-sale.
Net cash 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 $33.69 million for the year ended June 30,
2014 compared to $13.13 million for the year ended June 30, 2013. Net cash used in investing activities for fiscal 2014 is
due in part to loan originations being higher than loan pay-off and principal payments during the year. Loan origination
and principal collection, net was $61.17 million for fiscal 2014. In addition, there was $44.74 million in available-for-sale
security purchases during fiscal 2014. These uses of cash were partially offset by available-for-sale security sales and
maturities, principal payments and calls of $74.40 million. The net cash used in investing activities for fiscal 2013 was
primarily due to purchases of available-for-sale securities, partially offset by cash received for the Sterling branch
acquisition.
Net cash provided by the Company’s financing activities was $24.75 million for the year ended June 30, 2014 compared to
$6.35 million for the year ended June 30, 2013. Net cash provided by financing activities for fiscal 2014 was primarily a
result of a net increase in FHLB advances and other borrowings of $16.59 million, as well as a net increase in deposits of
$9.29 million. Net cash provided by financing activities for fiscal 2013 was due to a net increase in deposits of $15.30
million, partially offset by net payments on FHLB advances and other borrowings of $7.84 million.
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.
At May 31, 2014 (the most recent report available), the Bank’s internally determined measurement of sensitivity to interest
rate movements as measured by a 200 basis point rise in interest rates scenario, decreased the economic value of equity
(“EVE”) by 17.8%. The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity. The
Bank’s tier I core capital ratio, as measured under OCC rules, decreased slightly from 8.64% as of June 30, 2013 to 8.43%
as of June 30, 2014. The Bank’s strong capital position helps to mitigate its interest rate risk exposure.
As of June 30, 2014, 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, 2014, the Bank’s tangible, core and risk-based capital ratios
amounted to 8.43%, 8.43% and 14.27%, respectively, compared to regulatory requirements of 1.50%, 3.00% and 8.00%,
respectively.
44
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 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 % Change of PV
Board Policy Limit
At June 30, 2014
(if applicable)
Projected EVE
Must be no greater than:
+300
+200
+100
0
-100
-26.8%
-17.8%
-8.6%
0%
3.9%
-30.0%
-20.0%
-10.0%
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.
45
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, 2014, 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, 2014,
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.
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, 2014.
Based on this assessment, management concluded that, as of June 30, 2014, 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, 2014 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM 9B.
OTHER INFORMATION.
None.
46
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 2014 Annual Meeting of Stockholders (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 56
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 serves on the Montana Independent Bankers Association board of directors and recently served on 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.
Laura F. Clark, Senior Vice President & Chief Financial Officer
Age 57
Ms. Clark joined the Bank and Eagle as the Senior Vice President and Chief Financial Officer in March 2014. She brings
over 35 years of extensive banking experience, including a variety of executive positions with respected community banks
in Montana. Ms. Clark has participated in a variety of volunteer community events and projects.
Michael C. Mundt, Senior Vice President & Chief Lending Officer
Age 59
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.
Age 45
Rachel R. Amdahl, Senior Vice President/Operations
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.
Tracy A. Zepeda, Senior Vice President/Branch Retail Administration
Age 35
Ms. Zepeda has served as the Senior Vice President/Retail Branches Officer of the Bank since December 2012. Prior to
being named Senior Vice President/Branch Retail Administration she served in a position with similar duties at Sterling
Savings Bank.
On July 1, 2014, the Company announced that Dale Field has been promoted to SVP/Chief Credit Officer, Chantelle Nash
has been promoted to SVP/Chief Risk Officer and Mike Mundt has been promoted to Executive Vice President/Chief
Community Banking Officer, effective July 1, 2014.
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.
47
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.
ITEM 12.
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.
ITEM 13.
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.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information in the Proxy Statement set forth under the captions of “Proposal IV – 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, 2014 and June 30,
2013 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive
Income, Consolidated Statements of Changes in Shareholder 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 10.17 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
Eagle Bancorp 2000 Stock Incentive Plan.
*
*
*
*
*
*
*
10.2
Employment Contract, effective as of October 1, 2009, between Peter J. Johnson and American Federal
Savings Bank.
10.3
Form of Change in Control Agreement between Laura Clark and American Federal Savings Bank.
10.4
Form of Change in Control Agreement between Michael C. Mundt and American Federal Savings Bank.
10.5
Form of Change in Control Agreement between Rachel R. Amdahl and American Federal Savings Bank.
10.6
10.7
10.8
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.
First Amendment to Salary Continuation Agreement, dated December 31, 2006, between Larry A.
Dreyer and American Federal Savings Bank.
48
*
*
*
*
*
*
*
10.9
10.10
10.11
10.12
10.13
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 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 November 16, 2006, between Rachel R. Amdahl and American
Federal Savings Bank.
10.14
American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004.
10.15
Summary of American Federal Savings Bank Bonus Plan.
10.16
10.17
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)
*
21.1
Subsidiaries of Registrant.
23.1
31.1
31.2
32.1
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 Laura F. Clark, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Peter J. Johnson, Chief Executive Officer and Laura F. Clark, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*
**
***
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 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.
101.INS XBRL
Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
49
SIGNATURES
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/ Laura F. Clark
Laura F. Clark
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
9/18/2014
9/18/2014
9/18/2014
9/18/2014
9/18/2014
9/18/2014
9/18/2014
9/18/2014
50
Exhibit 31.1
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, 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 18, 2014
/s/ Peter J. Johnson
Peter J. Johnson
Chief Executive Officer
Exhibit 31.2
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, Laura F. Clark, Chief Financial 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 18, 2014
/s/ Laura F. Clark
Laura F. Clark
Chief Financial Officer
Principal Accounting Officer
Exhibit 32.1
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, 2014 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 Laura F. Clark, 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 18, 2014
/s/ Laura F. Clark
Laura F. Clark
Senior VP and Chief Financial Officer and Principal Accounting Officer
(Principal Financial Officer)
September 18, 2014
[ This Page Intentionally Left Blank ]
CONSOLIDATED FINANCIAL STATEMENTSandREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMJUNE 30, 2014 and 2013AND SUBSIDIARY EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
Contents
Page
Report of Independent Registered Public Accounting Firm ........................................................................... 1
Financial Statements
Consolidated Statements of Financial Condition .................................................................................... 2
Consolidated Statements of Income ....................................................................................................... 3
Consolidated Statements of Comprehensive Income ............................................................................. 4
Consolidated Statements of Changes in Shareholders’ Equity ............................................................... 5
Consolidated Statements of Cash Flows ................................................................................................. 6
Notes to Consolidated Financial Statements .......................................................................................... 7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Eagle Bancorp Montana, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of Eagle Bancorp
Montana, Inc. and Subsidiaries (Eagle) as of June 30, 2014 and 2013 and the related consolidated
statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in
the two year period ended June 30, 2014. Eagle’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Eagle Bancorp Montana, Inc. and Subsidiaries as of June 30, 2014 and 2013, and
the results of its operations and its cash flows for each of the years in the two year period ended June 30,
2014 in conformity with accounting principles generally accepted in the United States of America.
Abilene, Texas
July 24, 2014
Certified Public Accountants
-1-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except for Per Share Data)
ASSETS:
Cash and due from banks
Interest-bearing deposits in banks
Total cash and cash equivalents
Securities available-for-sale
Federal Home Loan Bank stock
Investment in Eagle Bancorp Statutory Trust I
Mortgage loans held-for-sale
Loans receivable, net of deferred loan fees of $413 in 2014 and $117 in
2013 and allowance for loan losses of $2,125 in 2014 and $2,000 in 2013
Accrued interest and dividend receivable
Mortgage servicing rights, net
Premises and equipment, net
Cash surrender value of life insurance
Real estate and other repossessed assets acquired in settlement of loans, net
Goodwill
Core deposit intangible, net
Other assets
Total assets
LIABILITIES:
Deposit accounts:
Noninterest bearing
Interest bearing
Total deposits
Accrued expenses and other liabilities
Federal Home Loan Bank 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; 3,916,233 and 3,898,685 shares outstanding
at June 30, 2014 and 2013, respectively)
Additional paid-in capital
Unallocated common stock held by Employee Stock Ownership Plan
Treasury stock, at cost
Retained earnings
Net accumulated other comprehensive loss
Total shareholders' equity
$
$
$
June 30,
2014
2013
$
6,208
611
6,819
189,553
1,878
155
17,245
273,991
2,429
3,756
20,101
11,082
458
7,034
745
3,862
3,776
2,385
6,161
218,963
1,931
155
20,807
214,677
2,387
3,192
18,943
10,869
550
6,890
922
4,087
539,108
$
510,534
$
58,432
368,613
427,045
3,749
51,454
5,155
487,403
52,972
364,779
417,751
3,535
34,861
5,155
461,302
-
-
41
22,123
(1,224)
(1,800)
34,824
(2,259)
51,705
41
22,109
(1,390)
(1,993)
33,849
(3,384)
49,232
The accompanying notes are an integral part of these consolidated financial statements.
$
539,108
$
510,534
-2-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except for Per Share Data)
Years Ended June 30,
2014
2013
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans
Securities available-for-sale
Trust preferred securities
Interest on deposits with banks
Total interest and dividend income
INTEREST EXPENSE:
Deposits
Federal Home Loan Band advances and other borrowings
Subordinated debentures
Total interest expense
NET INTEREST INCOME
Loan loss provision
NET INTEREST INCOME AFTER LOAN LOSS PROVISION
NONINTEREST INCOME:
Service charges on deposit accounts
Net gain on sale of loans (includes $582 and $193 for 2014 and
2013, respectively, related to accumulated other comprehensive
earnings reclassification)
Mortgage loan service fees
Wealth management income
Net gain on sale of available-for-sale securities (includes $1,073
and $1,261 for 2014 and 2013, respectively, related to accumulated
other comprehensive earnings reclassification)
Net (loss) gain on fair value hedge
Net loss on sale of real estate owned and other reposesssed property
Other noninterest income
Total noninterest income
NONINTEREST EXPENSE:
Salaries and employee benefits
Occupancy and equipment expense
Data processing
Advertising
Amortization of mortgage servicing rights
Amortization of core deposit intangible and tax credits
Federal insurance premiums
Postage
Legal, accounting and examination fees
Consulting fees
Acquisition costs
Write-down on real estate owned and other repossessed property
Other noninterest expense
Total noninterest expenses
INCOME BEFORE INCOME TAXES
Income tax benefit (includes $774 and (3,891) for
2014 and 2013, respectively, related to income tax expense
(benefit) from reclassification items)
NET INCOME
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
$
$
$
$
$
12,985
4,285
3
8
17,281
1,294
664
87
2,045
15,236
608
14,628
1,022
4,586
1,372
527
1,073
(63)
(50)
1,574
10,041
12,822
2,774
1,870
816
630
427
271
175
555
537
-
10
2,021
22,908
1,761
(350)
2,111
0.54
0.53
$
$
$
11,200
3,568
3
27
14,798
1,198
956
93
2,247
12,551
678
11,873
810
5,417
1,024
211
1,261
204
(26)
1,413
10,314
10,344
2,242
1,326
946
752
360
264
138
439
133
1,920
192
1,808
20,864
1,323
(650)
1,973
0.51
0.50
The accompanying notes are an integral part of these consolidated financial statements.
-3-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands, Except for Per Share Data)
Years Ended June 30,
2014
2013
NET INCOME
$
2,111
$
1,973
OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS):
Change in fair value of investment securities
available-for-sale, before income taxes
Reclassification for realized gains and losses on investment
securities included in income, before income taxes
Change in fair value of derivatives designated as cash flow hedges,
before income taxes
Reclassification for realized gains and losses on derivatives
designated as cashflow hedges, before income tax
Total other items of comprehensive income (loss)
Income tax (expense) benefit related to:
Investment securities
Derivatives designated as cash flow hedges
3,093
(8,676)
(1,073)
(1,261)
461
(582)
1,899
(823)
49
(774)
582
(193)
(9,548)
4,049
(158)
3,891
COMPREHENSIVE INCOME (LOSS)
$
3,236
$
(3,684)
The accompanying notes are an integral part of these consolidated financial statements.
-4-
[ This Page Intentionally Left Blank ]
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 2014 and 2013
(Dollars in Thousands, Except for Per Share Data)
Preferred
Stock
Common
Stock
$
-
$
41
Balance at July 1, 2012
Net income
Other comprehensive loss
Dividends paid
Stock compensation expense
Treasury shares reissued for compensation
(19,714 shares at $10.48 average cost per share )
Employee Stock Ownership Plan shares allocated or
committed to be released for allocation (16,616 shares)
Balance at June 30, 2013
$
-
$
41
Net income
Other comprehensive income
Dividends paid
Stock compensation expense
Treasury shares reissued for compensation
(17,548 shares at $10.97 average cost per share )
Employee Stock Ownership Plan shares allocated or
committed to be released for allocation (16,616 shares)
Balance at June 30, 2014
$
-
$
41
The accompanying notes are an integral part of these consolidated financial statements.
Paid-In
Capital
Unallocated
ESOP
Shares
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
$
22,112
$
(1,556)
$
(2,210)
$
32,990
$
2,273
$
53,650
206
(217)
8
166
217
1,973
(1,114)
(5,657)
1,973
(5,657)
(1,114)
206
-
174
$
22,109
$
(1,390)
$
(1,993)
$
33,849
$
(3,384)
$
49,232
193
(193)
14
166
193
2,111
(1,136)
1,125
2,111
1,125
(1,136)
193
-
180
$
22,123
$
(1,224)
$
(1,800)
$
34,824
$
(2,259)
$
51,705
-5-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands, Except for Per Share Data)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Loan loss provision
Write-down on real estate owned and other repossessed assets
Depreciation
Net amortization of investment securities premium and discounts
Amortization of mortgage servicing rights
Amortization of core deposit intangible and tax credits
Net gain on sale of loans
Net gain on sale of available-for-sale securities
Net loss on sale of real estate owned and other repossessed assets
Loss (gain) on fair value hedge
Net gain on sale/disposal of premises and equipment
Net appreciation in cash surrender value of life insurance
Net change in:
Accrued interest and dividends receivable
Loans held-for-sale
Other assets
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities:
Sales
Maturities, principal payments and calls
Purchases
Federal Home Loan Bank stock redeemed
Cash received in acquisition of Sterling Bank branches, net of cash paid
Final valuation adjustments related to acquisition of Sterling Bank branches
Loan origination and principal collection, net
Proceeds from bank owned life insurance
Purchases of bank owned life insurance
Proceeds from sale of real estate and other repossessed assets
acquired in settlement of loans
Proceeds from sale of premises and equipment
Additions to premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Net short-term advances from Federal Home Loan Bank and other borrowings
Long-term advances from Federal Home Loan Bank and other borrowings
Payments on long-term Federal Home Loan Bank and other borrowings
Dividends paid
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
Years Ended June 30,
2014
2013
$
2,111
$
1,973
608
10
1,146
2,839
630
427
(4,586)
(1,073)
50
63
(15)
(322)
(42)
8,027
(802)
526
9,597
52,058
22,344
(44,738)
53
-
(144)
(61,166)
109
-
83
31
(2,320)
(33,690)
9,294
20,793
5,000
(9,200)
(1,136)
24,751
658
6,161
678
192
931
2,169
752
360
(5,417)
(1,261)
26
(204)
(285)
(297)
(1,016)
(4,388)
(1,360)
272
(6,875)
19,501
32,888
(192,919)
72
130,094
-
(2,476)
-
(1,400)
1,856
647
(1,391)
(13,128)
15,299
7,500
865
(16,200)
(1,114)
6,350
(13,653)
19,814
CASH AND CASH EQUIVALENTS, end of period
$
6,819
$
6,161
The accompanying notes are an integral part of these consolidated financial statements.
-6-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Nature of Operations
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. Shareholders 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 currently a federally chartered savings bank and was previously subject to the
regulations of the Office of Thrift Supervision (“OTS”). These regulations were 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”).
On May 8, 2014, the Company announced that it has applied to the State of Montana to form an
interim bank for the purpose of facilitating the conversion of the Company's wholly-owned
subsidiary, American Federal Savings Bank, from a federally chartered savings bank to a
Montana chartered commercial bank. If the new charter is approved, the bank plans to rename
itself "Opportunity Bank of Montana."
The Bank is headquartered in Helena, Montana, and operates additional branches in Butte,
Bozeman, Billings, Big Timber, Livingston, Missoula, Hamilton and Townsend, Montana. It
also operates two separate mortgage loan origination locations in Bozeman and Missoula,
Montana. The Bank’s market area is concentrated in southern 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 its subsidiaries are
referred to herein as “the Company.”
Principles of Consolidation
The consolidated financial statements include the accounts of Eagle Bancorp Montana Inc. the
Bank, Eagle Bancorp Statutory Trust I, and AFSB NMTC Investment Fund, LLC. All
significant intercompany transactions and balances have been eliminated in consolidation.
-7-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
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 consolidated statement of financial
condition 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.
Significant Group Concentrations of Credit Risk
Most of the Company’s business activity is with customers located within Montana. 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, 2014 and
June 30, 2013, no account balances were held with correspondent banks that were in excess of
FDIC insured levels, except for federal funds sold or deposit balances held at FHLB Seattle.
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 $0 as of June 30, 2014 and 2013.
Investment Securities
The Company can designate debt and equity securities as held-to-maturity, available-for-sale or
trading. Currently all securities are designated as available-for-sale.
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.
-8-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Investment Securities – continued
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.
Trading – No investment securities were designated as trading at June 30, 2014 and 2013.
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 531
shares during the year ended June 30, 2014 and 712 in the year ended June 30, 2013.
Mortgage Loans Held-for-Sale
Mortgage loans originated and intended for sale in the secondary market are carried at fair 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 Montana. At June 30, 2014 and
2013, 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.
-9-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – 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
nonperforming 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.
-10-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Loans – continued
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.
-11-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – 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.
-12-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Loans – continued
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.
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.
-13-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Mortgage Servicing Rights – 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 Company 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, 2014 and 2013 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 40 years. The costs of maintenance and repairs are
expensed as incurred, while major expenditures for renewals and betterments are capitalized.
Income Taxes
The Company adopted authoritative 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-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – 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.
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 accrued on penalties related to unrecognized tax benefits in tax
expense. During the years ended June 30, 2014 and 2013, the Company recognized no interest
and penalties. Based on management’s analysis, the Company did not have any uncertain tax
positions as of June 30, 2014 or 2013. The Company files tax returns in the U.S. federal
jurisdiction and the State of Montana. There are currently no income tax examinations
underway for these jurisdictions. The Company’s income tax returns are subject to examination
by relevant taxing authorities as follows: U.S. Federal income tax returns for tax years 2011 and
forward; Montana income tax returns for tax years 2011 and forward.
Treasury Stock
Treasury stock is accounted for on the cost method and consists of 166,894 shares in 2014 and
184,442 shares in 2013.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising costs were
approximately $816,000 and $946,000 for the years ended June 30, 2014 and 2013, 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 shareholders’ equity (capital surplus). The cost of ESOP shares that have
not yet been allocated or committed to be released is deducted from shareholders’ equity.
-15-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Earnings Per Share
Earnings per common share is computed using the two-class method prescribed under ASC
Topic 260, “Earnings Per Share.” ASC Topic 260 provides that unvested share based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The Corporation has determined that its outstanding non-
vested stock awards are participating securities. Under the two-class method, basic earnings per
common share is computed by dividing net earnings allocated to common stock by the weighted-
average number of common shares outstanding during the applicable period, excluding
outstanding participating securities. Diluted earnings per common share is computed using the
weighted-average number of shares determined for the basic earnings per common share
computation plus the dilutive effect of stock compensation using the treasury stock method. A
reconciliation of the weighted-average shares used in calculating basic earnings per common
share and the weighted average common shares used in calculating diluted earnings per common
share for the reported periods is provided in Note 2 - Earnings Per Share.
Derivatives
Derivatives are recognized as assets and liabilities on the consolidated statement of financial
condition 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.
-16-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Derivatives – continued
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.
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 statement of financial condition 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.
-17-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
Transfers of Financial Assets
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.
Business Combinations, Goodwill and Other Intangible Assets
Authoritative guidance requires that all business combinations initiated after December 31, 2001,
be accounted for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business combination. The
guidance also addresses the initial recognition and measurement of intangible assets acquired in
a business combination and the accounting for goodwill and other intangible assets subsequent to
their acquisition. The guidance provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment.
The goodwill recorded for the acquisition of the branches of Sterling Bank in the second quarter
of 2013 was $6,890,000 and is not subject to amortization in accordance with the
guidance. Final valuation adjustments were recorded in the second quarter of 2014 for $144,000
and impacted goodwill. The final goodwill recorded related to the acquisition was $7,034,000.
The Company performs a goodwill impairment test annually. There have been no reductions of
recorded goodwill resulting from the impairment tests. Other identifiable intangible assets
recorded by the Company represent the future benefit associated with the acquisition of the core
deposits of the Sterling Branches and are being amortized over 7 years utilizing a method that
approximates the expected attrition of the deposits. This amortization expense is included in the
noninterest expense section of the consolidated statements of income.
Recent Accounting Pronouncements
In January 2014, the FASB issued Accounting Standards Update No. 2014-4, Receivables –
Troubled Debt Restructuring by Creditors (Subtopic 310-40) related to residential real estate to
clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to
have received physical possession of residential real estate property collateralizing a consumer
mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate
property upon completion of a foreclosure or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan through completion of a deed in
lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires
interim and annual disclosure of both (1) the amount of foreclosed residential real estate property
held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized
by residential real estate property that are in the process of foreclosure according to local
requirements of the applicable jurisdiction. The new guidance is effective for the Company on
January 1, 2015 and is not expected to have a significant impact to the Company’s financial
statements.
-18-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies – continued
In May 2014, the FASB issued Accounting Standards Update No. 2014-9, Revenue from
Contracts with Customers (Topic 606). This guidance is a comprehensive new revenue
recognition standard that will supersede substantially all existing revenue recognition guidance.
The new standard’s core principle is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates than under existing
guidance. These may include identifying performance obligations in the contract, estimating the
amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation. The new standard will be effective in the first
quarter of 2017 and is not expected to have a significant impact to the Company’s financial
statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-14, Receivables—
Troubled Debt Restructuring by Creditors (Subtopic 310-40) — Classification of Certain
Government-Guaranteed Mortgage Loans upon Foreclosure: (a consensus of the FASB
Emerging Issues Task Force. The amendment changes the accounting for foreclosed home loans
with government backed guarantees. The amendment requires lenders to measure the unpaid
principal and interest they expect to recover through the loan guarantee. The loan should be
removed from the lender's asset total and added to the balance sheet as a new receivable. The
amendments will become effective for public companies for fiscal years that begin after
December 15, 2014. The Company does not expect this guidance to have a significant impact on
the consolidated financial statements.
NOTE 2: Earnings Per Share
The computations of basic and diluted earnings per share were as follows:
Weighted average shares outstanding during the
year on which basic earnings per share is calculated
Dilutive effect of stock compensation
Average outstanding shares on which
diluted earnings per share is calculated
Years Ended June 30,
2013
2014
(Dollars in Thousands)
3,910,320
63,996
3,892,042
85,519
3,974,316
3,977,561
Net income applicable to common stockholders
Basic earnings per share
Diluted earnings per share
$
$
$
2,111
0.54
0.53
$
$
$
1,973
0.51
0.50
NOTE 3: Investment Securities
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.
-19-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Investment Securities – continued
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 fair values of securities, together with unrealized gains and losses, were
as follows:
Amortized
Cost
June 30, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
Available-for-Sale:
U.S. government and agency
Municipal obligations
Corporate obligations
Mortgage-backed securites - government-backed
CMOs - government backed
$
$
41,955
82,882
5,984
29,448
33,557
$
48
1,079
22
79
40
$
(697)
(3,597)
(42)
(369)
(836)
41,306
80,364
5,964
29,158
32,761
Total
$
193,826
$
1,268
$
(5,541)
$
189,553
Amortized
Cost
June 30, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
Available-for-Sale:
U.S. government and agency
Municipal obligations
Corporate obligations
Mortgage-backed securites - government-backed
CMOs - government backed
$
$
50,904
88,948
9,130
27,680
48,594
$
514
1,072
84
35
307
$
(487)
(5,584)
(153)
(813)
(1,268)
50,931
84,436
9,061
26,902
47,633
Total
$
225,256
$
2,012
$
(8,305)
$
218,963
The Company has not entered into any interest rate swaps, options, or futures contracts relating
to investment securities.
Net proceeds from sales of securities available-for-sale were $52,058,000 and $19,501,000 for
the years ended June 30, 2014 and 2013, respectively. Gross realized gains on securities
available-for-sale were $1,286,000 and $1,323,000 for the years ended June 30, 2014 and 2013,
respectively. Gross realized losses on securities available-for-sale were $213,000 and $62,000
for the years ended June 30, 2014 and 2013, respectively.
-20-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Investment Securities – continued
The amortized cost and fair value of securities at June 30, 2014 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.
Amortized
Cost
Fair
Value
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
$
1,512
7,773
17,311
104,225
1,531
7,769
16,811
101,523
(In Thousands)
$
130,821
127,634
Mortgage-backed securites - government-backed
CMOs - government backed
Total
29,448
33,557
193,826
$
$
29,158
32,761
189,553
Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.
At June 30, 2014 and 2013, securities with a carrying value of $8,433,000 and $9,640,000,
respectively, were pledged to secure public deposits and for other purposes required or permitted
by law.
-21-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Investment Securities – continued
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 were as follows:
June 30, 2014
Less than 12 months
Gross
Unrealized
Losses
Fair
Value
12 months or longer
Gross
Unrealized
Losses
Fair
Value
U.S. government and agency
Municipal obligations
Corporate obligations
Mortgage-backed & CMOs
$
$
20,607
871
-
14,724
(In Thousands)
(284)
$
(49)
-
(143)
13,593
56,700
2,958
38,742
$
(413)
(3,548)
(42)
(1,062)
Total
$
36,202
$
(476)
$
111,993
$
(5,065)
June 30, 2013
Less than 12 months
Gross
Unrealized
Losses
Fair
Value
12 months or longer
Gross
Unrealized
Losses
Fair
Value
U.S. government and agency
Municipal obligations
Corporate obligations
Mortgage-backed & CMOs
$
$
19,615
60,910
5,017
52,548
(In Thousands)
(487)
$
(5,495)
(153)
(2,080)
-
539
-
309
$
Total
$
138,090
$
(8,215)
$
848
$
-
(89)
-
(1)
(90)
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, 2014 and 2013. 114 and 126 securities were in
an unrealized loss position as of June 30, 2014 and 2013, 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-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Investment Securities – continued
At June 30, 2014, 90 U.S. Government and agency securities and municipal obligations have
unrealized losses with aggregate depreciation of approximately 4.47% 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. As management has the ability to
hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be
other than temporary.
At June 30, 2014, 21 mortgage backed and CMO securities have unrealized losses with
aggregate depreciation of approximately 2.20% 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, changes in interest rates and credit spreads and uncertainty of future
prepayment speeds. Management considers available evidence to assess whether it is more
likely-than-not that all amounts due would not be collected. In such assessment, management
considers the severity and duration of the impairment, the credit ratings of the security, the
overall deal and payment structure, including the Company's position within the structure,
underlying obligor, financial condition and near term prospects of the issuer, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash
flows and fair value estimates. There has been no disruption of the scheduled cash flows on any
of the securities. Management’s analysis as of June 30, 2014 revealed no expected credit losses
on the securities and therefore, declines are not deemed to be other than temporary.
At June 30, 2014, 3 corporate obligations had an unrealized loss with aggregate depreciation of
approximately 1.40% 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, no declines are deemed
to be other than temporary.
At June 30, 2013, 98 U.S. Government and agency securities and municipal obligations had
unrealized losses with aggregate depreciation of approximately 6.96% from the Company's
amortized cost basis. These unrealized losses were principally due to changes in interest rates
and credit spreads. In analyzing an issuer's financial condition, management considers whether
the securities are issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred, and industry analysts' reports. As management has the ability to
hold debt securities until maturity, or for the foreseeable future, no declines were deemed to be
other than temporary.
At June 30, 2013, 23 mortgage backed and CMO securities had unrealized losses with aggregate
depreciation of approximately 3.79% from the Company’s cost basis. We believed these
unrealized losses were principally due to the credit market’s concerns regarding the stability of
the mortgage market.
-23-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Investment Securities – continued
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 was no disruption of the scheduled cash flows on any of the securities.
Management’s analysis as of June 30, 2013 revealed no expected credit losses on the securities
and therefore, declines are not deemed to be other than temporary.
At June 30, 2013, 5 corporate obligations had unrealized losses with aggregate depreciation of
approximately 2.96% from the Company's cost basis. This unrealized loss was principally due
to changes in interest rates. No credit issues were identified that cause management to believe
the declines in market value were other than temporary. In analyzing the issuer's financial
condition, management considers industry analysts' reports, financial performance and projected
target prices of investment analysts within a one-year time frame. As management has the
ability to hold debt securities until maturity, or for the foreseeable future, no declines were
deemed to be other than temporary.
NOTE 4: Loans
Loans receivable consisted of the following:
First mortgage loans:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Other loans:
Home equity
Consumer
Commercial
Total
Allowance for loan losses
Deferred loan fees, net
June 30,
2014
2013
(In Thousands)
$
$
92,321
92,043
6,923
70,453
74,395
2,738
37,866
12,964
34,412
276,529
(2,125)
(413)
35,660
11,773
21,775
216,794
(2,000)
(117)
Total loans, net
$
273,991
$
214,677
Within the commercial real estate loan category above, $12,830,000 and $13,134,000 was
guaranteed by the United States Department of Agriculture Rural Development, at June 30, 2014
and 2013, respectively. In addition, within the commercial loan category above, $3,880,000 and
$707,000 were in loans originated through a syndication program where the business resides
outside of Montana, at June 30, 2014 and 2013, respectively.
-24-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Loans – continued
The following table includes information regarding nonperforming assets.
June 30,
2014
2013
(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 nonperforming assets
Total nonperforming assets as a percentage of total assets
Allowance for loan losses
Percent of allowance for loan losses to nonperforming loans
Percent of allowance for loan losses to nonperforming assets
$
$
$
$
$
$
342
-
180
522
458
980
0.18%
2,125
407.09%
216.84%
470
-
303
773
550
1,323
0.26%
2,000
258.73%
151.17%
Historical loss averages have decreased, as a result of lower charge-offs within the past three
years, and impacted the allowance adequacy calculation as a percent of loans. Allowance for
loan losses activity was as follows:
1-4 Family Commercial
Real Estate Real Estate Construction
Home
Equity
Consumer
Commercial
Total
(In Thousands)
Allowance for loan losses:
Beginning balance, July 1, 2013
Charge-offs
Recoveries
Provision
Ending balance, June 30, 2014
Ending balance, June 30, 2014 allocated to
$
$
$
$
$
$
$
423
-
-
62
485
952
(199)
17
204
974
15
-
-
15
30
290
(73)
-
82
299
40
(88)
4
93
49
280
(144)
-
152
288
2,000
(504)
21
608
2,125
$
$
$
$
$
$
$
loans individually evaluated for impairment
$
-
$
-
$
-
$
31
$
20
$
15
$
66
Ending balance, June 30, 2014 allocated to
loans collectively evaluated for impairment
$
485
$
974
$
30
$
268
$
29
$
273
$
2,059
Loans receivable:
Ending balance, June 30, 2014
$
92,321
$
92,043
$
6,923
$
37,866
$
12,964
$
34,412
$
276,529
Ending balance, June 30, 2014 of loans
individually evaluated for impairment
Ending balance, June 30, 2014 of loans
collectively evaluated for impairment
$
660
$
280
$
-
$
288
$
101
$
315
$
1,644
$
91,661
$
91,763
$
6,923
$
37,578
$
12,863
$
34,097
$
274,885
-25-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4:
Loans – continued
Allowance for loan losses:
Beginning balance, July 1, 2012
Charge-offs
Recoveries
Provision
Ending balance, June 30, 2013
Ending balance, June 30, 2013 allocated to
1-4 Family Commercial
Real Estate Real Estate Construction
Home
Equity
Consumer
Commercial
Total
(In Thousands)
$
$
$
$
$
$
$
403
(73)
-
93
423
772
(35)
-
215
952
10
-
-
5
15
156
(190)
-
324
290
78
(66)
6
22
40
206
(1)
56
19
280
1,625
(365)
62
678
2,000
$
$
$
$
$
$
$
loans individually evaluated for impairment
$
-
$
-
$
-
$
153
$
6
$
-
$
159
Ending balance, June, 30, 2013 allocated to
loans collectively evaluated for impairment
$
423
$
952
$
15
$
137
$
34
$
280
$
1,841
Loans receivable:
Ending balance, June 30, 2013
$
70,453
$
74,395
$
2,738
$
35,660
$
11,773
$
21,775
$
216,794
Ending balance, June 30, 2013 of loans
individually evaluated for impairment
Ending balance, June 30, 2013 of loans
collectively evaluated for impairment
$
315
$
722
$
-
$
779
$
78
$
121
$
2,015
$
70,138
$
73,673
$
2,738
$
34,881
$
11,695
$
21,654
$
214,779
Internal classification of the loan portfolio was as follows:
1-4 Family
Real Estate
Commercial
Real Estate Construction
June 30, 2014
Home
Equity
(In Thousands)
Consumer
Commercial
Total
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
Performing
Restructured loans
Nonperforming
Total
Credit Risk Profile Based on Payment Activity
$
$
$
$
$
$
$
91,661
-
660
-
-
92,321
92,271
-
50
92,321
$
$
91,763
-
280
-
-
92,043
91,913
130
-
92,043
$
$
6,923
-
-
-
-
6,923
6,923
-
-
6,923
$
$
$
$
$
$
37,578
-
257
-
31
37,866
37,674
50
142
37,866
12,863
-
74
7
20
12,964
12,921
-
43
12,964
34,097
-
300
-
15
34,412
34,305
-
107
34,412
$
$
274,885
-
1,571
7
66
276,529
276,007
180
342
276,529
$
$
$
$
$
$
$
$
$
-26-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Loans – continued
1-4 Family
Real Estate
Commercial
Real Estate Construction
June 30, 2013
Home
Equity
(In Thousands)
Consumer
Commercial
Total
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
Performing
Restructured loans
Nonperforming
Total
Credit Risk Profile Based on Payment Activity
$
$
$
$
$
$
$
70,138
-
315
-
-
70,453
70,395
-
58
70,453
$
$
73,680
715
-
-
-
74,395
74,092
303
-
74,395
$
$
2,738
-
-
-
-
2,738
2,738
-
-
2,738
$
$
$
$
$
$
34,881
-
626
-
153
35,660
35,355
-
305
35,660
11,695
-
62
10
6
11,773
11,732
-
41
11,773
21,654
-
121
-
-
21,775
21,709
-
66
21,775
$
$
214,786
715
1,124
10
159
216,794
216,021
303
470
216,794
$
$
$
$
$
$
$
$
$
The Company utilizes a 5 point internal loan rating system, largely based on regulatory
classifications, for 1-4 family real estate, commercial real estate, construction, home equity,
consumer, 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 or the collateral pledged, if any. Loans so classified have a well-
defined weakness or weaknesses. They are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected.
Loans rated Doubtful: these loans 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.
-27-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Loans – continued
On an annual basis, or more often if needed, the Company formally reviews the ratings of all
commercial real estate, construction, and commercial business loans that have a principal
balance of $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.
The following tables include information regarding impaired loans.
Recorded
Investment
Unpaid
Principal
Balance
$
660
280
-
257
81
300
$
660
393
-
277
91
328
June 30, 2014
Related
Allowance
(In Thousands)
$
-
-
-
-
-
-
Interest
Income
Recognized
Average
Recorded
Investment
$
17
2
-
7
4
6
$
488
501
-
329
77
211
-
-
-
31
20
15
-
-
-
31
20
15
-
-
-
31
20
15
-
-
-
-
-
-
-
-
-
205
13
8
660
280
-
288
101
315
1,644
$
660
393
-
308
111
343
1,815
$
-
-
-
31
20
15
66
$
17
2
-
7
4
6
36
$
488
501
-
534
90
219
1,832
$
With no related allowance:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
With a related allowance:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total
-28-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Loans – continued
Recorded
Investment
Unpaid
Principal
Balance
$
315
722
-
400
72
121
$
315
722
-
400
72
121
June 30, 2013
Related
Allowance
(In Thousands)
$
-
-
-
-
-
-
Interest
Income
Recognized
Average
Recorded
Investment
$
14
38
-
10
2
7
$
158
361
-
200
36
61
-
-
-
379
6
-
-
-
-
404
6
-
-
-
-
153
6
-
-
-
-
9
-
-
-
113
-
-
4
-
315
722
-
779
78
121
2,015
$
315
722
-
804
78
121
2,040
$
-
-
-
153
6
-
159
$
14
38
-
19
2
7
80
$
158
474
-
200
40
61
933
$
With no related allowance:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
With a related allowance:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total:
1-4 Family
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total
The following tables include information regarding delinquencies within the loan portfolio.
30-89 Days
Past Due
$
701
294
-
583
97
79
1,754
1-4 Family real estate
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total
$
$
June 30, 2014
Total
Past Due
Current
Total
Loans
$
(In Thousands)
701
$
424
-
775
128
186
2,214
91,620
91,619
6,923
37,091
12,836
34,226
274,315
$
$
92,321
92,043
6,923
37,866
12,964
34,412
276,529
$
Recorded
Investment
>90 Days and
Still Accruing
-
$
-
-
-
-
-
$
-
90 Days
and
Greater
-
$
130
-
192
31
107
460
$
-29-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Loans – continued
30-89 Days
Past Due
$
312
39
-
265
279
187
1,082
90 Days
and
Greater
5
$
217
-
196
37
-
455
$
$
$
June 30, 2013
Total
Past Due
Current
Total
Loans
$
(In Thousands)
$
317
256
-
461
316
187
1,537
70,136
74,139
2,738
35,199
11,457
21,588
215,257
$
$
70,453
74,395
2,738
35,660
11,773
21,775
216,794
$
Recorded
Investment
>90 Days and
Still Accruing
-
$
-
-
-
-
-
$
-
1-4 Family real estate
Commercial real estate
Construction
Home equity
Consumer
Commercial
Total
Interest income not accrued on these loans and cash interest income was immaterial for the years
ended June 30, 2014 and 2013. The allowance for loan losses on non-accrual loans as of June 30,
2014 and 2013 was $66,000 and $93,000, respectively. There were $1,644,000 ($1,578,000 net
of loss reserves of $66,000) and $2,015,000 ($1,856,000 net of loss reserves of $159,000) of
loans considered impaired at June 30, 2014 and 2013, 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, 2014 were $1,678,000 ($7,176,000 including loans serviced for others). During the
year ended June 30, 2014, including loans sold and serviced for others, total principal additions
were $166,000 and total principal reductions were $695,000. Interest income from loans owned
was $86,000 for the year ended June 30, 2014. The Bank serviced, for the benefit of others,
$5,498,000at June 30, 2014 loans from directors and senior officers.
Loans receivable from directors and senior officers, and their related parties, of the Company at
June 30, 2013 were $1,684,000 ($7,705,000 including loans serviced for others). During the
year ended June 30, 2013, including loans sold and serviced for others, total principal additions
amounted to $664,000 and total principal payments amounted to $957,000. Interest income from
loans owned was $93,000 for the year ended June 30, 2013. The Bank serviced, for the benefit
of others, $6,020,000 at June 30, 2013.
-30-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Troubled Debt Restructurings
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 previous fiscal year (July 1, 2011) for identification as
troubled debt restructurings. The Company identified as troubled debt restructurings certain
receivables for which the allowance for credit losses had previously been measured under a
general allowance for credit losses methodology (ASC 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, 2014, 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
$180,000 (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 $113,000 (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.
Combination Modification – Any other type of modification, including the use of multiple
categories above.
-31-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Troubled Debt Restructurings – continued
The following tables present troubled debt restructurings.
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
Accrual
Status
$
-
-
-
-
-
-
$
-
Accrual
Status
-
$
86
-
-
-
-
$
86
June 30, 2014
Non-Accrual
Status
(In Thousands)
$
-
130
-
50
-
-
180
$
June 30, 2013
Non-Accrual
Status
(In Thousands)
-
$
217
-
-
-
-
217
$
Total
Modification
$
-
130
-
50
-
-
180
$
Total
Modification
-
$
303
-
-
-
-
303
$
-32-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Troubled Debt Restructurings - continued
The following tables present restructured loans that occurred during the year ended June 30,
2014.
June 30, 2014
Rate
Term
Interest Only
Payment
Combination
Total
Modification Modification Modification Modification Modification Modification
(In Thousands)
Pre-modification Outstanding
Recorded Investment:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
70
-
-
$
70
$
-
-
-
70
-
-
$
70
June 30, 2014
Rate
Term
Interest Only
Payment
Combination
Total
Modification Modification Modification Modification Modification Modification
(In Thousands)
Post-modification Outstanding
Recorded Investment:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
-
$
-
-
-
50
-
-
$
50
$
-
-
-
50
-
-
$
50
There has been one default within 12 months after the troubled debt restructuring and this loan is
still in default. 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, 2014 and 2013, the Company had no commitments to lend
additional funds to loan customers whose terms had been modified in trouble debt restructures.
-33-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: Foreclosed Assets
Foreclosed assets are presented net of an allowance for losses. A summary of the balance of
foreclosed assets is presented below:
Land
Single family residence
Total foreclosed assets
Expenses applicable to foreclosed assets included the following:
Write-down on real estate owned and other repossessed assets
Net loss on sale
Operating expenses net of rental income
Total expenses related to foreclosed assets
June 30,
2014
2013
(In Thousands)
$
458
-
458
$
473
77
550
Years Ended June 30,
2014
2013
(In Thousands)
$
10
50
11
71
$
192
26
22
240
$
$
$
$
NOTE 7: Mortgage Servicing Rights
The Company is servicing loans for the benefit of others totaling approximately $558,636,000
and $476,590,000 at June 30, 2014 and 2013, 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 $4,082,000 and $3,314,000 at June 30, 2014
and 2013, respectively.
-34-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: Mortgage Servicing Rights – continued
The following table is a summary of activity in mortgage servicing rights and the valuation
allowance.
Mortgage servicing rights:
Beginning balance
Mortgage servicing rights capitalized
Amortization of mortgage servicing rights
Ending balance
Valuation allowance:
Beginning balance
Provision (credited) to operations
Ending balance
Years Ended June 30,
2014
2013
(In Thousands)
$
$
3,192
1,194
(630)
3,756
-
-
-
2,218
1,726
(752)
3,192
-
-
-
Mortgage servicing rights, net
$
3,756
$
3,192
The fair values of these rights were $4,999,000 and $3,589,000 at June 30, 2014 and June 30,
2013, respectively. The fair value of servicing rights was determined using discount rates
ranging from 10.00% to 12.00%, prepayment speeds ranging from 100.00% to 385.00% PSA,
depending on stratification of the specific right. The fair value was also adjusted for the effect of
potential past dues and foreclosures.
-35-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: Premises and Equipment
The cost and accumulated depreciation of premises and equipment was as follows:
Land
Buildings and improvements
Furniture and equipment
Construction in progress
Accumulated depreciation
$
June 30,
2014
2013
(In Thousands)
4,587
$
17,899
5,548
1,206
29,240
(9,139)
4,587
17,068
5,273
19
26,947
(8,004)
Premises and equipment, net
$
20,101
$
18,943
Depreciation expense was $1,146,000 and $931,000 for the years ended June 30, 2014 and 2013,
respectively.
NOTE 9: Goodwill and Other Intangible Assets
Goodwill and other intangible assets were recorded as part of the Sterling acquisition.
The carrying amount of goodwill was as follows:
Goodwill
June, 30
2014
2013
(In Thousands)
7,034
$
6,890
$
Goodwill of $6,890,000 was recorded in the second quarter of 2013 for the acquisition. Final
valuation adjustments were recorded in the second quarter of 2014 for $144,000 and impacted
goodwill. The final goodwill recorded related to the acquisition was $7,034,000.
The components of other intangible assets were as follows:
June, 30
2014
2013
(In Thousands)
1,031
$
(286)
745
$
1,031
(109)
922
$
$
Core deposit intangible
Accumulated amortization
Core deposit intangible, net
-36-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: Goodwill and Other Intangible Assets – continued
Core deposit intangible assets are amortized on an accelerated basis over their estimated life of
10 years. Amortization expense related to intangible assets was $177,000 and $109,000 for the
years ended June 30, 2014 and 2013, respectively. The estimated aggregate future amortization
expense for core deposit intangible assets remaining as of June 30, 2014 is as follows:
2015
2016
2017
2018
2019
Thereafter
(In Thousands)
$
158
139
120
102
83
143
$
745
NOTE 10: Deposits
Deposits are summarized as follows:
June 30,
2014
2013
$
Noninterest checking
Interest bearing checking
Savings
Money market
Time certificates of deposits
Balance
58,432
68,033
60,493
87,892
152,195
Balance
Weighted
Average
Rate
(In Thousands)
0.00% $
0.03%
0.05%
0.12%
0.93%
52,972
65,876
56,051
85,361
157,491
$
427,045
0.37% $
417,751
Weighted
Average
Rate
0.00%
0.04%
0.05%
0.13%
1.02%
0.42%
Time certificates of deposit include $4,195,000 and $0 related to a 5 year, 1.80% fixed rate
brokered CD at June 30, 2014 and 2013, respectively.
Time certificates of deposits with balances of $100,000 and greater was $63,851,000 and
$62,057,000 at June 30, 2014 and 2013, respectively.
-37-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: Deposits – continued
At June 30, 2014, the scheduled maturities of time deposits were as follows:
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:
Checking
Savings
Money market accounts
Time certificates of deposits
$
(In Thousands)
$
98,304
23,165
14,254
7,236
9,236
$
152,195
Years Ended June 30,
2014
2013
(In Thousands)
$
28
31
110
1,125
28
37
87
1,046
$
1,294
$
1,198
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, 2014 the Company held
$58,652,000 in deposit accounts that included balances of $250,000 or more.
At June 30, 2014 and 2013, the Company reclassified $67,000 and $54,000, respectively, in
overdrawn deposits as loans.
Directors’ and senior officers’ deposit accounts at June 30, 2014 and 2013, were $463,000 and
$645,000, respectively.
-38-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: 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:
June 30,
2014
2013
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
(In Thousands)
$
$
37,493
7,200
200
5,200
200
1,161
16,700
9,200
7,200
200
200
1,361
$
51,454
$
34,861
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 a blanket pledge of
the Bank’s 1-4 family residential mortgage portfolio. At June 30, 2014 and 2013, 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, 2014, was 30% of total Bank assets, or approximately $159,804,000. The
balance of advances was $49,404,000 and $33,996,000 at June 30, 2014 and 2013, respectively.
Other Borrowings
The Bank had no structured repurchase agreements with PNC Financial Service Group, Inc.
(“PNC”) at June 30, 2014 and 2013. At June 30, 2014 and 2013, the Bank’s subsidiary had an
$865,000 borrowing related to the New Markets Tax Credit. It is interest only at 1.0% and
matures in 2019.
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, 2014 and 2013.
The Bank has a $10,000,000 Federal Funds line of credit with Zions Bank. The balance was
$1,185,000 as of June 30, 2014 and $0 as of June 30, 2013.
The Bank has a $7,000,000 Federal Funds line of credit with Stockman Bank. The balance was
$0 as of June 30, 2014 and 2013.
-39-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: Advances from the Federal Home Loan Bank and Other Borrowings – continued
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. There were no pledged securities at the Federal Reserve Bank as of June 30,
2014. The credit facility account had $0 balance as of June 30, 2014 and 2013.
All Borrowings Outstanding
For all borrowings outstanding the weighted average interest rate for advances at June 30, 2014
and 2013 was 1.17% and 2.23%, respectively. The weighted average amount outstanding was
$32,618,000 and $38,781,000 for the years ended June 30, 2014 and 2013, respectively.
The maximum amount outstanding at any month-end was $51,454,000 and $41,249,000 during
the years ended June 30, 2014 and 2013, respectively.
NOTE 12: 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
1.651% and 1.693% as of June 30, 2014, and 2013, 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.
For the years ended June 30, 2014 and June 30, 2013, interest expense on the subordinated
debentures was $87,000 and $93,000, 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.
-40-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: Commitments and Contingencies
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.
The Company leases certain office branches under short-term operating leases. Some of these
leases have renewal options. Total lease expenditures were $511,000 and $296,000 for the years
ended June 30, 2014 and 2013, respectively. The future payments of all lease obligations are as
follows:
Years Ended June 30,
2015
2016
2017
2018
2019
Thereafter
Total
Amount
(In Thousands)
$
474
432
350
333
339
664
2,592
NOTE 14: Accumulated Other Comprehensive Income (Loss)
The following table includes information regarding the activity in accumulated other
comprehensive income (loss):
Gains (Losses)
on Derivatives
Designated as
Unrealized (Losses)
Gains on Investment
Securities
Cash Flow Hedges Available for Sale
Total
(In Thousands)
Balance, July 1, 2013
Other comprehensive income,
before reclassifications and income taxes
Amounts reclassified from accumulated other
comprehensive income (loss), before income taxes
Income tax benefit (expense)
Total other comprehensive (loss) income
Balance, June 30, 2014
$
345
$
(3,729)
$
(3,384)
461
3,093
3,554
(582)
49
(72)
273
$
(1,073)
(823)
1,197
(2,532)
$
(1,655)
(774)
1,125
(2,259)
$
-41-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: Accumulated Other Comprehensive Income (Loss) – continued
Gains (Losses)
on Derivatives
Designated as
Unrealized
Gains (Losses)
on Investment
Securities
Cash Flow Hedges Available for Sale
Total
(In Thousands)
Balance, July 1, 2012
Other comprehensive income (loss),
before reclassifications and income taxes
Amounts reclassified from accumulated other
comprehensive income, before income taxes
Income tax (expense) benefit
Total other comprehensive income (loss)
Balance, June 30, 2013
$
114
$
2,159
$
2,273
582
(8,676)
(8,094)
(193)
(158)
231
345
$
(1,261)
4,049
(5,888)
(3,729)
$
(1,454)
3,891
(5,657)
(3,384)
$
NOTE 15: Income Taxes
The components of the Company’s income tax provision were as follows:
Current
U.S. federal
Montana
Deferred
U.S. federal
Montana
Total
Years Ended June 30,
2014
2013
(In Thousands)
$
$
(164)
(33)
(197)
(113)
(40)
(153)
21
4
25
(563)
(112)
(675)
$
(350)
$
(650)
-42-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: Income Taxes – continued
The nature and components of deferred tax assets and liabilities, which were a component of
other assets in the accompanying statement of financial condition, were as follows:
Deferred tax assets:
Deferred compensation
Loans receivable
Unrealized losses on securities available-for-sale
Deferred loan fees
Acquisition costs
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
FHLB stock
Unrealized gain on hedging
Other
Total deferred tax liabilities
$
June 30,
2014
2013
(In Thousands)
$
483
715
1,742
191
714
361
4,206
1,016
529
188
389
2,122
473
594
2,565
84
772
252
4,740
1,126
529
237
143
2,035
Net deferred tax asset
$
2,084
$
2,705
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.
-43-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: Income Taxes – continued
A reconciliation of the Company’s effective income tax provision to the statutory federal income
tax rate is as follows:
Years Ended June 30,
2014
2013
% of
Pretax
Income
Amount
(Dollars in Thousands)
450
34.00%
89
6.75%
(550)
-32.30%
(147)
-9.30%
(380)
-21.39%
(112)
2.36%
% of
Pretax
Income
34.00%
6.75%
-42.02%
-11.19%
-29.01%
-7.63%
$
Amount
599
119
(574)
(165)
(380)
51
Federal income taxes at the statutory rate
State income taxes
Tax-exempt interest income
Income from bank-owned life insurance
New Market Tax Credits
Other, net
Actual tax benefit and effective tax rate
$
(350)
-19.88%
(650)
-49.10%
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 includes approximately $852,000 at both June 30,
2014 and 2013, for which federal income tax has not been provided.
The Company has equity investments in Certified Development Entities which have received
allocations of New Markets Tax Credits (“NMTC”). Administered by the Community
Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC
program is aimed at stimulating economic and community development and job creation in low-
income communities. The federal income tax credits received are claimed over a seven-year
credit allowance period. The federal tax credit benefits were $380,000 for the years ended June
30, 2014 and 2013. The balance of these credits was $2,204,000 and $2,584,000 as of June 30,
2014 and 2013, respectively.
-44-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: Supplemental Cash Flow Information
Supplemental Cash Flow Information:
Cash paid during the year for interest
Cash paid during the year for income taxes
Non-Cash Investing Activities:
Increase (decrease) in market
value of securities available-for-sale
Mortgage servicing rights recognized
Loans transferred to real estate and
other assets acquired in foreclosure
Real estate acquired in foreclosure
transferred to premises and equipment
Treasury shares reissued for compensation
Employee Stock Ownership Plan shares released
NOTE 17: Regulatory Capital Requirements
Years Ended June 30,
2014
2013
(In Thousands)
$
$
2,063
109
2,331
497
2,020
1,194
(9,936)
1,726
51
-
193
180
569
306
206
174
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, 2014 and
2013, 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:
-45-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: Regulatory Capital Requirements – continued
Actual
Minimum
Capital
Requirement
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
June 30, 2014:
Amount
Ratio
Amount
(Dollars in Thousands)
Ratio
Amount
Ratio
Total Risk-based Capital
to Risk Weighted Assets
Consolidated
Bank
$
53,310
46,516
16.23 %
14.27
$
26,276
26,083
8.00 % $
8.00
N/A
32,603
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
June 30, 2013:
Total Risk-based Capital
to Risk Weighted Assets
51,185
44,457
15.58
13.64
13,138
13,041
4.00
4.00
N/A
19,562
51,185
44,457
9.43
8.43
16,288
15,814
3.00
3.00
N/A
26,357
N/A
6.00
N/A
5.00
51,185
44,457
9.43
8.43
8,144
7,907
1.50
1.50
N/A
N/A
N/A
N/A
Consolidated
Bank
$
51,804
45,174
18.22 %
16.02
$
22,743
22,563
8.00 % $
8.00
N/A
28,204
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
49,804
43,334
17.52
15.36
11,371
11,282
4.00
4.00
N/A
16,923
49,804
43,334
9.65
8.64
15,487
15,053
3.00
3.00
N/A
25,088
N/A
6.00
N/A
5.00
49,804
43,334
9.65
8.64
7,744
7,526
1.50
1.50
N/A
N/A
N/A
N/A
-46-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: 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:
Capital determined by generally
accepted accounting principles
Unrealized loss on securities available-for-sale
Unrealized gain on forward delivery commitments
Goodwill and core deposit intangible
Tier I (core) capital
General allowance for loan losses
June 30,
2014
2013
(In Thousands)
$
$
50,004
2,505
(273)
(7,779)
44,457
2,059
47,808
3,683
(345)
(7,812)
43,334
1,840
Total risk based capital
$
46,516
$
45,174
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 $1,030,000 and $476,000
to the Company during the years ended June 30, 2014, and 2013, respectively. The Company
had paid quarterly dividends of $0.0725 per share to its shareholders for the year ended June 30,
2014. The Company had paid quarterly dividends of $0.07125 per share in the first three
quarters and paid $0.0725 per share in the fourth quarter for the year ended June 30, 2013.
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.
-47-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: Regulatory Capital Requirements – continued
Liquidation Rights – continued
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 18: 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 $3,000 during the year ended June 30, 2014 for support
services, and an additional $33,000 for computer hardware and software used by the Bank for its
computer network. For the year ended June 30, 2013, expenditures were $68,000 for support
services and $318,000 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,
80.0%, or $6,000,000 was sold to the Montana Board of Investments. As of June 30, 2014 this
loan’s principal balance was $6,017,000 ($1,203,000 net of participation sold). The Bank
maintains the servicing for this loan and the loan is current.
NOTE 19: Business Combination
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 was 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 was subject to the terms and conditions set forth in the Agreement. The
transaction was completed on November 30, 2012. The final purchase price was $8.07 million
and exceeded the estimated fair value of tangible net assets acquired by approximately $8.07
million, which was recorded as goodwill and intangible assets.
Cash flow information relative to the asset purchase agreement was as follows (in thousands):
Fair value of net assets acquired
Cash paid for deposit premium
Liabilities assumed
Goodwill and intangible assets recorded
$
182,463
(8,065)
(182,463)
$
(8,065)
-48-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Business Combination – continued
The primary purpose of the acquisition was 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 are recorded in the statement of financial condition
of the Company. Final valuation adjustments of $144,000 were recorded during the quarter
ended December 31, 2013 and impacted goodwill.
The following is a condensed balance sheet disclosing the estimated fair value amounts of the
acquired branches of Sterling assigned to the major consolidated asset and liability captions at
the acquisition date (dollars in thousands):
ASSETS
Cash and cash equivalents
Loans receivable
Premises and equipment
Goodwill and intangible assets
Other assets
Total assets
Deposits and accrued interest
Equity
Total liabilities and equity
LIABILITIES AND EQUITY
$
129,950
41,323
2,980
8,065
145
$
182,463
$
182,463
-
$
182,463
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 was no carryover of Sterling’s allowance
for loan losses associated with the loans we acquired as the loans were initially recorded at fair
value.
-49-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Business Combination – continued
Information about the Sterling loan portfolio that was acquired, at the acquisition date, was as
follows (in thousands):
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected (nonaccretable discount)
$
41,223
(769)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
40,454
869
Fair value of acquired loans
$
41,323
The core deposit intangible asset that was recognized as part of the business combination was
$1.0 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 were expensed as incurred in the year ended June
30, 2013. These acquisition and integration expenses included salaries and benefits, technology
and communications, occupancy and equipment, professional services and other noninterest
expenses. No acquisition costs were incurred for the year ended June 30, 2014. $1.92 million of
acquisition costs were incurred and expensed during the year ended June 30, 2013.
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 resulted as of
the closing of the branch acquisition of the Sterling branches.
-50-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Business Combination – continued
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
$
149,764
215,159
18,541
8,065
89,277
28,956
$
509,762
$
402,452
53,660
53,650
$
509,762
Operations of the branches acquired have been included in the consolidated financial statements
since December 1, 2012. The Company does not consider these branches a separate reporting
unit and does not track the amount of revenues and net income attributable to these branches
since the acquisition. As such, it is impracticable to determine such amounts for the twelve
months ended June 30, 2014.
The following table presents unaudited pro forma results of operations for the twelve months
ended June 30, 2014 and 2013 as if the acquisition of the Sterling branches had occurred on
July 1, 2011 (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. 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 twelve months ended June 30, 2014 and 2013.
Years Ended June 30,
2014
2013
$
15,236
10,041
22,908
$
13,446
13,644
23,642
2,111
3,171
0.54
0.53
0.81
0.80
Net interest income
Noninterest income
Noninterest expense
Net income1)
Pro forma earnings per share1)
Basic
Diluted
-51-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Business Combination – continued
1) Significant
assumptions utilized
above,
amortization/accretion of interest rate fair value adjustments, amortization of the core
deposit intangible asset and a 25% effective tax rate for the year ended June 30, 2013.
cost noted
acquisition
include
the
NOTE 20: Employee Benefits
Profit Sharing 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 (the
“Board”). Profit sharing expense was $379,000 and $295,000 for the years ended June 30, 2014
and 2013, respectively.
The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board, 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, 2014 and 2013, the Company’s match totaled
$148,000 and $96,000, 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, 2014 and 2013, the total expense was $131,000 and $212,000, respectively.
The Company has recorded a liability for the deferred compensation plan of $1,186,000 and
$1,162,000 at June 30, 2014 and 2013, respectively, which is included in the balance of accrued
expenses and other liabilities.
Employee Stock Ownership Plan
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.
-52-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20: Employee Benefits – continued
Total ESOP expenses of $142,000 and $131,000 were recognized in fiscal 2014 and 2013,
respectively. 16,616 shares were released and allocated to participants during the year ended
June 30, 2014. The cost of the 122,368 ESOP shares ($1,224,000 at June 30, 2014) that have not
yet been allocated or committed to be released to participants is deducted from shareholders’
equity. The fair value of these shares was approximately $1,285,000 at that date.
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. Shares of restricted stock vest in equal installments over five years
beginning one year from the grant date. There were 8,674 shares of restricted stock granted
under the Plan during fiscal 2014 and no shares of restricted stock granted under the Plan during
fiscal 2013. There were 6,505 shares of restricted stock forfeited under the Plan during fiscal
2014 and 8,674 shares of restricted stock forfeited under the Plan during fiscal 2013. The
Company expects the total expense over the vesting periods to be approximately $928,000.
$193,000 and $206,000 was recognized as an expense during fiscal year 2014 and 2013,
respectively, and is included in salaries and employee benefits in the consolidated statements of
income. The remaining expense of approximately $399,000 is expected to be fully recognized
by November 2017.
NOTE 21: 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.
Generally, as interest rates increase, the market value of the loan commitment goes down. The
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.
-53-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21: Financial Instruments and Off-Balance-Sheet Activities – continued
The notional amounts of the Company’s commitments to extend credit at fixed and variable
interest rates were approximately $5,421,000 and $7,076,000 at June 30, 2014 and 2013,
respectively. Fixed rate commitments are extended at rates ranging from 2.79% to 5.13% and
2.13% to 5.00% at June 30, 2014 and 2013, respectively. The Company has lines of credit
representing credit risk of approximately $88,603,000 and $79,850,000 at June 30, 2014 and
2013, respectively, of which approximately $41,239,000 and $36,434,000 had been drawn at
June 30, 2014 and 2013, respectively. The Company has credit cards issued representing credit
risk of approximately $1,091,000 and $965,000 at June 30, 2014 and 2013, respectively, of
which approximately $71,000 and $79,000 had been drawn at June 30, 2014 and 2013,
respectively. The Company has letters of credits issued representing credit risk of approximately
$4,058,000 and $2,882,000 at June 30, 2014 and 2013, 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
$5,241,000 and $7,076,000 at June 30, 2014 and 2013, 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.
-54-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: Derivatives and Hedging Activities
Interest rate contracts
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. The loan had an outstanding principal
balance of $10,830,000 and $11,191,000, and the interest rate swap had a notional value of
$10,830,000 and $11,191,000, at June 30, 3014, and 2013, respectively.
-55-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: 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
June 30, 2014
June 30, 2013
June 30, 2014
June 30, 2013
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
(In Thousands)
Derivatives designed
as fair value hedging instruments
n/a
Interest rate contracts
$
-
n/a
$
-
Other
Liabilities
$
250
Other
Liabilities
$
115
Change in fair value of
financial instrument
being hedged
Interest rate contracts
Loans
$
173
Loans
$
101
n/a
$
-
n/a
$
-
Effect of Derivative Instruments on Statement of Income
For the Years Ended June 30, 2014 and 2013
(In Thousands)
Derivatives Designated
as Hedging Instruments
Location of
(Loss) Gain
Recognized in
Income on Derivative
Amount of
(Loss) Gain
Recognized in
Income on Derivative
2014
2013
Interest rate contracts
Noninterest income
$
(63)
$
204
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, 2014 and 2013, the Company had entered into commitments to deliver
approximately $16,839,000 and $20,314,000 respectively, in loans to various investors, all at
fixed interest rates ranging from 2.75% to 4.88% and 2.17% to 6.00% at June 30, 2014 and
2013, respectively. The Company had approximately $461,000 and $582,000 of gains deferred
as a result of the forward delivery commitments entered into as of June 30, 2014 and 2013,
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,
2014.
-56-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: Derivatives and Hedging Activities – continued
Forward delivery commitments – continued
Refer to Note 21 for additional information regarding the Company’s use of derivative loan
commitments. These derivative instruments are not designated as hedging instruments.
NOTE 23: Fair Value Disclosures
The Company 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.
The Company uses 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, the
Company 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:
(cid:131) 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.
(cid:131) 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.
(cid:131) Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that
market participants would use in pricing the assets or liabilities.
-57-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: 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 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 2 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 2 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.
-58-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
The following table summarizes financial assets and financial liabilities measured at fair value
on a recurring basis, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
$
$
June 30, 2014
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
-
-
-
-
-
-
-
-
$
$
41,306
80,364
5,964
29,158
32,761
11,003
17,245
250
$
-
-
-
-
-
-
-
-
41,306
80,364
5,964
-
29,158
32,761
11,003
17,245
250
June 30, 2013
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
-
-
-
-
-
-
-
-
$
$
50,931
84,436
9,061
26,902
47,633
11,292
20,807
115
$
-
-
-
-
-
-
-
-
50,931
84,436
9,061
-
26,902
47,633
11,292
20,807
115
Financial Assets:
Available-for-sale securities
U.S. Government and agency
Municipal obligations
Corporate obligations
Mortgage-backed securities
government-backed
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
CMOs - government backed
Loan subject to fair value hedge
Loans held-for-sale
Financial Liabilities:
Derivative financial instruments
-59-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment).
The following table summarizes financial assets and financial liabilities measured at fair value
on a nonrecurring basis, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
June 30, 2014
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
Impaired loans
Repossessed assets
Impaired loans
Repossessed assets
$
$
-
-
Level 1
Inputs
-
-
$
$
(In Thousands)
$
1,578
458
June 30, 2013
Level 2
Inputs
Level 3
Inputs
(In Thousands)
$
1,856
550
-
-
-
-
$
$
1,578
458
Total Fair
Value
1,856
550
During the year ended June 30, 2014, 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 $1,644,000 were reduced by specific valuation allowance allocations totaling $66,000 to
a total reported fair value of $1,578,000 based on collateral valuations utilizing Level 3 valuation
inputs.
-60-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value
Measurements – The following table represents the Banks’s Level 3 financial assets and
liabilities, the valuation techniques used to measure the fair value of those financial assets and
liabilities, and the significant unobservable inputs and the ranges of values for those inputs:
Instrument
2014
2013
Fair Value at
June 30,
Principal
Valuation
Technique
Significant
Unobservable
Inputs
Range of
Significant Input
Values
(Dollars in Thousands)
Impaired loans
$
1,578
$
1,856
Repossessed assets
$
458
$
550
Appraisal of
collateral (1)
Appraisal
adjustments
Appraisal of
collateral (1) (3)
Liquidation
expenses (2)
10-30%
10-30%
(1) Fair value is generally determined through independent appraisals of the underlying
collateral, which generally include various level 3 inputs which are not identifiable, less
associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic
conditions and estimated liquidation expenses. The range of liquidation expenses and other
appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
-61-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
FASB ASC Topic 825 requires disclosure of the fair value of financial instruments, both assets
and liabilities recognized and not recognized in the statement of financial position, for which it is
practicable to estimate fair value. Below is a table that summarizes the fair market values of all
financial instruments of the Company at June 30, 2014 and 2013, followed by methods and
assumptions that were used by the Company in estimating the fair value of the classes of
financial instruments.
The fair value amounts of financial instruments have been determined by the Company using
available market information and appropriate valuation methodologies. However, considerable
judgment is required to interpret data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Level 1
Inputs
Level 2
Inputs
June 30, 2014
Level 3
Inputs
(In Thousands)
Total
Fair Value
Carrying
Amount
$
$
-
-
-
$
-
-
267,945
$
6,819
1,878
267,945
6,819
1,878
261,410
2,429
3,756
-
-
-
216,418
-
-
-
-
-
-
-
-
4,999
2,429
4,999
-
11,082
11,082
-
-
153,078
-
51,917
3,854
-
-
-
216,418
58,432
153,078
3,749
51,917
3,854
-
-
-
216,418
58,432
152,195
3,749
51,454
5,155
-
-
-
Financial Assets:
Cash and cash equivalents
FHLB stock
Loans receivable, net
Accrued interest on dividends receivable
$
receivable
Mortgage servicing rights
Cash surrender value of
life insurance
Financial Liabilities:
Non-maturing interest bearing deposits
Non-interest bearing 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
6,819
1,878
-
2,429
-
11,082
-
58,432
-
3,749
-
-
-
-
-62-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
Financial Assets:
Cash and cash equivalents
FHLB stock
Loans receivable, net
Accrued interest on dividends receivable
$
Mortgage servicing rights
Cash surrender value of
life insurance
Financial Liabilities:
Non-maturing interest bearing deposits
Non-interst bearing 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
Level 1
Inputs
Level 2
Inputs
June 30, 2013
Level 3
Inputs
(In Thousands)
Total
Fair Value
Carrying
Amount
$
6,161
1,931
-
2,387
-
10,869
-
52,972
-
3,535
-
-
-
-
-
-
-
-
-
-
$
$
-
-
206,426
$
6,161
1,931
206,426
-
3,589
2,387
3,589
6,161
1,931
201,529
2,387
3,192
-
10,869
10,869
207,288
-
-
-
-
-
-
-
-
-
158,452
-
35,611
3,860
-
-
-
207,288
52,972
158,452
3,535
35,611
3,860
-
-
-
207,288
52,972
157,491
3,535
34,861
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.
Stock in the FHLB – The fair value of stock in the FHLB approximates redemption value.
-63-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
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 10.00% to 12.00%, prepayment speeds ranging from 100.00% to 385.00%
PSA, depending on stratification of the specific right. The fair value was also adjusted for the
effect 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, 2014 and 2013, 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.
-64-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24: Condensed Parent Company Financial Statements
Included below are the condensed financial statements of Eagle Bancorp Montana, Inc.:
Condensed Statements of Financial Condition
June 30,
2014
2013
(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
$
$
297
4,991
155
50,004
1,441
185
5,289
155
47,808
959
Total assets
$
56,888
$
54,396
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses
Long-term subordinated debt
Shareholders' equity
28
5,155
51,705
9
5,155
49,232
Total liabilities and shareholders' equity
$
56,888
$
54,396
Condensed Statements of Income
Years Ended June 30,
2014
2013
(In Thousands)
$
$
139
(87)
15
(556)
(489)
(478)
216
(93)
367
(2,252)
(1,762)
(827)
(11)
(935)
2,122
2,908
$
2,111
$
1,973
Interest income
Interest expense
Noninterest income
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
-65-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24: Condensed Parent Company Financial Statements – continued
Condensed Statements of Cash Flow
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 contributions from American Federal Savings Bank
Cash distributions to American Federal Savings Bank
Activity in available-for-sale securities:
Sales
Maturities, principal payments and calls
Purchases
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Employee Stock Ownership Plan payments and dividends
Treasury shares reissued for compensation
Dividends paid
Net cash used in financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
Years Ended June 30,
2014
2013
(In Thousands)
$
2,111
$
1,973
(2,122)
(448)
(459)
1,030
-
427
371
(492)
1,336
178
193
(1,136)
(765)
112
185
(2,908)
(923)
(1,858)
476
(7,000)
9,757
785
(3,735)
283
168
206
(1,114)
(740)
(2,315)
2,500
CASH AND CASH EQUIVALENTS, end of period
$
297
$
185
-66-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25: Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations:
Year ended June 30, 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in Thousands, Except Per Share Data)
$
$
$
$
$
$
(1,470)
$
0.17 $
0.17 $
(863)
$
0.12 $
0.12 $
1,874
$
0.03 $
0.03 $
1,584
0.22
0.21
Year ended June 30, 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in Thousands, Except Per Share Data)
$
$
$
4,317
516
3,801
153
3,648
2,469
5,613
504
30
474
3,499
586
2,913
187
2,726
1,917
4,786
(143)
(103)
(40)
4,321
502
3,819
128
3,691
2,123
5,699
115
7
108
4,109
535
3,574
116
3,458
3,273
6,453
278
(629)
907
4,502
503
3,999
168
3,831
2,351
5,743
439
(423)
862
3,962
557
3,405
140
3,265
3,549
6,190
624
(60)
684
4,141
524
3,617
159
3,458
3,098
5,853
703
36
667
3,225
566
2,659
235
2,424
1,575
3,435
564
142
422
$
$
$
$
141
0.11 $
0.11 $
$
(467)
-0.01 $
-0.01 $
(1,157)
$
0.23 $
0.23 $
(4,174)
0.18
0.17
Interest and dividend income
Interest expense
Net interest income
Loan loss provision
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Other comprehensive (loss) income
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
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income (loss)
Other comprehensive income (loss)
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
$
$
$
$
$
$
-67-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26: Subsequent Events
On July 1, 2014, the Company announced that its Board had authorized the repurchase of up to
200,000 shares of its common stock, representing approximately 5.1% of outstanding shares.
Under the plan, shares may be purchased by the Company on the open market or in privately
negotiated transactions. The extent to which the Company repurchases its shares and the timing
of such repurchase will depend upon market conditions and other corporate considerations.
On August 28, 2014, the Board of Eagle approved a change in the Company’s fiscal year end
from June 30 to December 31 of each year. The fiscal year change is effective beginning with
the Company’s 2015 fiscal year, which will now begin on January 1, 2015 and end on December
31, 2015.
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SHAREHOLDER INFORMATIONSTOCK LISTINGSymbol: EBMT NASDAQ GlobalSHAREHOLDER SERVICES AGENTREGISTRAR AND TRANSFER COMPANY 10 Commerce Drive Cranford, NJ 07106-3572 800.368.5948CORPORATE HEADQUARTERS1400 Prospect Avenue Helena, MT 59601 406.442.3080 INVESTOR INFORMATIONCopies 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.comINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMDAVIS, KINARD & CO., P.C. 400 Pine Street, Suite 600 Abilene, TX 79601 325.672.4000SHAREHOLDER CONTACTCHANTELLE NASH, CORPORATE SECRETARY American Federal Savings Bank P.O. Box 4999 Helena, MT 59604-4999 406.442.3080 | Fax: 406.457.4013 cnash@amfedsb.comCORPORATE COUNSELNIXON PEABODY, LLP 401 9th Street, N.W., Suite 900 Washington, DC 20004 202.585.8000 www.nixonpeabody.comEAGLE BANCORP MT, INC.Absaroka Beartooth Wilderness