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2016 ANNUAL REPORT
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i
OUR MISSION IS TO PROVIDE STRONG
FINANCIAL FUTURES FOR MONTANANS
EAGLE BANCORP MONTANA , INC. (NASDAQ: EBMT) is the stock holding company
of Opportunity Bank of Montana. Founded in 1922 in Helena, Montana as a Montana
chartered building and loan association, Opportunity Bank was previously known as American
Federal Savings Bank. In October 2014, the Bank changed its charter to become a Montana
State Chartered Commercial bank. This led to a required change in name, resulting in the Bank’s
new identity —Opportunity Bank of Montana. Previously, the Bank operated under a federal thrift
charter since 1975. 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 a loan production office in Great Falls, a mortgage lending
office in Missoula, as well as Wealth Management locations in the Bozeman, Helena and Livingston
branches. The Bank’s market area is 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.
FIN ANC IA L HI GHL I GH TS
(Dollars in thousands)
2016
year ended
2015
year ended
2014S
six months ended
2014
year ended June 30
2013
year ended June 30
SELECTED FINANCIAL CONDITION DATA:
Total Assets...........................................
$673,925
$630,347
$560,207
$539,108
$510,534
Net Loans.............................................
461,391
403,734
316,270
273,991
214,677
Total Securities......................................
128,436
145,738
161,787
189,553
218,963
Total Deposits........................................
512,795
483,182
440,983
427,045
417,751
Total Shareholders’ Equity......................
59,456
55,450
54,498
51,705
49,232
SELECTED OPERATING DATA:
Net Interest Income ..............................
20,793
18,011
8,579
15,236
12,551
Provision for Loan Losses ......................
Non-interest Income .............................
Non-interest Expense ............................
1,833
15,990
28,019
1,303
11,761
25,726
515
5,092
11,979
608
10,041
22,908
678
10,314
20,864
NET INCOME
$5,132
$2,580
$1,642
$2,111
$1,973
NON-PERFO RMI NG AS S ET S TO TO TA L AS S ET S
Peer Median
Eagle Bancorp Montana, Inc.
2.83%
2.48%
2.29%
2.32%
2.19%
1.94%
1.77%
1.65%
1.64%
1.87%
1.51%
0.21%
0.18%
0.21%
0.29%
0.15%
0.21%
0.20%
0.42%
0.35%
0.40%
0.79%
0.29%
0.22%
Source: SNL Fina ncia l
STOCK PRICE
in d ol la rs
DIVIDENDS
d ol la r s p er sh ar e
(annualized)
EPS
b a sic in do ll a rs
TO TAL ASSETS
d ol la r s in mill ion s
FULL SERVICE BRANCHES
H ELEN A — PRO S PEC T
1400 Prospect Avenue
Helena, MT 59601
HELEN A — DOWN TOWN
28 Neill Avenue
Helena, MT 59601
HELEN A — SKYWAY
2090 Cromwell Dixon Lane
Helena, MT 59602
BIG TIMBER
101 McLeod Street
Big Timber, MT 59011
BILLINGS
455 S. 24th Street West
Billings, MT 59102
BOZE MA N — MAIN
237 W. Main Street
Bozeman, MT 59715
BOZE MA N — OA K
1455 W. Oak Street
Bozeman, MT 59715
BUTTE
3401 Harrison Avenue
Butte, MT 59701
HAMILTON
711 S. First Street
Hamilton, MT 59840
LIVIN GSTON
123 S. Main Street
Livingston, MT 59047
MISSOULA — DOWNTOW N
200 N. Higgins Avenue
Missoula, MT 59802
MISSOULA — RESE RVE
1510 S. Reserve Street
Missoula, MT 59801
TOWN SE ND
416 Broadway
Townsend, MT 59644
MORTGAGE LENDING BRANCHES
MISSOULA
2800 S. Reserve Street
Missoula, MT 59801
FINANCIAL SERVICES BRANCHES
BOZE MA N
1455 W. Oak Street
Bozeman, MT 59715
HELEN A
1400 Prospect Avenue
Helena, MT 59601
LIVIN GSTON
123 S. Main Street
Livingston, MT 59047
LOAN PRODUCTION OFFICE
GREAT FA LLS
120 1st Avenue N.
Great Falls, MT 59401
EAGLE BANCORP MT, INC.
2
M ARC H 22, 2017
T O OUR STOCKHOLDERS, CUS TOM E RS , A ND FR I E ND S :
O n b e h a l f o f o u r B o a r d o f D i r e c t o r s , m a n a g e m e n t , a n d
s t a f f o f E a g l e B a n c o r p M o n t a n a , I n c . a n d i t s w h o l l y o w n e d
s u b s i d i a r y, O p p o r t u n i t y B a n k o f M o n t a n a , I a m p l e a s e d t o
p r e s e n t o u r A n n u a l R e p o r t t o S h a r e h o l d e r s f o r o u r f i s c a l
y e a r e n d e d D e c e m b e r 3 1 , 2 0 1 6 .
In last year’s report I highlighted the progress that the Company had made related to the
components of our core income. I am very pleased to note that the strength we began to
show last year has continued and has enabled us to achieve the highest earnings in our history. This strength was evident
in each of the basic earnings components.
Total net income was $5.13 million, an increase of almost 100% over 2015’s net income of $2.58 million. Earnings per
share nearly doubled to $1.32 from $0.67 in 2015 and book value per share also rose significantly to $13.65 from the
previous year’s $12.67. Unlike many banks, we were able to produce significant increases in loans while maintaining
our traditionally high credit standards. For example, in the past year, total loans increased 14.5%, with the majority of
our growth in commercial loans and commercial real estate loans. As loan demand increased, this growth, along with a
reduction in the Company’s investment portfolio, enabled an increase in our yield on earning assets and a 16.8% increase
in total interest income.
Our success in 2016 also occurred on the residential lending side as we originated $350 million in residential real estate
loans. Virtually all of these loans were originated for sale into the secondary market. The fee income from the gain on sale
of those loans also set a record, exceeding $10 million for the year and surpassing last year’s $6.7 million.
I am pleased we were able to achieve this growth without sacrificing our traditionally high credit quality standards. Going
forward while we expect to continue loan growth we also expect our credit culture and asset quality to remain strong. At
year end 2016 non-performing assets were 0.29% of assets, a slight decrease from the level of 0.50% of a year ago. This
ratio remains well below peer averages, as reported by SNL Financial. We have continued to add to our allowance for
loan losses over the past year to keep pace with our growing loan portfolio.
The Company’s net interest margin grew by eight basis points over the previous year, with much of the improvement
coming in the second half of 2016. On a dollar basis, net interest income before the provision for loan losses
increased by $2.78 million, or 15.4%, over 2015. Our strong commercial lending staff is expected to help us achieve
similar success in 2017.
We made progress in reducing several categories of non-interest expense. The growth in our net interest income, along
with our strong fee income, contributed to an improvement in our efficiency ratio. It decreased from 84.96% in 2015 to
74.96% in 2016. Our goal is to stabilize the ratio in a range from 70-75% for the coming year.
We do face some challenges. One of these is that Montana’s economy is projected to have somewhat slower growth in
2017 than in previous years, according to the Bureau of Business and Economic Research at the University of Montana.
However, the growth rates for nonfarm earnings in the markets where we operate are projected to do better than the
state’s average. Also, the regulatory environment for community banks continues to be very challenging, and it is still
too early to know if the new administration in Washington, D.C. will provide some needed relief for our industry. Our
Company’s officers still spend significant time implementing and complying with regulatory guidance, and our compliance
staff has been increased to meet this regulatory burden.
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Construction is nearly complete on our new downtown location in Bozeman. This office will have a smaller, more efficient
footprint than our previous branch and will also feature the latest technology to assist our staff in meeting our customers’
needs. We expect to occupy the new space by early summer.
Our commercial loan production office in Great Falls has continued to have success in gaining new customers. Our next
goal is to add mortgage lenders to that team.
I would also like to take this opportunity to thank Mike Mundt, our Executive Vice President who retired at the end of
2016. Over his 28 years with the bank, he has guided our lending department and was instrumental in establishing our
strong credit culture.
We sincerely appreciate the continuing trust and loyalty of our constituencies – Stockholders, Customers, Employees, and
Communities. We will work to earn your continued confidence, and we thank you for the privilege of serving you!
Very Sincerely,
Peter J. Johnson, President/CEO
EAGLE BANCORP MT, INC.
4
BOA RD OF DIRECTOR S & EXEC U TI V E TE A M
DIRECTORS
EXECUTIVE OFFICERS
LY NN E. DICKEY
Retired
LARRY A. D REYER
Chairman of the Board
PETER J. JOHNSON
President / Chief Executive Officer
Eagle Bancorp Montana, Inc.
MICHAEL C. MUNDT, Retired Year-End 2016
Executive Vice President / Chief Community Banking Officer
RICK F. HAYS
Retired
RACHEL R. AMDAHL
Senior Vice President / Chief Operations Officer
PETER J. JOHNSON
President / Chief Executive Officer
Eagle Bancorp Montana, Inc.
JAM ES A. MAIERLE
Retired
DALE F. FIELD
Senior Vice President / Chief Credit Officer
TRACY A. ZEPEDA
Senior Vice President / Chief Retail Officer
LAURA F. CLARK
Senior Vice President / Chief Financial Officer
THOMAS J . MCCARVEL
Vice President of Carroll College
LARRY D. WILLIAMS
Senior Vice President / Chief Lending Officer
MAU REEN J. RUDE
Executive Director of NeighborWorks Montana
GEORGE BALLEW
Senior Vice President / Chief Mortgage Lending Officer
SHAV ON R. CAPE
Co-founder of JWT Capital, LLC
CORPORATE SECRETARY
TANYA J. CHEM ODUROW
President / Owner of Abatement Contractors of Montana, LLC
CHANTELLE R. NASH
Senior Vice President / Chief Risk Officer
5
EAGLE BANCORP MT, INC.
FOR M 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
December 31, 2016
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.
¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes x 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.
x Yes o 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).
x Yes o 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.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x 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 June 30, 2016 was $39,738,000. The outstanding number of shares of common stock of Eagle
as of February 1, 2017, was 3,811,409.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement relating to its 2017 annual meeting of stockholders (“2017 Proxy
Statement”) are incorporated by reference into Part III of this Form 10-K. The 2017 Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after the Company’s fiscal year end to which this report relates.
TABLE OF CONTENTS
Page
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
DESCRIPTION OF BUSINESS. .......................................................................................................2
RISK FACTORS ..............................................................................................................................15
UNRESOLVED STAFF COMMENTS. .........................................................................................19
PROPERTIES. .................................................................................................................................20
LEGAL PROCEEDINGS. ...............................................................................................................20
MINE SAFETY DISCLOSURES. ..................................................................................................20
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ........................................21
SELECTED FINANCIAL DATA. ..................................................................................................21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. .......................................................................................................22
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ...............43
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ...............................................43
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. ................................................................................................43
ITEM 9A.
CONTROLS AND PROCEDURES. ...............................................................................................43
ITEM 9B.
OTHER INFORMATION. ..............................................................................................................44
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. .......................45
EXECUTIVE COMPENSATION. ..................................................................................................46
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. .............................................46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE. ..........................................................................................................................46
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES. .................................................................46
PART IV
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES. ..............................................................46
FORM 10-K SUMMARY. ..............................................................................................................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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
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 insurance 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 Company’s ability to develop and maintain secure and reliable information technology systems,
effectively defend itself against cyberattacks or recover from breaches to its cybersecurity infrastructure;
the impact of the 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.
Overview
Eagle Bancorp Montana, Inc. (“Eagle” or “the Company”), is a Delaware corporation that holds 100.0% of the capital
stock of Opportunity Bank of Montana (“the Bank”), formerly American Federal Savings Bank (“AFSB”). In 2014, the
Board of Directors (“the Board”) determined that it was in the Company’s best interests to adopt a Montana community
bank charter and the Company applied to the State of Montana to form an interim bank for the purpose of facilitating the
conversion of AFSB from a federally chartered savings bank to a Montana-chartered commercial bank. Upon receiving
required approvals of the Montana Division of Banking and Financial Institutions and the federal banking agencies for the
conversion, the conversion became effective on October 14, 2014. Concurrent with the conversion, the Bank applied, and
was approved, for membership in the Federal Reserve System of the Board of Governors. In connection with the
conversion, AFSB changed its name to Opportunity Bank of Montana. As a result of the conversion, the Bank is now
regulated by the Montana Division of Banking and Financial Institutions. As a Federal Reserve Board (“FRB”) member
bank, its primary federal regulator is the FRB, and the Company is a registered bank holding company regulated by the
FRB. The Bank is headquartered at 1400 Prospect Avenue, Helena, Montana, 59601. Investor information for the
Company may be found at www.opportunitybank.com. The contents on or accessible through, our website are not
incorporated into this report.
The Bank 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 and in October 2014 converted to a Montana-
chartered commercial bank. In November 2012, the Company completed a significant transaction with Sterling Financial
Corporation (“Sterling”) 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 full service branches, with six branches in new markets. The acquisition also included the addition of a
wealth management division with over $100 million in managed assets and a mortgage banking operation that has
increased opportunities for additional origination and fee income. The Bank currently has 15 automated teller machines
located in our market areas and we participate in the Money Pass® ATM network. As of December 31, 2016, the Bank was
the 6th largest commercial bank headquartered in Montana in terms of deposits.
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.
Recent Developments
On February 13, 2017, Eagle completed the issuance, through a private placement, of $10.00 million aggregate principal
amount of 5.75% fixed senior unsecured notes due February 15, 2022. The Company estimates that the net cash proceeds
from the sale of the notes will be approximately $9.80 million. The Company intends to use the net proceeds from the
offering for general corporate purposes, including but not limited to, contribution of capital to the Bank, to support both
organic growth as well as opportunistic acquisitions, should appropriate opportunities arise.
Business Strategy
The Company’s principal strategy is to manage its principal asset, the 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.
The following are the key elements of our business strategy:
• Continue to diversify our portfolio through growth in commercial real estate and commercial business loans as a
complement to our traditional single family residential real estate lending. As of December 31, 2016, such loans
constituted approximately 57.71% of total loans;
• Continue to emphasize the attraction and retention of lower cost long-term core deposits;
2
• Seek opportunities where presented to acquire other institutions or expand our branch structure;
• Maintain our high asset quality levels; and
• Operate as a community-oriented independent financial institution that offers a broad array of financial services
with high levels of customer service.
Our results of operations may be significantly affected by our ability to effectively implement our business strategy
including our plans for expansion through strategic acquisitions. If we are unable to effectively integrate and manage
acquired or merged businesses or attract significant new business through our branching efforts, our financial performance
may be negatively affected.
Market Areas
From our headquarters in Helena, Montana, we operate 13 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 Montana
branch acquisition that was completed in November 2012 included retail banking offices in: Bozeman, Big Timber,
Livingston, Billings, Missoula and Hamilton. The Bozeman Mendenhall location was sold in June 2015 and relocated to a
leased building. The acquisition also included three mortgage loan origination locations in Bozeman, Missoula and
Kalispell. The Bozeman location is now part of our Bozeman – Oak branch. The Kalispell location was closed in March
2014. We opened a loan production office in Great Falls, Montana in January 2015.
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 (1.04 million estimated for 2016). 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 66,418 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.
Butte, Montana is approximately 64 miles southwest of Helena. Butte and the surrounding Silver-Bow County have a
population of approximately 34,622. 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.
Bozeman is approximately 95 miles southeast of Helena. It is located in Gallatin County, which has a population of
approximately 100,739. 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.
Townsend, Montana is approximately 34 miles southeast of Helena. Townsend is located in Broadwater County which has
a population of approximately 5,689. Many of its residents commute to other Montana locations for work, particularly
Helena. Other employment in Townsend is primarily in agriculture and services.
Livingston, Montana is approximately 124 miles southeast of Helena. Livingston and the surrounding Park County have a
population of approximately 15,972. Livingston’s economy is somewhat reliant on the wood products and tourism
industry.
Big Timber, Montana is approximately 158 miles southeast of Helena. Big Timber and the surrounding Sweet Grass
County have a population of approximately 3,634. Big Timber’s economy is somewhat reliant on the wood products,
agriculture and tourism industries.
Billings, Montana is approximately 239 miles southeast of Helena. Billings and the surrounding Yellowstone County have
a population of approximately 157,048. Billings is a significant trade center for eastern Montana. Select manufacturing is
also a significant contributing portion of its economy.
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Missoula, Montana is approximately 116 miles west of Helena. Missoula and the surrounding Missoula County have a
population of approximately 114,181. 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 41,373. 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.
Great Falls, Montana is approximately 91 miles northeast of Helena in Cascade County. Cascade County has a population
of approximately 82,278. Health care, education services, and accommodation and food services are large contributors to
Cascade County’s economy.
Competition
We face strong competition in our primary market areas 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 1.04
million people, there are 60 credit unions in Montana as well as 1 national thrift institution and 49 commercial banks as of
December 31, 2016. 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 areas. 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
The Bank primarily originates residential mortgages (1-4 family) and, commercial real estate loans, real estate construction
loans, home equity loans, consumer loans and commercial 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.
Fee Income
The 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 $1.84 million and $1.72 million for the years ended December 31, 2016 and 2015,
respectively. Other loan related fee income for contract collections, late charges, credit life commissions and credit card
fees were $125,000 and $59,000 the years ended December 31, 2016 and 2015, respectively.
Residential Lending
The Bank originates residential mortgage (1-4 family) loans secured by property located in the Bank’s market areas.
Approximately 24.2% of the Bank’s total loans as of December 31, 2016 were comprised of such loans. The Bank
generally originates residential mortgage (1-4 family) loans in amounts of up to 80.0% 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.
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The Bank derives 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. At December 31, 2016, the Bank had $802.52 million
in residential mortgage (1-4 family) loans and $6.38 million in commercial real estate loans sold with servicing retained.
The 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. The 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 the Bank makes disbursements for such items as real estate
taxes and hazard and mortgage insurance premiums as they become due.
Home Equity Loans
The 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 December 31, 2016, $49.02 million or 10.5% of our
total loans were home equity loans. Borrowers may use the proceeds from the Bank’s home equity loans for many
purposes, including home improvement, debt consolidation or other purchasing needs. The Bank offers fixed rate, fixed
payment home equity loans as well as variable and fixed rate home equity lines of credit. Fixed rate home equity loans
typically have terms of no 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. The Bank attempts to minimize this risk by maintaining conservative underwriting
policies on such loans. We generally make home equity loans for not more than 85.0% 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
The 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 46.0% of the Bank’s total loan
portfolio, or $214.93 million at December 31, 2016. The 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 75.0% of the appraised value or the selling price of the property, whichever is less. The average loan size is
approximately $440,000 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 areas of the Bank. The Bank’s largest single
commercial real estate loan had a balance of approximately $9.81 million ($8.83 million is guaranteed by Rural
Development of the U.S. Department of Agriculture, leaving approximately $980,000 unguaranteed) on December 31,
2016, and is secured by a detention facility.
Real Estate Construction Lending
The Bank also lends funds for the construction of one-to-four family homes. 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 $20.54 million or 4.4% of the Bank’s total loan portfolio at December 31, 2016.
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Consumer Loans
As part of its strategy to invest in higher yielding shorter term loans, the 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 December 31, 2016, consumer
loans totaled $14.80 million or 3.2% of the Bank’s total loan portfolio. These loans consist primarily of auto loans, RV
loans, boat loans, personal loans and credit lines and deposit account loans. Consumer loans are originated in the Bank’s
market areas and generally have maturities of up to 7 years. For loans secured by savings accounts, the Bank will lend up
to 90.0% of the account balance on single payment loans and up to 100.0% 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. Increasing consumer loans continues to be a part of the
Bank’s strategy of operating more like a commercial bank than a traditional savings bank.
The underwriting standards employed by the 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 $54.71 million, or 11.7% of the Bank’s total loan portfolio at December 31, 2016.
The 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, $1.59 million were in loans originated through a syndication program where the business
resides outside of Montana, at December 31, 2016.
The Bank intends to continue to increase commercial business 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 areas. 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 residential mortgage (1-4 family) 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 Montana law, commercial banks such as the Bank, are subject to certain exemptions and are allowed to select the
Office of the Comptroller of the Currency (“OCC”) formula used to determine limits on credit concentrations to single
borrowers to an amount equal to the greater of $500,000 or 15.0% of the institution’s unimpaired capital and surplus. As of
December 31, 2016, the Bank’s limit to a single borrower was $9.84 million. Our largest aggregation of loans to one
borrower was approximately $18.80 million at December 31, 2016. 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 $5.04 million. However,
80.0% of that amount, or $4.03 million was sold to the Montana Board of Investments, leaving a net principal balance
payable to the Bank of $1.01 million. As of December 31, 2016, the principal balance on the second commercial real estate
loan was $9.81 million. However, 90.0% of this loan is guaranteed by the USDA Rural Development. Thus, 90.0% of the
loan, or $8.83 million, is not required to be included in the Bank’s limitations to a single borrower under applicable
banking regulations. This leaves approximately $980,000 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 interest rate swap was terminated during the quarter ended March 31, 2015. The third
commercial real estate loan had a principal balance of $3.95 million as of December 31, 2016. As a result, the total amount
subject to the lending limit at December 31, 2016 was $5.94 million. At December 31, 2016, these loans were performing
in accordance with their terms. The Bank maintains the servicing for these loans.
6
Loan Solicitation and Processing
Our customary sources of mortgage loan applications include repeat customers, walk-ins and referrals from home builders
and real estate brokers. We also advertise in local newspapers and on local radio and television. We currently have the
ability to accept online mortgage loan applications and provide pre-approvals through our website. Our branch managers
and loan officers located at our headquarters and in branches, have authority to approve certain types of loans when
presented with a completed application. Other loans must be approved at our main offices as disclosed below. No loan
consultants or loan brokers are currently utilized for either residential or commercial lending activities.
After receiving a loan application from a prospective borrower, a credit report and verifications are obtained to confirm
specific information relating to the loan applicant’s employment, income and credit standing. When required by our
policies, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser.
In connection with the loan approval process, our staff analyzes 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. Three Directors of the Board are required for approval of any loan, or aggregation of loans to
a single borrower, that exceeds $1.25 million.
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 December 31, 2016, was approximately $19.74 million, all of which was for residential
mortgage loans.
Investment Activities
General
State-chartered commercial banks such as the 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 yields 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 (“MBSs”) 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 the Bank’s lending activities. The policy provides for available-
for-sale (including those accounted for under ASC Topic 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 (“CMOs”), 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.
7
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.
Sources of Funds
General
Deposits are the major source of our funds for lending and other investment purposes. Borrowings 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 loans and investment securities principal payments. Funds are also derived from proceeds for the maturity, call
and sale of investment securities and from the sale of loans. Loan and investment securities principal 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, 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.
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 to supplement our supply of lendable funds and to meet deposit withdrawal requirements. We have Federal funds
line of credits with FHLB of Des Moines, Pacific Coast Bankers Bank (“PCBB”), PNC Financial Services Group, Inc.
(“PNC”), Zions Bank and Stockman Bank.
In September 2005, 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 $5.16 million. Our predecessor entity has
issued subordinated debentures to the Trust, and the coupon on the debentures matches the dividend payment on the trust
preferred securities. Upon the closing of the second-step conversion and reorganization, we assumed the obligations of our
predecessor in connection with the subordinated debentures and trust preferred securities. For regulatory purposes, the
securities qualify as Tier 1 Capital, while for accounting purposes they are recorded as long term debt. The securities have
a 30 year maturity and carried a fixed coupon of 6.02% for the first five years, at which time the coupon became variable,
at a spread of 142 basis points over 3 month LIBOR. At December 31, 2016 the rate was 2.418%.
8
In June 2015, the Company completed the issuance of $10.00 million in aggregate principal amount of subordinated notes
due in 2025 in a private placement transaction to an institutional accredited investor. The notes will bear interest at an
annual fixed rate of 6.75% and interest will be paid quarterly through maturity date or earlier redemption. The notes qualify
as Tier 2 capital for regulatory purposes, subject to applicable limitations. The notes are recorded as long term debt for
accounting purposes.
Other Activities
The Company offers wealth management services at its locations through financial advisors employed by the Bank. Income
from wealth management services was $601,000 and $625,000 for the years ended December 31, 2016 and 2015,
respectively.
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: Opportunity Bank of Montana, Eagle Bancorp Statutory Trust I, and AFSB
NMTC Investment Fund, LLC, which is a subsidiary of the Bank.
Personnel
As of December 31, 2016, we had 185 full-time employees and 15 part-time employees. The employees are not represented
by a collective bargaining unit. We believe our relationship with our employees to be good.
Regulation
Set forth below is a brief description of certain laws and regulations applicable to Eagle and the Bank. 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 state-chartered commercial bank, the Bank is subject to extensive regulation, examination and supervision by the
Montana Division of Banking and Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”), as the
insurer of its deposits. The Bank is a member of the FRB 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 the
Bank’s safety and soundness and compliance with various regulatory requirements. Under certain circumstances, the FDIC
may also examine the Bank. 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 bank holding
company, is required to file certain reports with, and is subject to examination by, and must otherwise comply with the
rules and regulations of the FRB. Eagle is also subject to the rules and regulations of the Securities and Exchange
Commission (“SEC”) under the federal securities laws. See “—Holding Company Regulation.”
Dodd-Frank Act
In July 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. Many of the provisions of
the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations, some of
which have not yet been issued in final form. The Dodd-Frank Act and implementing regulations have increased the
regulatory burden, compliance cost and interest expense for Eagle and the Bank.
The Dodd-Frank Act will require the FRB 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.
9
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 such as the 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 with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined by their
applicable bank regulators.
The legislation also broadened the base for FDIC 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 had unlimited deposit insurance
through December 31, 2012. Lastly, the Dodd-Frank Act directs the FRB 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 Commercial Banks
General
Deposits in the Bank, a Montana state-chartered commercial bank are insured by the FDIC. The bank has no branches in
any other state. The Bank is subject to regulation and supervision by the Montana Department of Administration’s Banking
and Financial Institutions Division and the FRB. The federal laws that apply to the Bank regulate, among other things, the
scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the
nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit
transactions and impose safety and soundness standards.
The Bank’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15.0% of
unimpaired capital and surplus. An additional amount may be lent, equal to 10.0% 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
The Bank is a member of the FHLB of Des Moines (formerly FHLB of Seattle). The FHLB of Des Moines completed a
merger with FHLB of Seattle in June 2015. FHLB Des Moines is one of 11 regional FHLBs that administer the home
financing credit function of banks, credit unions and 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, the Bank is
required to purchase and maintain a specified amount of shares of capital stock in the FHLB of Des Moines.
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
future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value
of the Bank’s FHLB stock may result in a corresponding reduction in the Bank’s capital.
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Federal Reserve System
The Federal Reserve System requires all depository institutions to maintain noninterest-bearing reserves at specified levels
against their checking 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.
The Bank has authority to borrow from the Federal Reserve System “discount window”. The Bank maintains a “primary
credit” facility at the Federal Reserve’s discount window.
As a new member of the Federal Reserve System, the Company is required to maintain a minimum level of investment in
FRB stock based on a specific percentage of its capital and surplus. A reduction in value of the Bank’s FRB stock may
result in a corresponding reduction in the Bank’s capital.
Insurance of Deposit Accounts
Deposit accounts at the Bank are insured by the FDIC, 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. The Bank’s deposits, therefore, are
subject to FDIC deposit insurance assessments. Assessments paid to the FDIC by the Bank and other banking institutions
are used to fund the FDIC’s Federal Deposit Insurance Fund.
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 FRB 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 the Bank’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. The assessment base for calculating deposit insurance assessments is an institution's average total assets
minus its average tangible equity (defined as Tier I capital). Under the FDIC’s risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain
other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger
institutions pay lower rates while riskier institutions pay higher rates. The assessment rate schedule establishes assessments
ranging from 2.5 to 45 basis points. The FDIC may increase or decrease its rates for each quarter by 2 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 Deposit Insurance Fund. 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.
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Capital Requirements
Federally insured savings institutions, such as the Bank, are required by the FRB to maintain minimum levels of regulatory
capital. These minimum capital standards include: a ratio of total capital to risk-weighted assets of 8.0%, a ratio of Tier 1
capital to risk-weighted assets of 6.0%, a ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, or a ratio
of Tier 1 capital to total assets of 4.0%. The regulations require that, in meeting the 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 state chartered commercial banks to maintain Tier 1 and total capital (which is
defined as core capital and supplementary capital) to risk-weighted assets of at least 6.0% and 8.0%, 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 0.0% to 100.0%, assigned by the
FRB capital regulation based on the risks believed inherent in the type of asset. Tier 1 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 100.0% of core capital. The FRB also has authority to
establish individual minimum capital requirements for financial institutions.
Basel III – New Capital and Prompt Corrective Action Regulations. In July 2013, the federal bank regulatory agencies
issued interim final rules that revise and replace the current risk-based capital requirements in order to implement the
“Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Basel III reforms reflected in the final
rules include an increase in the risk-based capital requirements and certain changes to capital components and the
calculation of risk-weighted assets.
Effective January 1, 2015, bank holding companies with consolidated assets of $1 billion or more and banks like
Opportunity Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and
January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets
ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6.0% (increased from 4.0%); (iii) a total capital to
total risk weighted assets ratio of 8.0% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total
assets (“leverage”) ratio of 4.0%.
In addition, a “capital conservation buffer,” is established which when fully phased-in will require maintenance of a
minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum
capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common
equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer
requirement will be phased-in between January 1, 2016 and January 1, 2019. If the capital ratio levels of a banking
organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the
payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv)
engaging in share repurchases.
The federal bank regulatory agencies also implemented changes to the prompt corrective action framework, which is
designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness.
These changes will take effect beginning January 1, 2015 and will require insured depository institutions to meet the
following increased capital ratio requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1
capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8.0%; (iii) a total capital ratio of 10.0%; and (iv) a Tier 1 leverage ratio of
5.0%. See also the additional discussion below under “Prompt Corrective Action.”
Management believes that, as of December 31, 2016, the Company and the Bank would meet all capital adequacy
requirements under the Basel III Capital rules on a fully phased-in basis as if such requirements were currently in effect;
however, final rules are subject to regulatory discretion and could result in the need for additional capital levels in the
future.
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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 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 6.0%, a
ratio of common equity Tier 1 capital to risk-weighted assets of less than 4.5%, or a ratio of Tier 1 capital to total assets of
less than 4.0% is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio less than 6.0%,
a Tier 1 capital ratio of less than 4.0%, a common equity Tier 1 capital ratio of less than 3.0% or a Tier 1 leverage ratio that
is less than 3.0% is considered to be “significantly undercapitalized.” An institution that has a tangible capital to assets
ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the FRB 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 FRB 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 FRB 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 December 31, 2016, the Bank’s capital ratios
met the “well capitalized” standards.
Limitations on Capital Distributions
A principal source of the parent holding company’s cash is from dividends received from the Bank, which are subject to
government regulation and limitation. Regulatory authorities may prohibit banks and bank holding companies from paying
dividends in a manner that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash
dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable
regulatory capital requirements. The Bank is subject to Montana state law and cannot declare a dividend greater than the
previous two years’ net earnings without providing notice to the state. Additionally, current guidance from the FRB
provides, among other things, that dividends per share on the Company’s common stock generally should not exceed
earnings per share, measured over the previous four fiscal quarters. Basel III also introduces additional limitations on
banks’ ability to issue dividends by imposing a capital conservation buffer requirement.
Transactions with Affiliates
The Bank’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 FRB’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 the Bank. 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 10.0% 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, FRB 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 December 31, 2016, we were in
compliance with these regulations.
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Holding Company Regulation
General
Eagle is a bank holding company subject to regulatory oversight of the FRB. Eagle is required to register and file reports
with the FRB and is subject to regulation and examination by the FRB. In addition, the FRB has enforcement authority
over Eagle and its non-bank institution subsidiaries which also permits the FRB to restrict or prohibit activities that are
determined to present a serious risk to the Bank.
Mergers and Acquisitions
Eagle must obtain approval from the FRB before acquiring more than 5.0% of the voting stock of another bank or bank
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 bank, the FRB 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 Bank Holding Company Act and the Change in Bank Control Act, a notice or application must be submitted to
the FRB if any person (including a company), or a group acting in concert, seeks to acquire 10.0% or more of Eagle’s
outstanding voting stock, unless the FRB has found that the acquisition will not result in a change in control of Eagle. In
acting on such a notice or application, the FRB 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 bank holding company.
Federal Securities Laws
Eagle’s common stock is registered with the SEC 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 SEC, are available free of charge through our Internet website, www.opportunitybank.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.
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ITEM 1A.
RISK FACTORS
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 in December 2012, 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.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally
and in our states in particular.
Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of
outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and
services we offer and whose success we rely on to drive our future growth, is highly dependent upon the business
environment in the markets in which we operate, principally in Montana, and in the United States as a whole. Unlike larger
banks that are more geographically diversified, we provide banking and financial services to customers primarily in
Montana. The economic conditions in our local markets may be different from, and in some instances worse than, the
economic conditions in the United States as a whole. Some elements of the business environment that affect our financial
performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, monetary
policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we
operate. Unfavorable market conditions can result in deterioration in the credit quality of our borrowers and the demand for
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our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions
for loan and lease losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity
or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in
inflation or interest rates; high unemployment; natural disasters; state or local government insolvency; or a combination of
these or other factors.
In recent years, economic growth and business activity across a wide range of industries and regions in the U.S. has been
slow and uneven. There are continuing concerns related to the level of U.S. government debt and fiscal actions that may be
taken to address that debt, further declining oil prices and ongoing federal budget negotiations that may have a
destabilizing effect on financial markets. There can be no assurance that economic conditions will continue to improve, and
these conditions could worsen. Economic pressure on consumers and uncertainty regarding continuing economic
improvement may result in changes in consumer and business spending, borrowing and saving habits. Such conditions
could have a material adverse effect on the credit quality of our loans or our business, financial condition or results of
operations.
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.
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Because we have increased our commercial real estate and commercial business loan originations, our credit risk
has increased 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 residential real estate (1-4 family)
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 continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new,
technology-driven products and services. The effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address
the needs of our customers by using technology to provide products and services that will satisfy customer demands, as
well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven
products and services or be successful in marketing these products and services to our customers. In addition, the
implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause
service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with
applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and
avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of
operations.
We expect that new technologies and business processes applicable to the consumer credit industry will continue to
emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of
technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new
technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain
current technology and business processes could cause disruptions in our operations or cause our products and services to
be less competitive, all of which could have a material adverse effect on our business, financial condition or results of
operations.
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.
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Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest
rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their
borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest
the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.
Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay
adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our
ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so
long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of
securities moves inversely with changes in interest rates.
We earn a significant portion of our noninterest income through sales of residential mortgages in the secondary
market. We rely on the mortgage secondary market for some of our liquidity.
Our noninterest income attributable to mortgage banking activities has grown significantly in recent years. We originate
and sell mortgage loans, including $308.68 million of mortgage loans sold during 2016. We rely on Federal National
Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other purchasers to
purchase loans in order to reduce our credit risk and provide funding for additional loans we desire to originate. We cannot
provide assurance that these purchasers will not materially limit their purchases from us due to capital constraints or other
factors, including, with respect to FNMA and FHLMC, a change in the criteria for conforming loans. In addition, various
proposals have been made to reform the U.S. residential mortgage finance market, including the role of FNMA and
FHLMC. The exact effects of any such reforms are not yet known, but may limit our ability to sell conforming loans to
FNMA and FHLMC. In addition, mortgage lending is highly regulated, and our inability to comply with all federal and
state regulations and investor guidelines regarding the origination, underwriting documentation and servicing of mortgage
loans may also impact our ability to continue selling mortgage loans. If we are unable to continue to sell loans in the
secondary market or we experience a period of low mortgage activity, our noninterest income as well as our ability to fund,
and thus originate, additional mortgage loans may be adversely affected, which could have a material adverse effect on our
business, financial condition or results of operations.
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
Board and the Montana Division of Banking and Financial Institutions. 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 FDIC. 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.
Since the recent financial crisis, federal and state banking laws and regulations, as well as interpretations and
implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-
Frank Act drastically revised the laws and regulations under which we operate. Financial institutions generally have also
been subjected to increased scrutiny from regulatory authorities.
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The Dodd-Frank Act created the 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. Banks with $10 billion or less in
assets will continue to be examined for compliance with the consumer laws by their primary bank regulators, which in the
case of the Bank is the FRB.
It is difficult to predict at this time what impact the Dodd-Frank Act and its implementing rules will have on community
banks like the Bank. 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 Des Moines becomes impaired, our earnings and shareholders’
equity could decrease.
We are required to own common stock of the Federal Home Loan Bank of Des Moines (‘FHLB”) to qualify for
membership in the FHLB System and to be eligible to borrow funds under the FHLB’s advance program. The aggregate
cost of our FHLB common stock as of December 31, 2016 was $4.01 million. FHLB common stock is not a marketable
security and can only be redeemed by the FHLB.
FHLB’s 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 FHLB, including the FHLB of Des Moines, could be
substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB of
Des Moines 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.
19
ITEM 2.
PROPERTIES.
Eagle’s and the Bank’s executive office is located at 1400 Prospect Avenue in Helena, Montana. The Bank conducts its
business through 16 offices. These offices are located in Helena, Butte, Bozeman, Townsend, Livingston, Big Timber,
Billings, Missoula and Hamilton, Montana. A loan production office was opened in Great Falls, Montana in January 2015.
The Bozeman – Mendenhall Branch that was acquired in 2012 as part of the Sterling Montana branch acquisition was sold
in June 2015 and was relocated to a leased location. The principal banking office in Helena also serves as the executive
headquarters. This headquarters houses approximately 33.0% of the Bank’s full-time employees. In addition, an operations
center is located in Helena. The following table includes the location of each of the Bank’s offices, the year the office was
opened and the net book value including land, buildings and furniture and equipment. The square footage at each location
is also presented.
Location
Address
Opened
(In Thousands)
Value At
December 31, 2016
Helena Main Office
Helena Neill Avenue Branch
Helena Skyway Branch
Butte Office
Bozeman - Oak Office
Townsend Office
Bozeman - Downtown Branch
Livingston Office
Big Timber Office
Billings Office
Missoula - Higgins Branch
Missoula - Reserve Office
Hamilton Office
Helena Operations Center
Missoula Home Loan Office
Great Falls Loan Production Office
* 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
237 W. Main 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.
2800 S. Reserve St.
Missoula, MT 59801
120 1st Ave. North, Suite 201
Great Falls, MT 59401
1997
1987
2009
1979
2009
1979
2012 (Relocated 2015)
*
2012 (Leased until building
was purchased in 2016)
2012
2012
2012
2012
2012
2012
2012
2015
*
*
*
*
*
$
3,226
838
1,980
421
6,991
133
71
Square
Footage
32,304
1,391
4,643
3,890
19,818
1,973
1,711
2,484
11,072
796
108
178
50
1,691
399
23
4
2,004
3,778
3,079
4,320
4,870
6,758
2,965
1,883
As of December 31, 2016, the net book value of land, buildings and furniture and equipment owned by the Bank, less
accumulated depreciation, totaled $19.39 million.
ITEM 3.
LEGAL PROCEEDINGS.
The Bank, 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 the Bank holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against Eagle or the Bank as of December 31, 2016.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
20
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
December 31, 2016, there were 3,811,409 shares of common stock outstanding, held by approximately 850 shareholders of
record. The closing price of the common stock on December 31, 2016, was $21.10 per share. The following table includes
the high and low prices for our common stock for each quarter presented, as well as, dividends paid during each quarter:
Quarter Ended
High
Low
Calendar Year 2016:
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Calendar Year 2015:
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
$
$
24.00
15.25
13.56
12.42
13.23
12.46
11.19
11.20
14.25
12.59
11.99
11.15
11.26
10.68
10.54
10.60
Dividends
Paid
$
0.0800
0.0800
0.0775
0.0775
0.0775
0.0775
0.0750
0.0750
Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors
(the “Board’’) 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 21, 2016, the Board authorized the repurchase of up to 100,000 shares of its common stock. 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. No shares were purchased under this plan during the quarter ended December 31, 2016 or the quarter ended
September 30, 2016. The plan expires on July 21, 2017.
On July 23, 2015, the Board authorized the repurchase of up to 100,000 shares of its common stock. Under the plan, shares
could be purchased by the Company on the open market or in privately negotiated transactions. During the quarter ended
December 31, 2015, 15,000 shares were purchased at an average price of $11.75 per share. During the quarter ended
September 30, 2015, 46,065 shares were purchased at an average price of $11.47 per share. The plan expired on July 23,
2016.
On July 1, 2014, the Board authorized the repurchase of up to 200,000 shares of its common stock. Under this plan, shares
could be purchased on the open market or in privately negotiated transactions. Under this plan, 55,800 shares were
purchased at an average price of $11.03 per share during the six months ended June 30, 2015. In addition, under this plan,
55,000 shares were purchased at an average price of $10.66 per share during the six months ended December 31, 2014. The
plan expired on June 30, 2015.
ITEM 6.
SELECTED FINANCIAL DATA.
This item has been omitted based on Eagle’s status as a smaller reporting company.
21
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of the financial condition and results of operations of Eagle is intended to help
investors understand our company and our operations. The financial review is provided as a supplement to, and should be
read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report.
Overview
Historically, our principal business has consisted of attracting deposits from the general public and the business community
and making loans secured by various types of collateral, including real estate and other consumer assets. We are
significantly affected by prevailing economic conditions, particularly interest rates, as well as government policies
concerning, among other things, monetary and fiscal affairs, housing and financial institutions and regulations regarding
lending and other operations, privacy and consumer disclosure. Attracting and maintaining deposits is influenced by a
number of factors, including interest rates paid on competing investments offered by other financial and non-financial
institutions, account maturities, fee structures and levels of personal income and savings. Lending activities are affected by
the demand for funds and thus are influenced by interest rates, the number and quality of lenders and regional economic
conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from
maturities of investment securities and income provided from operations.
Our earnings depend primarily on our level of net interest income, which is the difference between interest earned on our
interest-earning assets, consisting primarily of loans, mortgage-backed securities and other investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities.
Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our
interest-earning assets and the average rate paid on our interest- bearing liabilities, as well as a function of the average
balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest
income, which consists primarily of service charges and fees on loan and deposit products and services, net gains and
losses on sale of assets, and mortgage loan service fees. Net interest income and noninterest income are offset by
provisions for loan losses, general administrative and other expenses, including salaries and employee benefits and
occupancy and equipment costs, as well as by state and federal income tax expense.
The 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 December 31, 2016, commercial real estate and land loans and commercial business loans represented
46.0% and 11.7% 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. The Bank’s management
recognizes that fee income will also enable it to be less dependent on specialized lending and it maintains a significant loan
serviced portfolio, which provides a steady source of fee income. As of December 31, 2016, we had mortgage servicing
rights, net of $5.85 million compared to $4.97 million as of December 31, 2015. 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. The Bank has a high percentage of non-
maturity deposits, such as checking accounts and savings accounts, which allows management flexibility in managing its
spread. Non-maturity deposits and certificates of deposit do not automatically reprice as interest rates rise.
In recent 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.
22
Other than in limited circumstances for certain high-credit-quality customers, we do not offer “interest only” mortgage
loans on residential (1-4 family) 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”) changed the federal funds target rate from 0.5% to 0.75% in December 2016.
From time to time the Bank has considered growth through mergers or acquisition as an alternative to its strategy of
organic growth. In this regard, the Bank has experienced an increase in loan originations due to the Sterling branch
acquisition which closed in December 2012. Deposit fee income has also increased due to the increase in the number of
accounts. The addition of the wealth management division from the acquisition has also increased noninterest income and
furthered the Bank’s strategy to increase fee income to complement its margin. Operating expenses, primarily salaries and
employee benefits also increased as a result of the acquisition.
The Bank completed a core systems conversion during the third quarter of 2015. Future cost savings are anticipated due to
the core systems conversion.
Recent Accounting Pronouncements
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. On July 9, 2015, the FASB agreed to delay the effective date of the standard by one year.
Therefore, the new standard will be effective in the first quarter of 2018 and is not expected to have a significant impact to
the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities.” The amendment has a number of provisions including the requirements that
public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the
methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost. The amendment is effective for annual and interim reporting periods beginning after December
15, 2017 and is not expected to have a significant impact to the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) intended to improve financial reporting regarding
leasing transactions. The new standard affects all companies and organizations that lease assets. The standard will require
organizations to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those
leases if the lease terms are more than 12 months. The guidance also will require qualitative and quantitative disclosures
providing additional information about the amounts recorded in the financial statements. The amendments in this update
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The
Company is evaluating the potential impact of the amendment on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) intended to improve
financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial
institutions and other organizations. The standard requires an organization to measure all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable
forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their
credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users
better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and
underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements
that provide additional information about the amounts recorded in the financial statements. Additionally, the standard
23
amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit
deterioration. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the
amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company believes the
amendments in this update will have an impact on the Company’s consolidated financial statements and is working to
evaluate the significance of that impact.
Critical Accounting Policies
Certain accounting policies are important to the understanding of our financial condition, since they require management to
make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances,
including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and
laws and regulations. The following are the accounting policies we believe are critical.
Allowance for Loan Losses
We recognize that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type
of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. We
maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses
represents management’s estimate of probable losses based on all available information. The allowance for loan losses is
based on management’s evaluation of the collectability of the loan portfolio, including past loan loss experience, known
and inherent losses, information about specific borrower situations and estimated collateral values, and current economic
conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the
allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of
historical losses, internal data including delinquencies among others, industry data, and economic conditions.
As an integral part of their examination process, the FRB and the Montana Division of Banking 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 Topic 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
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.
24
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 Topic 740 Income Taxes.
Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If
current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in
which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating
the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make
projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets,
which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A
reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of
valuation allowances could result in increased income tax expense, and could negatively affect earnings.
Financial Condition
December 31, 2016 compared to December 31, 2015
Total assets increased $43.58 million, or 6.95%, to $673.93 million at December 31, 2016 from $630.35 million at
December 31, 2015. The loan portfolio increased $57.66 million or 14.3%, to $461.39 million at December 31, 2016 from
$403.73 million at December 31, 2015. Securities available-for-sale decreased $17.30 million or 11.9%, to $128.44 million
from $145.74 million at December 31, 2015. Total liabilities increased by $39.57 million, or 6.9%, to $614.47 million from
$574.90 million at December 31, 2015. Total deposits increased $29.61 million or 6.1%, to $512.80 million at December
31, 2016. Federal Home Loan Bank (“FHLB”) advances and other borrowings increased $9.70 million or 13.3%, to $82.41
million at December 31, 2016.
Balance Sheet Details
Investment Activities
We maintain a portfolio of investment securities, classified as either available-for-sale (including those accounted for under
FASB ASC Topic 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 (“MBSs”), collateralized mortgage obligations (“CMOs”) 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 December 31, 2016. All investment securities included in the investment portfolio are currently
available-for-sale. Eagle also has interest-bearing deposits in other banks and stock in the FHLB of Des Moines and FRB.
25
The following table summarizes investment activities:
December 31,
2016
2015
Fair Value
Percentage
of Total
Fair Value
(Dollars in Thousands)
Percentage
of Total
Securities available-for-sale:
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs
CMOs
$
5,608
67,664
9,307
29,512
16,345
4.18% $
50.45%
6.94%
22.01%
12.19%
10,615
67,069
9,450
32,735
25,869
Total securities available-for-sale
128,436
95.77%
145,738
Interest-bearing deposits
FHLB capital stock, at cost
FRB capital stock, at cost
787
4,012
871
0.59%
2.99%
0.65%
970
3,397
887
7.03%
44.42%
6.26%
21.68%
17.13%
96.52%
0.64%
2.25%
0.59%
Total
$ 134,106
100.00% $ 150,992
100.00%
Securities available-for-sale decreased $17.30 million. The largest decrease in securities available-for-sale was CMOs,
which decreased $9.52 million primarily due to sales activity. U.S. government and agency securities decreased by $5.01
million largely due to a security sale. MBSs decreased $3.22 million due to sales and principal payments received partially
offset by purchases. Municipal obligations increased by $595,000 due to purchase activity largely offset by sales activity.
26
The following table sets forth information regarding the values, weighted average yields and maturities of investments:
One Year or Less
One to Five Years
Five to Ten Years
After Ten Years
Total Investment Securities
December 31, 2016
Securities available-for-sale:
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs
CMOs
Total securities available-for-sale
Interest-bearing deposits
Federal funds sold
FHLB capital stock (no maturity)
FRB capital stock (no maturity)
Annualized
Weighted
Average
Yield
-
-
1.22
-
-
1.22
0.43
-
-
-
Fair Value
-
$
-
1,040
-
-
1,040
787
-
-
-
%
Fair Value
$
994
2,702
4,362
-
5,152
13,210
Annualized
Weighted
Average
Yield
Annualized
Weighted
Average
Yield
Fair Value
Annualized
Weighted
Average
Yield
Fair Value
(Dollars in Thousands)
Fair Value
Approximate
Market Value
Annualized
Weighted
Average
Yield
%
1.04
2.50
1.46
-
1.89
1.81
-
$
11,133
3,905
-
5,025
20,063
%
-
3.38
1.95
-
1.98
2.75
$
4,614
53,829
-
29,512
6,168
94,123
%
2.58
3.81
-
2.93
2.31
3.38
$
5,608
67,664
9,307
29,512
16,345
$
5,608
67,664
9,307
29,512
16,345
128,436
128,436
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
787
-
4,012
871
787
-
4,012
871
%
2.31
3.69
1.64
2.93
2.08
3.10
0.43
-
3.03
6.00
Total
$
1,827
0.88
%
$
13,210
1.81
%
$
20,063
2.75
%
$
94,123
3.38
%
$
134,106
$
134,106
3.10
%
27
Lending Activities
The following table includes the composition of the Bank’s loan portfolio by loan category:
December 31,
2016
2015
Amount
Percent of
Total
Amount
(Dollars in thousands)
Percent of
Total
$
113,262
214,927
20,540
348,729
24.24% $
46.00%
4.40%
74.64%
118,133
167,930
22,958
309,021
49,018
14,800
54,706
118,524
10.49%
3.16%
11.71%
25.36%
45,345
14,641
39,072
99,058
28.95%
41.15%
5.63%
75.73%
11.11%
3.59%
9.57%
24.27%
Real estate loans:
Residential mortgage
(1-4 family) (1)
Commercial real estate
Real estate construction
Total real estate loans
Other loans:
Home equity
Consumer
Commercial
Total other loans
Total loans
467,253
100.00%
408,079
100.00%
Deferred loan fees
Allowance for loan losses
(1,092)
(4,770)
(795)
(3,550)
Total loans, net
$
461,391
$
403,734
(1) Excludes loans held-for-sale.
Loans receivable increased $57.66 million. Commercial real estate and land loans increased $47.00 million, commercial
loans increased $15.64 million and home equity loans increased $3.67 million. Consumer loans remained consistent period
over period only increasing $159,000. These increases were slightly offset by decreases in residential mortgage loans of
$4.87 million and construction loans of $2.42 million. Total loan originations were $529.84 million for the year ended
December 31, 2016, with residential mortgages (1-4 family) accounting for $333.03 million of the total. Commercial real
estate and land loan originations totaled $94.08 million. Construction and home equity loan originations totaled $32.15
million and $19.33 million, respectively, for the same period. Consumer loan originations totaled $8.28 million.
Commercial loan originations totaled $42.97 million. There were no commercial loan originations from loan syndication
programs with borrowers residing outside of Montana during the year ended December 31, 2016. Loans held-for-sale
decreased slightly by $472,000, to $18.23 million at December 31, 2016 from $18.70 million at December 31, 2015.
28
Loan Maturities. The following table sets forth the estimated maturity of the loan portfolio of the Bank at December 31,
2016. 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 the Bank the right to declare loans
immediately due and payable in the event, among other things, 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.
Loans having no stated maturity, those without a scheduled payment, demand loans and matured loans, are shown as due
within six months.
One Year
or Less
One to
Five Years
After 5
Years
$
$
1,351
25,418
14,029
5,647
1,316
19,161
$
$
2,245
17,036
3,087
6,267
9,792
7,174
127,896
172,473
3,424
37,104
3,692
28,371
Total
131,492
214,927
20,540
49,018
14,800
54,706
$
66,922
$
45,601
$
372,960
$
485,483
Residential mortgage (1-4 family) (1)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total loans (1)
(1) Includes loans held-for-sale.
The following table includes loans by fixed or adjustable rates at December 31, 2016:
Due after December 31, 2017:
Residential mortgage (1 to 4 family) (1)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total (1)
Fixed
Adjustable
(Dollars in Thousands)
Total
$
$
85,121
80,467
3,204
9,066
11,689
26,385
215,932
$
45,020
109,042
3,307
34,305
1,795
9,160
202,629
130,141
189,509
6,511
43,371
13,484
35,545
418,561
Due in less than one year
59,225
7,697
66,922
Total Loans (1)
Percent of total
(1) Includes loans held-for-sale
$
275,157
$
210,326
$
485,483
56.68%
43.32%
100.00%
29
The following table sets forth information with respect to our loan originations, purchases and sales activity:
Years Ended
December 31,
2016
2015
(In Thousands)
Net loans receivable at beginning of period (1)
$
422,436
$
333,857
Loans originated:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total loans originated
Loans sold:
Whole loans
333,030
94,079
32,149
19,328
8,284
42,968
529,838
240,649
80,505
16,561
13,544
8,106
20,993
380,358
308,675
230,616
Principal repayments and loan refinancings
165,495
62,572
Deferred loan fees increase
Allowance for losses increase
297
1,220
309
1,100
Net loan increase
57,185
88,579
Net loans receivable at end of period (1)
$
479,621
$
422,436
(1) Includes loans held-for-sale.
Nonperforming Assets. 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 December 31,
2016, the Bank had $805,000 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 collectability of the loan. At December 31, 2016, we had $614,000 ($606,000
million net of specific reserves for loan losses) of loans that were nonperforming and held on non-accrual status.
30
The following table provides information regarding the Bank’s loans that are delinquent 30 to 89 days:
Loan type:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
Number
December 31, 2016
Amount
(Dollars in Thousands)
Percentage
of Total
8
5
-
8
31
3
55
$
$
975
513
-
365
169
249
2,271
42.94%
22.59%
0.00%
16.07%
7.44%
10.96%
100.00%
The following table sets forth information regarding nonperforming assets:
December 31,
2016
2015
(Dollars in Thousands)
Non-accrual loans
Real estate loans:
Residential mortgage (1-4 family)
Commercial real estate
$
$
221
-
Other loans:
Home equity
Consumer
Commercial
Accruing loans delinquent 90 days or more
Real estate loans:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Other loans:
Home equity
Restructured loans:
Other loans:
Home equity
Total nonperforming loans
Real estate owned and other repossessed property, net
Total nonperforming assets
$
Total nonperforming loans to total loans
Total nonperforming loans to total assets
Total allowance for loan loss to nonperforming loans
Total nonperforming assets to total assets
730
667
161
145
327
221
4
247
-
297
96
-
456
4
-
35
43
1,152
825
1,977
$
0.25%
0.17%
414.06%
0.29%
46
2,548
595
3,143
0.63%
0.40%
139.32%
0.50%
Residential mortgage (1-4 family) non-accrual loans decreased during the year ended December 31, 2016 primarily due to
one loan paid off via a short sale. Commercial real estate non-accrual loans decreased during the year ended December 31,
2016 due to one loan moving out of non-accrual status. Commercial non-accrual loans decreased due to one loan being
paid off.
During the year ended December 31, 2016, the Bank sold five real estate owned and other repossessed assets resulting in a
net gain of $6,000. There were no write-downs on fair value less cost to sell for foreclosed real estate property and other
repossessed during the year ended December 31, 2016. During the year ended December 31, 2016, a minimal amount of
interest was recorded on loans previously accounted for on a non-accrual basis.
31
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 loss in an amount that is deemed prudent. When management classifies a loan as a loss
asset, an allowance equal up to 100.0% 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 regulatory agencies as part of their examination process. In addition, each loan that
exceeds $750,000 and each group of loans that exceeds $750,000 is monitored more closely.
The following table reflects our classified assets:
December 31,
2016
2015
(In Thousands)
Residential mortgage (1-4 family):
Special mention
Substandard
Doubtful
Loss
Commercial real estate:
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
$
-
738
-
-
-
451
-
-
456
-
-
-
-
375
-
-
-
-
95
8
-
236
-
-
-
-
-
-
$
-
1,422
-
-
-
667
-
-
-
782
-
-
-
156
82
7
-
140
4
11
-
367
-
30
-
-
-
-
Real estate owned/repossessed property
825
595
Total classified loans and real estate owned
$
3,184
$
4,263
32
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 (1-4 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. 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 collectability 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 December
31, 2016, we had $4.77 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.
33
The following table includes information for allowance for loan losses:
Years Ended
December 31,
2016
2015
(Dollars in Thousands)
Beginning balance
$
3,550
$
2,450
Provision for loan losses
Loans charged-off
Residentail mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Recoveries
Residentail mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Net loans charged-off
1,833
1,303
(4)
(298)
-
(7)
(204)
(119)
-
-
-
-
19
-
(613)
(137)
-
-
-
(61)
(25)
-
-
-
1
18
1
(203)
Ending balance
$
4,770
$
3,550
Allowance for loan losses to total loans
Allowance for loan losses to total nonperforming
1.02%
0.87%
loans
Net charge-offs to average loans
outstanding during the period
414.06%
139.32%
0.13%
0.05%
34
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:
December 31,
2016
Percentage
of Allowance
to Total
Allowance
Loan
Category
to Total
Loans
Amount
2015
Percentage
of Allowance
to Total
Allowance
Loan
Category
to Total
Loans
Amount
(Dollars in Thousands)
$
997
2,079
244
3,320
460
193
797
1,450
20.90%
43.58%
5.12%
69.60%
9.64%
4.05%
16.71%
30.40%
24.24% $
46.00%
4.40%
74.64%
10.49%
3.16%
11.71%
25.36%
911
1,593
184
2,688
342
66
454
862
25.66%
44.88%
5.18%
75.72%
9.63%
1.86%
12.79%
24.28%
28.95%
41.15%
5.63%
75.73%
11.11%
3.59%
9.57%
24.27%
Real estate loans:
Residential mortgage
(1-4 family)
Commercial real estate
Real estate construction
Total real estate loans
Other loans:
Home equity
Consumer
Commercial
Total other loans
Total
$
4,770
100.00%
100.00% $
3,550
100.00%
100.00%
Deposits and Other Sources of Funds
Deposits. Deposits are the Company’s primary source of funds. 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, 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 were $378.79 million or 73.87% of the Bank’s deposits at December 31, 2016 ($347.52
million or 67.8% excluding IRA certificates of deposit). 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.
The following table includes deposit accounts and the associated weighted average interest rates for each category of
deposits:
Noninterest checking
Interest bearing checking
Savings
Money market accounts
Total
Certificates of deposit accounts:
IRA certificates
Brokered certificates
Other certificates
Total certificates of deposit
Total deposits
Amount
$
82,877
93,163
82,266
89,211
347,517
31,277
15,596
118,405
165,278
512,795
$
2016
Percent
of Total
16.16%
18.17%
16.04%
17.40%
67.77%
6.10%
3.04%
23.09%
32.23%
100.00%
December 31,
Weighted
Average
Rate
Amount
(Dollars in Thousands)
0.00%
0.03%
0.04%
0.11%
0.05%
0.64%
0.80%
0.89%
0.84%
0.30%
$
77,031
87,350
71,474
94,880
330,735
33,262
7,071
112,114
152,447
483,182
$
35
2015
Percent
of Total
15.94%
18.08%
14.79%
19.64%
68.45%
6.88%
1.46%
23.21%
31.55%
100.00%
Weighted
Average
Rate
0.00%
0.03%
0.04%
0.12%
0.05%
0.96%
1.02%
0.89%
0.92%
0.32%
All deposit products increased during the period with the exception of money markets. Management attributes the
continued organic increase in deposits to increased marketing of checking accounts as well as customers’ preference for
placing funds in secure, federally insured accounts. Noninterest checking increased $5.85 million or 7.6%, to $82.88
million at December 31, 2016. Interest bearing checking increased $5.82 million or 6.7%, to $93.16 million at December
31, 2016. Savings increased $10.79 million or 15.1%, to $82.27 million at December 31, 2016. Money markets decreased
$5.67 million, or 6.0% and time certificates of deposit increased $12.83 million or 8.4%. Brokered certificates increased
$8.53 million to $15.60 million at December 31, 2016 from $7.07 million at December 31, 2015. The increase is largely
due to the purchase of four brokered certificates with coupon rates ranging from 0.50% to 0.70% and maturities ranging
from February 2017 through November 2017, partially offset by the maturity of a $2.47 million brokered certificate in
December 31, 2016.
The following table shows the amount of certificates of deposit with balances of $250,000 and greater by time remaining
until maturity as of December 31, 2016:
Balance
$250
and Greater
(In Thousands)
3 months or less
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
$
$
16,078
10,882
10,347
8,056
45,363
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 FHLB of Des Moines to supplement our supply of lendable funds and to meet deposit withdrawal
requirements. We also have Federal funds line of credits with PCBB, PNC, Zions Bank and Stockman Bank.
36
The following table includes information related to FHLB of Des Moines and other borrowings:
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
December 31,
2015
2016
(Dollars in Thousands)
$
75,620
87,661
81,548
1.05%
1.10%
$
47,344
68,261
68,261
1.11%
1.08%
-
$
-
-
0.00%
0.00%
-
$
-
-
0.00%
0.00%
$
3,274
8,385
865
0.73%
1.00%
$
4,023
12,647
4,455
0.57%
0.68%
$
78,894
92,436
82,413
1.03%
1.10%
$
51,367
72,716
72,716
1.07%
1.05%
Advances from the FHLB and other borrowings increased $9.70 million or 13.3%, to $82.41 million at December 31,
2016. The increase was primarily due to increases in net short-term advances from FHLB and other borrowings partially
offset by net long-term payments on FHLB borrowings. The borrowings were used to help fund the continued loan growth.
Shareholders’ Equity
Total shareholders’ equity increased by $4.01 million or 7.2%, to $59.46 million at December 31, 2016 from $55.45
million at December 31, 2015. The increase is primarily due to net income of $5.13 million partially offset by dividends
paid of $1.19 million.
37
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.
Year Ended December 31, 2016
Interest
and
Average
Daily
Year Ended December 31, 2015
Interest
and
Average
Daily
Balance
Dividends
Balance
Dividends
Yield/
Cost(4)
Yield/
Cost(4)
Assets:
Interest-earning assets:
Investment securities
FHLB and FRB stock
Loans receivable, net
(1)
Other
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 and other borrowings
including subordinated debt
Total interest-bearing liabilities
Non-interest checking
Other noninterest-bearing liabilities
Total liabilities
Total equity
(Dollars in Thousands)
$
138,655
$
2,917
4,646
456,808
1,715
601,824
52,987
142
20,842
10
23,911
2.10%
3.06%
4.56%
0.58%
3.97%
$
150,520
$
3,058
2,979
374,849
4,913
533,261
50,397
67
17,332
9
20,466
$
654,811
$
583,658
0.11%
0.04%
0.03%
0.86%
1.72%
0.62%
$
90,783
$
101
32
27
1,358
1,600
3,118
75,288
88,900
158,465
92,985
506,421
84,788
4,848
596,057
58,754
$
94,525
$
107
30
27
1,293
998
2,455
67,051
81,462
151,472
61,392
455,902
70,766
2,940
529,608
54,050
2.03%
2.25%
4.62%
0.18%
3.84%
0.11%
0.04%
0.03%
0.85%
1.63%
0.54%
Total liabilities and equity
$
654,811
$
583,658
Net interest income/interest rate spread(2)
$
20,793
3.35%
$
18,011
3.30%
Net interest margin(3)
Total interest-earning assets to interest-bearing liabilities
3.46%
118.84%
3.38%
116.97%
(1)
(2)
Includes loans held-for-sale.
Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate
on interest-bearing liabilities.
(3) Net interest margin represents income before the provision for loan losses divided by average interest-earning assets.
(4) For purposes of this table, tax exempt income is not calculated on a tax equivalent basis.
38
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. For 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.
Year Ended December 31, 2016
Due to
Rate
Net
Volume
Year Ended December 31, 2015
Due to
Rate
Net
Volume
Interest earning assets:
Investment securities
FHLB and FRB stock
Loans receivable, net
Other earning assets
Total interest earning assets
Interest-bearing liabilities:
Savings, money market and
checking accounts
Certificates of deposit
Borrowings and
subordinated debentures
Total interest-bearing liabilities
(In Thousands)
$
(241)
37
3,790
(4)
3,582
$
100
38
(280)
5
(137)
$
(141)
75
3,510
1
3,445
$
(844)
9
3,923
1
3,089
$
(307)
39
(786)
-
(1,054)
$
(1,151)
48
3,137
1
2,035
2
61
511
574
(6)
4
91
89
(4)
65
602
663
11
(12)
229
228
(8)
128
73
193
3
116
302
421
Change in net interest income
$
3,008
$
(226)
$
2,782
$
2,861
$
(1,247)
$
1,614
Results of Operations
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
Net Income
Eagle’s net income for the year ended December 31, 2016 was $5.13 million compared to $2.58 million for the year ended
December 31, 2015. The increase of $2.55 million was primarily due to an increase in net interest income after loan loss
provision of $2.25 million and an increase in noninterest income of $4.23 million, partially offset by an increase in
noninterest expense of $2.29 million and an increase in income tax expense of $1.64 million. Basic and diluted earnings
per share were $1.36 and $1.32, respectively, for the year ended December 31, 2016 compared to $0.68 and $0.67,
respectively, for the prior period.
Net Interest Income
Net interest income increased to $20.79 million for the year ended December 31, 2016, from $18.01 million for the year
ended December 31, 2015. This increase of $2.78 million, or 15.4%, was due to an increase in interest and dividend
income of $3.44 million partially offset by an increase in interest expense of $663,000 and an increase in the loan loss
provision of $530,000.
Interest and Dividend Income
Total interest and dividend income was $23.91 million for the year ended December 31, 2016, compared to $20.47 million
for the year ended December 31, 2015, an increase of $3.44 million, or 16.8%. Interest and fees on loans increased to
$20.84 million for the year ended December 31, 2016 from $17.33 million for the same period ended December 31, 2015.
This increase of $3.51 million, or 20.3%, was due to an increase in the average balance of loans partially offset by a
decrease in the average yield of loans for the year ended December 31, 2016. Average balances for loans receivable, net,
including loans held for sale, for the year ended December 31, 2016 were $456.81 million, compared to $374.85 million
for the prior year period. This represents an increase of $81.96 million, or 21.9%. The average interest rate earned on loans
receivable decreased by 6 basis points, from 4.62% to 4.56%. Interest and dividends on investment securities available-for-
sale decreased slightly by $141,000 or 4.6% for the year ended December 31, 2016 compared to the same period last year.
39
Average balances on investments decreased to $138.66 million for the year ended December 31, 2016, from
$150.52 million for the year ended December 31, 2015. However, the average interest rate earned on investments
increased to 2.10% for the year ended Decemb er 31, 2016 from 2.03% for the year ended December 31, 2015.
Interest Expense
Total interest expense increased for the year ended December 31, 2016 to $3.12 million from $2.46 million for the
year ended December 31, 2015, an increase of $663,000, or 27.0%. Interest expense for total borrowings was $1.60 million
for the year ended December 31, 2016 compared to $998,000 for the year ended December 31, 2015. The average balance
for borrowings was $92.99 million for the year ended December 31, 2016 compared to $61.39 million for the year
ended December 31, 2015. The average rate paid on borrowings also increased 9 basis points, from 1.63% to 1.72%.
Borrowings have been used to help fund continued loan growth. Interest expense on deposits remained fairly consistent
period over period only increasing $61,000. The average balance for total deposits was $498.22 million for the year ended
December 31, 2016 compared to $465.28 million for the year ended December 31, 2015. The overall average rate on
total deposits increased 1 basis point from 0.30% for the year ended December 31, 2015 to 0.31% for the year ended
December 31, 2016.
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, the Bank recorded $1.83 million in provision for loan losses for the year ended
December 31, 2016 and $1.30 million for the year ended December 31, 2015. The provision for loan losses has been
increased to keep pace with increasing loan production that is fueling loan growth. Management believes the level of
total allowances is adequate. Total nonperforming loans, including restructured loans, net decreased from $2.55 million at
December 31, 2015 to $1.15 million at December 31, 2016. The Bank has $825,000 in other real estate owned and other
repossessed assets at December 31, 2016.
Noninterest Income
Total noninterest income increased to $15.99 million for the year ended December 31, 2016, from $11.76 million for the
year ended December 31, 2015, an increase of $4.23 million or 36.0%. The increase is largely due to increases in net gain
on sale of loans which increased to $10.35 million for the year ended December 31, 2016 from $6.67 million for the year
ended December 31, 2015. During the year ended December 31, 2016, $333.03 million residential mortgages
were originated compared to $240.65 million for the year ended December 31, 2015. In addition, $308.68 million
mortgage loans were sold during the year ended December 31, 2016 compared to $230.62 million in the same period
in the prior year.
Noninterest Expense
Noninterest expense was $28.02 million for the year ended December 31, 2016 compared to $25.73 million for the
year ended December 31, 2015. The increase of $2.29 million, or 8.9%, is largely due to increased salaries and
employee benefits ex penses of $1.94 million . Increased salaries expense is due in part to higher commissio n-based
compensation related to the continued loan growth.
Income Tax
Income tax expense was $1.80 million for the year ended December 31, 2016, compared to $163,000 for the year ended
December 31, 2015. The effective tax rate was 26.0% for the year ended December 31, 2016.
Income tax expense has
increased with our increased income levels. However, tax free municipal bond income and Bank owned life insurance
income help to lower the overall effective tax rate. The effective tax rate is further reduced by a tax credit investment
entered into by the Company in fiscal year 2013. The Bank made an investment in Certified Development Entities which
have
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 an estimated seven-y ear credit allowance period.
received allocations of New Markets Tax Credits
(“NMTC”). Administered by
40
Liquidity and Capital Resources
Liquidity
The Bank is required to maintain minimum levels of liquid assets as defined by the Montana Division of Banking and FRB
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 Des Moines. The Bank
exceeded those minimum ratios as of December 31, 2016 and 2015.
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 Des Moines 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.
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.
Comparison of Cash Flow for Years Ended December 31, 2016 and 2015
Net cash provided by the Company’s operating activities, which is primarily comprised of cash transactions affecting net
income, was $12.89 million for the year ended December 31, 2016 compared to $4.88 million for the prior year. Net cash
provided by operating activities was higher for the year ended December 31, 2016 primarily due to higher net income and
changes in loans held-for-sale.
Net cash used in the Company’s investing activities, which is primarily comprised of cash transactions from investment
securities and the loan portfolio, was $51.13 million for the year ended December 31, 2016 compared to $76.76 million for
the year ended December 31, 2015. Net cash used in investing activities for the year ended December 31, 2016 was 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 $62.20 million for the year ended December 31, 2016. In addition, there was $18.86 million in
available-for-sale securities purchases during the year ended December 31, 2016. These uses of cash were partially offset
by available-for-sale securities sales and maturities, principal payments and calls of $33.53 million. Net cash used in
investing activities for the year ended December 31, 2015 was also impacted by loan originations being higher than loan
pay-off and principal payments during the year. Loan origination and principal collection, net was $90.48 million for the
year ended December 31, 2015. In addition, there was $28.87 million in available-for-sale securities purchases during the
year ended December 31, 2015. These uses of cash were partially offset by available-for-sale securities sales and
maturities, principal payments and calls of $43.82 million.
Net cash provided by the Company’s financing activities was $38.12 million for the year ended December 31, 2016
compared to $66.82 million for the year ended December 31, 2015. Net cash provided by financing activities for the year
ended December 31, 2016 was primarily a result of a net increase in deposits of $29.61 million and net advances from
FHLB and other borrowings of $9.70 million. Net cash provided by financing activities for the year ended December 31,
2015 was due to net advances from FHLB and other borrowings of $17.72 million and a net increase in deposits of $41.78
million. In addition, there were net proceeds from the issuance of subordinated debentures of $9.79 million during the year
ended December 31, 2015.
41
Capital Resources
At November 30, 2016 (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, increased the economic value of
equity (“EVE”) by 2.1% compared to a decrease of 1.8% at November 30, 2015 (the most recent report available for
December 31, 2015). The Bank is within the guidelines set forth by the Board of Directors for interest rate sensitivity.
The Bank’s Tier I leverage ratio, as measured under State of Montana and FRB rules, decreased from 9.36% as of
December 31, 2015 to 9.23% as of December 31, 2016. The Bank’s strong capital position helps to mitigate its interest rate
risk exposure.
As of December 31, 2016, the Bank’s regulatory capital was in excess of all applicable regulatory requirements and the
Bank is deemed “well capitalized” pursuant to State of Montana and FRB rules. At December 31, 2016, the Bank’s total
capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios amounted to 14.05%, 13.03%, 13.03% and
9.23%, respectively, compared to regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively.
Impact of Inflation and Changing Prices
Our consolidated financial statements and the accompanying notes, which are found in Item 8, have been prepared in
accordance with generally accepted accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Interest rates have
a greater impact on our performance than do the general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
Interest Rate Risk
Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates.
Interest rate risk results from several factors and could have a significant impact on the Company’s net interest income,
which is the Company primary source of net income. Net interest income is affected by changes in interest rates, the
relationship between rates on interest bearing assets and liabilities, the impact of interest fluctuations on asset prepayments
and the mix of interest bearing assets and liabilities.
Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices
in place to measure, monitor and control interest rate exposures. The objective of interest rate risk management is to
contain the risks associated with interest rate fluctuations. The process involves identification and management of the
sensitivity of net interest income to changing interest rates.
The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability
committee, which is governed by policies established by the Company’s Board that are reviewed and approved annually.
The Board delegates responsibility for carrying out the asset/liability management policies to the Bank’s asset/liability
committee. In this capacity, the asset/liability committee develops guidelines and strategies impacting the Company’s
asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain or
increase the level of net interest income within an acceptable level of interest rate risk. 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 Bank has established acceptable levels of interest rate risk as follows: Projected net interest i ncome over the next
twelve months will not be reduced by more than 15.0% given a change in interest rates of up to 200 basis points (+ or -).
The following table includes the Banks’s net interest income sensitivity analysis.
Changes in Market
Interest Rates
(Basis Points)
+200
-100
Rate Sensitivity
As of November 30, 2016
Year 1
0.06%
-1.67%
42
Year 2
0.52%
-5.90%
Policy
Limits
-15.0%
-15.0%
The following table discloses how the Bank’s economic value of equity (“EVE”) would react to interest rate changes.
Given the current relatively low level of market interest rates, an EVE calculation for an interest rate decrease of greater
than 100 basis points has not been prepared.
Changes in Market
Interest Rates
(Basis Points)
As of November 30, 2016
Projected EVE
EVE as a % Change from 0 Shock
+300
+200
+100
0
-100
0.5%
2.1%
2.9%
0.0%
-10.9%
Board Policy
Limit
Must be no greater than:
-30.0%
-20.0%
-10.0%
0.0%
-10.0%
While the Bank was technically out of policy for the EVE calculation for a shock down 100 basis points, the Board
determined that no action was deemed necessary given that the EVE computation includes a highly conservative operating
cost for servicing deposits.
Off-Balance Sheet Arrangements
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such
as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash
requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments
are subject to the same credit policies and approval process accorded to loans we make. In addition, we use mandatory sell
forward delivery commitments to sell whole loans to the secondary markets. These commitments are also used as a hedge
against exposure to interest rate risks relating from rate locked loan origination commitments on certain mortgage loans
held-for-sale.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item has been omitted based on Eagle’s status as a smaller reporting company.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Eagle’s audited consolidated financial statements, notes thereto, and auditor’s reports are found immediately following Part
III of this report.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
ITEM 9A.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management including our Chief
Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended, as of
December 31, 2016, 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 December 31,
2016, our disclosure controls and procedures were effective.
43
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 the 2013 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 December 31,
2016. Based on this assessment, management concluded that, as of December 31, 2016, 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
December 31, 2016 that have materially affected, or were reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B.
OTHER INFORMATION.
None.
44
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 year ended December 31, 2016.
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 2017 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 59
Mr. Johnson has served as President and CEO of Eagle since December 2009. He has also served as President of the Bank
since July 2007 and CEO since November 2007. Prior to being named President, he had served as the Company’s
Executive Vice President and Chief Financial Officer. He joined the Bank in 1981. He currently serves on the Montana
Independent Bankers Association board of directors and served as a member of the Federal Reserve Board’s Community
Depository Institution Advisory Council from 2010-2012. 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. He serves on
the Independent Community Bankers of America’s Political Action Committee.
Laura F. Clark, Senior Vice President/Chief Financial Officer
Age 60
Ms. Clark has served as the Senior Vice President and Chief Financial Officer of the Bank and Eagle since March 2014.
Prior to being named the Chief Financial Officer, she had served as the Senior Vice President and Chief Financial Officer
of the Bank of Bozeman since 2005. Her experience spans over 30 years and includes a variety of executive positions with
First National Bancorp, Bankers Resource Center, Security Bank, Bank of Montana System and Montana Bancsystem. Ms.
Clark holds a Bachelor of Arts degree in Business Administration from Montana State University in Billings, Montana. She
currently serves as a board member of ExplorationWorks, a local Science Center that provides programs for early
childhood education, STEM (science, technology, engineering and math) and healthy living.
Michael C. Mundt, Executive Vice President/Chief Community Banking Officer
Age 62
Mr. Mundt has served as the Chief Lending Officer of the Bank since April 1994 and was promoted to Executive Vice
President/Chief Community Banking Officer in July 2014. 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 recently served on the Montana
Bankers Association’s board of directors and as a Past-President of the Montana Business Assistance Connection, a local
economic development non-profit organization. Mr. Mundt retired effective December 31, 2016.
Rachel R. Amdahl, Senior Vice President/Chief Operations Officer
Age 48
Mrs. Amdahl has served as Senior Vice President/Chief Operations Officer of the Bank since February 2006. Prior to being
named the Senior Vice President/Chief Operations Officer, she served as Vice President/Operations since 2000. She joined
the Bank in 1987. She is a past board member of the Lewis and Clark County United Way and the Women’s Leadership
Network in Helena.
Tracy A. Zepeda, Senior Vice President/Chief Retail Officer
Age 37
Ms. Zepeda joined the Bank in December 2012 at the time of the acquisition of seven branches from Sterling Financial
Corporation. She had served as Vice President/Territory Manager of Sterling Financial Corporation since January 1, 2011.
Prior to that position Ms. Zepeda served as Assistant Vice President/Community Manager of Sterling Financial
Corporation since July 2007. She is a board member of the Missoula chapter of Big Brothers Big Sisters.
Dale F. Field, Senior Vice President/Chief Credit Officer
Age 45
Mr. Field joined Eagle in 2001 as VP/Commercial Lender and was promoted to Vice President/Chief Credit Administration
Officer in 2011. He was promoted to Senior Vice President/Chief Credit Officer in July 2014. He serves on the Helena
Exchange Club board of directors and is a school board trustee in Clancy, Montana.
45
Chantelle R. Nash, Senior Vice President/Chief Risk Officer
Age 46
Ms. Nash joined Eagle as a Compliance Manager in 2006 and served as Vice President /Compliance Officer since 2010.
She was promoted to Senior Vice President/Chief Risk Officer in July 2014 . She serves on the board of the Helena YWCA.
Larry D. Williams, Senior Vice President/Chief Lending Officer
Age 49
Mr. Williams joined Eagle in November 2014. He was formerly with Community Bank, Inc. and served as Vi ce President
and Chief Credit Officer since January 2012. He was the Vice President/Senior Lender for Community Bank, Inc. from
March 2005 through December 2011. He is currently a director of the Wester n Montana Chapter of Risk Management
Associates.
George Ballew, Senior Vice President/Chief Mortgage Lending Officer
Age 57
Mr. Ballew joined Eagle in September 2015. He has served in management positions in the mortgag e industry over the past
29 years. Prior to joining Eagle he was the Chief Executive Officer/Mortgage Division at First Mortgage from May
2014 through August 2015. He was the Senior Vice President/Mortgage Market Manager for BB&T Mortgage from
April 2001 through April 2014. He serves as a board member of th e state CASA chapter, a child advocacy group.
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.opportunitybank.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 executive officers.
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.
PART IV
(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 subsidiaries as of December 31, 2016 and 2015
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 10.12 are management contracts or compensatory plans or arrangements.
46
**
*
*
*
*
*
*
*
*
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Certificate of Incorporation of Eagle Bancorp Montana, Inc.
Bylaws of Eagle Bancorp Montana, Inc., amended as of August 20, 2015 (incorporated by reference to
Exhibit 3.1 of our Current Report on Form 8-K filed on August 25, 2015).
Form of Common Stock Certificate of Eagle Bancorp Montana, Inc.
Form of 6.75% Subordinated Note due 2025 (incorporated by reference to Exhibit 4.1 of our Current
Report on Form 8-K filed on June 19, 2015).
Form of 5.75% Subordinated Note due 2022 (incorporated by reference to Exhibit 4.1 of our Current
Report on Form 8-K filed on February 13, 2017).
Employment Contract, effective as of April 27, 2015, among Peter J. Johnson, Eagle Bancorp Montana,
Inc. and Opportunity Bank of Montana (incorporated by reference to Exhibit 10.2 of our Current Report
on Form 8-K filed on April 29, 2015).
Form of Change in Control Agreement entered into between Eagle Bancorp Montana, Inc. and its
executive officers (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on
August 24, 2015).
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.
Amended Salary Continuation Agreement, dated April 27, 2015, between Peter J. Johnson and
Opportunity Bank of Montana (incorporated by reference to Exhibit 10.7 of our Current Report on Form
8-K filed on August 24, 2015).
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.
10.9
American Federal Savings Bank Split-Dollar Plan, effective October 21, 2004.
10.10
Summary of American Federal Savings Bank Bonus Plan.
10.11
10.12
10.13
10.14
10.15
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).
Amendment No. 1 to the Eagle Bancorp Montana, Inc. 2011 Stock Incentive Plan for Directors, Officers,
and Employees (incorporated by reference to Exhibit 10.13 of our Annual Report on Form 10-K filed on
March 15, 2016).
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K filed on June 19, 2015).
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K filed on February 13, 2017).
Form of Eagle Bancorp Montana, Inc. Indemnification Agreement (incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K/A filed on February 24, 2017).
21.1
Subsidiaries of Registrant.
47
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.
___________________
(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
ITEM 16.
FORM 10-K SUMMARY.
None.
48
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 and Chief Executive Officer
March 14, 2017
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 and 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
/s/ Shavon R. Cape
Director
Shavon R. Cape
/s/ Tanya J. Chemodurow
Director
Tanya J. Chemodurow
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
3/14/2017
49
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:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
(a)
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;
Designed such internal control over financial reporting, or caused such internal control over financial
(b)
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
(c)
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 quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
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: March 14, 2017
/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:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
(a)
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;
Designed such internal control over financial reporting, or caused such internal control over financial
(b)
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
(c)
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 quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
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: March 14, 2017
/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 year ended
December 31, 2016 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)
March 14, 2017
/s/ Laura F. Clark
Laura F. Clark
SVP and Chief Financial Officer and Principal Accounting Officer
(Principal Financial Officer)
March 14, 2017
[ This Page Intentionally Left Blank ]
[ This Page Intentionally Left Blank ]
A N D S U B S I D I A R Y
CONSOLID ATED FI NA NCI AL STATEM E NT S
a nd
REPORT OF INDEPENDENT RE GI S T E RE D P U B L I C A CC O UNT I NG FI RM
DECEMBER 31, 2016 AND DECE MB E R 3 1, 2 0 1 5
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
First Financial Bank Building
400 Pine Street, Ste. 600, Abilene, TX 79601
325.672.4000 / 800.588.2525 / f: 325.672.7049
www.dkcpa.com
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 December 31, 2016 and December 31, 2015 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 December 31, 2016. 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 December 31, 2016 and
December 31, 2015 and the results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2016, in conformity with accounting principles generally accepted
in the United States of America.
Abilene, Texas
February 24, 2017
Certified Public Accountants
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
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
Federal Reserve Bank stock
Investment in Eagle Bancorp Statutory Trust I
Mortgage loans held-for-sale
Loans receivable, net of deferred loan fees of $1,092 at December 31, 2016
and $795 at December 31, 2015 and allowance for loan losses of
$4,770 at December 31, 2016 and $3,550 at December 31, 2015
Accrued interest and dividends 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
Deferred tax asset, 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:
Principal amount
Unamortized debt issuance costs
Total subordinated debentures less unamortized debt issuance costs
$
$
$
December 31,
2016
2015
$
6,531
787
7,318
128,436
4,012
871
155
18,230
461,391
2,123
5,853
19,393
14,095
825
7,034
384
1,965
1,840
673,925
82,877
429,918
512,795
4,291
82,413
15,155
(185)
14,970
$
$
6,468
970
7,438
145,738
3,397
887
155
18,702
403,734
2,278
4,968
18,217
12,514
595
7,034
514
1,490
2,686
630,347
77,031
406,151
483,182
4,050
72,716
15,155
(206)
14,949
Total liabilities
614,469
574,897
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; 3,811,409 and 3,779,464 shares
outstanding at December 31, 2016 and 2015, 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) income
Total shareholders' equity
-
-
41
22,366
(809)
(2,971)
41,240
(411)
59,456
41
22,152
(975)
(3,321)
37,301
252
55,450
Total liabilities and shareholders' equity
$
673,925
$
630,347
The accompanying notes are an integral part of these consolidated financial statements.
-2-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except for Per Share Data)
Years Ended
December 31,
2016
2015
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans
Securities available-for-sale
Federal Home Loan Bank and Federal Reserve Bank dividends
Trust preferred securities
Interest on deposits in banks
Other interest income
Total interest and dividend income
INTEREST EXPENSE:
Deposits
Federal Home Loan Bank 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 $2,938 and $1,907 for
2016 and 2015, respectively, related to accumulated other
comprehensive earnings reclassification)
Mortgage loan service fees
Wealth management income
Interchange and ATM fees
Appreciation in cash surrender value of life insurance
Net gain on sale of available-for-sale securities (includes $249
and $234 for 2016 and 2015, respectively, related to
accumulated other comprehensive earnings reclassification)
Net loss on fair value hedge
Net gain (loss) on sale of real estate owned and other repossessed 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
Other noninterest expense
Total noninterest expenses
INCOME BEFORE INCOME TAXES
Income tax expense (includes ($455) and $321 for 2016
and 2015, respectively, related to income tax (benefit)
expense from reclassification items)
NET INCOME
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
-3-
$
20,842
2,917
142
3
1
6
23,911
1,518
815
785
3,118
20,793
1,833
18,960
865
10,346
1,835
601
873
484
249
-
6
731
15,990
16,286
2,815
1,980
696
1,249
445
404
194
394
202
3,354
28,019
6,931
1,799
5,132
1.36
1.32
$
$
$
17,332
3,058
67
3
1
5
20,466
1,457
550
448
2,455
18,011
1,303
16,708
1,009
6,672
1,718
625
580
426
234
(93)
(13)
603
11,761
14,350
2,988
2,259
800
799
432
332
181
520
576
2,489
25,726
2,743
163
2,580
0.68
0.67
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
NET INCOME
$
5,132
$
2,580
Years Ended
December 31,
2016
2015
OTHER ITEMS OF COMPREHENSIVE (LOSS) INCOME:
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 on derivatives designated
as cash flow hedges, before income taxes
Total other items of comprehensive (loss) income
Income tax benefit (expense) related to:
Investment securities
Derivatives designated as cash flow hedges
Total income tax benefit (expense)
(792)
(249)
2,861
(2,938)
(1,118)
424
31
455
883
(234)
2,046
(1,907)
788
(264)
(57)
(321)
COMPREHENSIVE INCOME
$
4,469
$
3,047
The accompanying notes are an integral part of these consolidated financial statements.
-4-
[ This Page Intentionally Left Blank ]
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except for Per Share Data)
Balance at January 1, 2015
$
-
$
41
Preferred
Stock
Common
Stock
Net income
Other comprehensive income
Dividends paid
Stock compensation expense
Treasury stock purchased
(116,865 shares at $11.30 average cost per share )
Treasury stock 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 December 31, 2015
$
-
$
41
Net income
Other comprehensive loss
Dividends paid
Stock compensation expense
Treasury stock reissued for compensation
(31,945 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 December 31, 2016
$
-
$
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
(Loss) Income
Total
$
22,122
$
(1,141)
$
(2,194)
$
35,885
$
(215)
$
54,498
204
(193)
19
(1,320)
193
166
2,580
(1,164)
467
2,580
467
(1,164)
204
(1,320)
-
185
$
22,152
$
(975)
$
(3,321)
$
37,301
$
252
$
55,450
500
(350)
64
350
166
5,132
(1,193)
(663)
5,132
(663)
(1,193)
500
-
230
$
22,366
$
(809)
$
(2,971)
$
41,240
$
(411)
$
59,456
-5-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Loan loss provision
Depreciation
Net amortization of investment securities premiums and discounts
Amortization of mortgage servicing rights
Amortization of core deposit intangible and tax credits
Deferred income tax benefit
Net gain on sale of loans
Net gain on sale of available-for-sale securities
Net (gain) loss on sale of real estate owned and other repossessed assets
Net loss on fair value hedge
Net loss (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 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 purchased
Federal Reserve Bank stock redeemed (purchased)
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 (payments) 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
Proceeds from issuance of subordinated debentures
Payments for debt issuance costs
Purchase of treasury stock, at cost
Dividends paid
Net cash provided by financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
Years Ended
December 31,
2016
2015
$
5,132
$
2,580
1,833
1,058
1,838
1,249
445
(20)
(10,346)
(249)
(6)
-
6
(466)
155
10,741
552
971
12,893
23,649
9,882
(18,859)
(615)
16
(62,201)
885
(2,000)
353
7
(2,247)
(51,130)
29,613
15,313
5,000
(10,616)
-
-
-
(1,193)
38,117
(120)
7,438
1,303
1,231
1,988
799
432
(344)
(6,672)
(234)
13
93
(305)
(329)
40
5,696
(1,603)
196
4,884
31,301
12,515
(28,872)
(1,429)
(246)
(90,477)
-
(450)
87
1,438
(630)
(76,763)
41,782
(1,723)
33,000
(13,554)
10,000
(206)
(1,320)
(1,164)
66,815
(5,064)
12,502
7,438
CASH AND CASH EQUIVALENTS, end of period
$
7,318
$
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: Organization and Operations
On April 5, 2010, Eagle Bancorp completed its 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, Eagle Bancorp Montana, Inc. (“the Company”, or “Eagle”) became the stock
holding company for American Federal Savings Bank (“AFSB”), 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 $24,643,000.
Concurrent with the completion of the offering, shares of Eagle Bancorp common stock owned
by the public were exchanged. Shareholders of Eagle Bancorp received 3.80 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 8.00% 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 $1,971,000.
In 2014, the Board of Directors (the “Board”) determined that it was in the Company’s best
interests to adopt a Montana community bank charter and the Company applied to the State of
Montana to form an interim bank for the purpose of facilitating the conversion of AFSB from a
federally chartered savings bank to a Montana-chartered commercial bank. Upon receiving
required approvals of the Montana Division of Banking and Financial Institutions and the federal
banking agencies for the conversion the conversion became effective on October 14, 2014.
Concurrent with the conversion, the Bank applied, and was approved, for membership in the
Federal Reserve System of the Board of Governors. In connection with the conversion, AFSB
changed its name to Opportunity Bank of Montana (“the Bank”). As a result of the conversion,
the Bank is regulated by the Montana Division of Banking and Financial Institutions. As a
Federal Reserve Board (“FRB”) member bank, its primary federal regulator is the FRB, and the
Company is a registered bank holding company regulated by the FRB. The Bank is a member of
the Federal Home Loan Bank System and its deposit accounts are insured to the applicable limits
by the Federal Deposit Insurance Corporation (“FDIC”).
The Bank is headquartered in Helena, Montana, and operates additional branches in Butte,
Bozeman, Billings, Big Timber, Livingston, Missoula, Hamilton and Townsend, Montana. It
also operates a separate mortgage loan origination location in Missoula, Montana. The Bank
opened a Loan Production Office in Great Falls, Montana in January 2015. 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.”
NOTE 2: Summary of Significant Accounting Policies
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 2: Summary of Significant Accounting Policies – continued
Consolidated Financial Statement Presentation and Use of Estimates
The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). In preparing
consolidated financial statements, 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, valuation of mortgage servicing
rights and valuation of the interest rate swap (terminated during the quarter ended March 31,
2015), management obtains independent appraisals and valuations.
The Company evaluated subsequent events for potential recognition and/or disclosure through
the date the consolidated financial statements were issued.
Significant Group Concentrations of Credit Risk
Most of the Company’s business activity is with customers located within Montana. Note 4:
Investment Securities discusses the types of securities that the Company invests in. Note 5:
Loans 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 December 31, 2016
and 2015, 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 Federal Home Loan Bank
(“FHLB”) of Des Moines (formerly FHLB of Seattle), Pacific Coast Bankers Bank (“PCBB”)
and Zions Bank. FHLB of Des Moines completed a merger with FHLB of Seattle in June 2015.
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” and “interest bearing deposits in banks” all of which mature within ninety days.
The Bank properly maintains amounts in excess of reserve balances as required by the FRB. The
Bank had vault cash reserves in excess of the required reserve amount of $676,000 as of
December 31, 2016.
-8-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Investment Securities
The Company can designate debt and equity securities as held-to-maturity, available-for-sale or
trading. At December 31, 2016 and 2015 all securities were 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.
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 – Investments that are purchased with the intent of selling them within a short period of
time.
Federal Home Loan Bank Stock
The Company’s investment in 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 total
assets and a specific percentage of its outstanding FHLB advances. The Company had 40,121
and 33,969 FHLB shares at December 31, 2016 and 2015, respectively. Dividends are paid
quarterly and are subject to FHLB board approval.
Federal Reserve Bank Stock
The Company’s investment in FRB stock is a restricted investment carried at cost, which
approximates its fair value. Although the par value of the stock is $100 per share, banks pay only
$50 per share at the time of purchase, with the understanding that the other half of the
subscription amount is subject to call at any time. As a member of the Federal Reserve System,
the Company is required to maintain a minimum level of investment in FRB stock based on a
specific percentage of its capital and surplus. The Company had 17,415 FRB shares at December
31, 2016 and 2015. Dividends are received semi-annually at a fixed rate of 6.00% on the total
number of shares.
-9-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
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 Bank grants mortgage, commercial and consumer loans to customers. A substantial portion
of the loan portfolio is represented by mortgage loans in Montana. The ability of the Bank’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.
Loan Origination/Risk Management – The Bank selectively extends credit for the purpose of
establishing long-term relationships with its customers. The Bank 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 Bank considers 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 Bank is engaged and require all lenders to
obtain appropriate approvals for the extension of credit. The Bank 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 Bank 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.
Residential Mortgages (1-4 Family) – The Bank originates 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 80.00% 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.
-10-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Loans – continued
Commercial Real Estate Mortgages and Land Loans – The Bank makes commercial real estate
loans and land loans (both developed and undeveloped) and loans on multi-family dwellings.
Commercial real estate loans are 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 Bank 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.
Real Estate Construction – The Bank makes loans to finance the construction of residential
properties. The majority of the Bank’s residential construction loans are made 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. 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 Bank 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 Bank 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 Bank. 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 Bank attempts to
minimize this risk by maintaining conservative underwriting policies on these types of loans.
Generally, home equity loans are made for up to 85.00% 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 Bank 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.
-11-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Loans – continued
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. Bank’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 Bank 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.
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 Bank considers the borrower's debt service capacity
through the analysis of current financial information, if available, and/or current information
with regards to the Bank'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 uncollectability 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 collectability 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.
-12-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Allowance for Loan Losses – continued
The allowance consists of specific, general and unallocated components. For such loans that are
classified as impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and general losses in
the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-
case basis, taking into consideration all the circumstances surrounding the loan and the borrower,
including the length of delay, the reasons for the delay, the borrower's prior payment record, and
the amount of the shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral dependent. 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 Bank 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 2: 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 December 31, 2016 and 2015,
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.
-14-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
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.
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 December 31, 2016 and 2015 the Company recognized no
interest and penalties. Based on management’s analysis, the Company did not have any uncertain
tax positions as of December 31, 2016 or 2015. 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 2013 and forward;
Montana income tax returns for tax years 2013 and forward.
Treasury Stock
Treasury stock is accounted for on the cost method and consists of 271,718 and 303,663 shares
at December 31, 2016 and 2015, respectively.
On July 21, 2016, the Board authorized the repurchase of up to 100,000 shares of its common
stock. 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. No shares were purchased under this plan during 2016. The plan expires on July
21, 2017.
-15-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Treasury Stock – continued
On July 23, 2015, the Board authorized the repurchase of up to 100,000 shares of its common
stock. Under the plan, shares could be purchased by the Company on the open market or in
privately negotiated transactions. During the three months ended December 31, 2015, 15,000
shares were purchased at an average price of $11.75 per share. During the three months ended
September 30, 2015, 46,065 shares were purchased at an average price of $11.47 per share. The
plan expired on July 23, 2016.
On July 1, 2014, the Board authorized the repurchase of up to 200,000 shares of its common
stock. Under this plan, shares could be purchased on the open market or in privately negotiated
transactions. Under this plan, 55,800 shares were purchased at an average price of $11.03 per
share during the six months ended June 30, 2015. In addition, under this plan, 55,000 shares
were purchased at an average price of $10.66 per share during the six month transition period
ended December 31, 2014. The plan expired on June 30, 2015.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising costs were $696,000
and $800,000 for the years ended December 31, 2016 and 2015, 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.
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 Company 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 3: Earnings Per Share.
-16-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
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 non-exchange 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.
Mortgage 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. 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 after inception of the rate lock.
Interest Rate Lock Commitments – The Company enters into agreements to extend credit to a
borrower under certain specified terms and conditions in which the interest rate and the
maximum amount of the loan are set prior to funding. Under the agreement, the lender commits
to lend funds to a potential borrower (subject to the lender’s approval of the loan) on a fixed or
adjustable rate basis, regardless of whether interest rates change in the market, or on a floating
rate basis.
Forward Delivery Commitments – The Company uses mandatory sell forward delivery
commitments to sell whole loans. These commitments are 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 on the items hedged are deferred and recognized in
accumulated other comprehensive income until the commitments are completed. At the point of
completion of the commitments the gains and losses are recognized in the Company’s income
statement.
Interest Rate Swap Agreements – For asset/liability management purposes, the Company may
use 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 fixed-rate loans to a variable rate.
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 ineffective portion of the
gain or loss on the derivative instrument, if any, is recognized currently in earnings. 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 over the life of the loans.
-17-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: 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 Financial Corporation
(“Sterling”) in 2012 was $6,890,000 and is not subject to amortization in accordance with
accounting guidance. Final valuation adjustments were recorded in 2013 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 as of June 30. 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 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. On July 9, 2015, the FASB agreed to delay the
effective date of the standard by one year. Therefore, the new standard will be effective in the
first quarter of 2018 and is not expected to have a significant impact to the Company’s
consolidated financial statements.
-18-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies – continued
Recent Accounting Pronouncements – continued
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendment
has a number of provisions including the requirements that public business entities use the exit
price notion when measuring the fair value of financial instruments for disclosure purposes, a
separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for
public business entities to disclose the methods and significant assumptions used to estimate the
fair value that is required to be disclosed for financial instruments measured at amortized cost.
The amendment is effective for annual and interim reporting periods beginning after December
15, 2017 and is not expected to have a significant impact to the Company’s consolidated
financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) intended to improve
financial reporting regarding leasing transactions. The new standard affects all companies and
organizations that lease assets. The standard will require organizations to recognize on the
balance sheet the assets and liabilities for the rights and obligations created by those leases if the
lease terms are more than 12 months. The guidance also will require qualitative and quantitative
disclosures providing additional information about the amounts recorded in the financial
statements. The amendments in this update are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is
evaluating the potential impact of the amendment on the Company’s consolidated financial
statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic
326) intended to improve financial reporting by requiring timelier recording of credit losses on
loans and other financial instruments held by financial institutions and other organizations. The
standard requires an organization to measure all expected credit losses for financial assets held at
the reporting date based on historical experience, current conditions and reasonable and
supportable forecasts. Financial institutions and other organizations will now use forward-
looking information to better inform their credit loss estimates. The standard also requires
enhanced disclosures to help investors and other financial statement users better understand
significant estimates and judgments used in estimating credit losses, as well as the credit quality
and underwriting standards of an organization’s portfolio. These disclosures include qualitative
and quantitative requirements that provide additional information about the amounts recorded in
the financial statements. Additionally, the standard amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets with credit deterioration. The
amendments in this update are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. All entities may adopt the amendments in this
update earlier as of the fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. An entity will apply the amendments in this update through a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period
in which the guidance is effective (that is, a modified-retrospective approach). The Company
believes the amendments in this update will have an impact on the Company’s consolidated
financial statements and is working to evaluate the significance of that impact.
-19-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: Earnings Per Share
The computations of basic and diluted earnings per share were as follows:
Years Ended
December 31,
2016
2015
(Dollars in Thousands,
Except for Per Share Data)
3,784,788
88,801
3,813,090
46,535
3,873,589
3,859,625
$
$
$
5,132
1.36
1.32
$
$
$
2,580
0.68
0.67
Weighted average shares outstanding
during the period in which basic
earnings per share is calculated
Dilutive effect of stock compensation
Average outstanding shares on which
diluted earnings per share is calculated
Net income applicable to common
stockholders
Basic earnings per share
Diluted earnings per share
NOTE 4: 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.
Mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) are
issued by government sponsored corporations, including Federal Home Loan Mortgage
Corporation, Fannie Mae and the Guaranteed National Mortgage Association.
-20-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Investment Securities – continued
The amortized cost and fair values of securities, together with unrealized gains and losses, were
as follows:
Amortized
Cost
5,673
68,493
9,454
29,537
16,530
129,687
Amortized
Cost
10,684
66,606
9,615
32,810
26,233
145,948
$
$
$
$
$
$
$
$
December 31, 2016
Gross
Gross
Unrealized Unrealized
Gains
Losses
(In Thousands)
7
575
15
283
15
895
$
$
(72)
(1,404)
(162)
(308)
(200)
(2,146)
$
$
December 31, 2015
Gross
Gross
Unrealized Unrealized
Gains
Losses
(In Thousands)
26
1,041
-
111
40
1,218
$
$
(95)
(578)
(165)
(186)
(404)
(1,428)
$
$
Fair
Value
5,608
67,664
9,307
29,512
16,345
128,436
Fair
Value
10,615
67,069
9,450
32,735
25,869
145,738
Available-for-sale:
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs - government-backed
CMOs - government-backed
Total
Available-for-sale:
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs - government-backed
CMOs - government-backed
Total
The Company has not entered into any interest rate swaps, options or futures contracts relating to
investment securities.
Proceeds from sale of available-for-sale securities
$
23,649
$
31,301
Years Ended
December 31,
2016
2015
(In Thousands)
$
$
272
(23)
249
534
(300)
234
$
$
Gross realized gain on sale of available-for-sale securities
Gross realized loss on sale of available-for-sale securities
Net realized gain on sale of available-for-sale securities
-21-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Investment Securities – continued
The amortized cost and fair value of securities at December 31, 2016 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
MBSs - government-backed
CMOs - government-backed
Total
Amortized
Cost
Fair
Value
(In Thousands)
1,042
$
8,116
15,223
59,239
83,620
1,040
8,058
15,038
58,443
82,579
29,537
16,530
129,687
$
29,512
16,345
128,436
$
$
Maturities of securities do not reflect repricing opportunities present in adjustable rate securities.
At December 31, 2016 and 2015, securities with a fair value of $18,626,001 and $11,389,000,
respectively, were pledged to secure public deposits and for other purposes required or permitted
by law.
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:
December 31, 2016
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
MBSs and CMOs - government-backed
Total
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs and CMOs - government-backed
Total
$
$
$
$
-22-
4,420
39,786
3,375
18,113
65,694
$
$
(In Thousands)
$
-
(72)
(1,392)
(15)
(405)
(1,884)
634
4,918
7,855
13,407
$
$
$
-
(12)
(147)
(103)
(262)
December 31, 2015
Less than 12 months
Gross
Unrealized
Losses
Fair
Value
12 months or Longer
Gross
Unrealized
Losses
Fair
Value
3,173
15,913
5,283
23,164
47,533
$
$
(In Thousands)
$
(24)
(132)
(80)
(249)
(485) $
5,986
21,163
3,915
13,886
44,950
$
$
(71)
(446)
(85)
(341)
(943)
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Investment Securities – continued
97 and 85 securities were in an unrealized loss position as of December 31, 2016 and 2015,
respectively.
Management evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent
and ability of the Company to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.
At December 31, 2016, 70 U.S. government and agency securities and municipal obligations had
unrealized losses with aggregate depreciation of approximately 3.19% from the Company's
amortized cost basis of these securities. At December 31, 2015, 52 U.S. government and agency
securities and municipal obligations had unrealized losses with aggregate depreciation of
approximately 1.43% from the Company's amortized cost basis of these securities. 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 December 31, 2016, 13 corporate obligations had unrealized losses with aggregate
depreciation of approximately 1.92% from the Company's amortized cost basis of these
securities. At December 31, 2015, 13 corporate obligations had an unrealized loss with aggregate
depreciation of approximately 1.76% from the Company's amortized cost basis of these
securities. These unrealized losses are 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 December 31, 2016, 14 MBSs and CMOs had unrealized losses with aggregate depreciation
of approximately 1.92% from the Company’s amortized cost basis of these securities. At
December 31, 2015, 20 MBSs and CMOs had unrealized losses with aggregate depreciation of
approximately 1.57% from the Company’s amortized cost basis of these securities. 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 was no disruption of the scheduled cash flows on any of the
securities. Management’s analysis as of December 31, 2016 revealed no expected credit losses
on the securities and therefore, declines are not deemed to be other than temporary.
-23-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: 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
Total loans, net
December 31,
2016
2015
(In Thousands)
$
113,262
214,927
20,540
118,133
167,930
22,958
49,018
14,800
54,706
467,253
(4,770)
(1,092)
461,391
$
45,345
14,641
39,072
408,079
(3,550)
(795)
403,734
$
$
Within the commercial real estate loan category above, $11,586,000 and $12,117,000 was
guaranteed by the United States Department of Agriculture Rural Development at December 31,
2016 and 2015, respectively. In addition, within the commercial loan category above, $1,588,000
and $1,917,000 were in loans originated through a syndication program where the business
resides outside of Montana at December 31, 2016 and 2015, respectively.
The following table includes information regarding nonperforming assets.
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
December 31,
2016
2015
(Dollars in Thousands)
$
$
$
614
495
43
1,152
825
1,977
$
$
2,030
472
46
2,548
595
3,143
0.29%
0.50%
4,770
$
3,550
Percent of allowance for loan losses to nonperforming loans
414.06%
139.32%
Percent of allowance for loan losses to nonperforming assets
241.27%
112.95%
-24-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
Allowance for loan losses activity was as follows:
Residential
Mortgage Commercial Real Estate
(1-4 Family) Real Estate Construction
Home
Equity
(In Thousands)
Consumer
Commercial
Total
Allowance for loan losses:
Beginning balance, January 1, 2016
Charge-offs
Recoveries
Provision
Ending balance, December 31, 2016
Ending balance, December 31, 2016 allocated to
loans individually evaluated for impairment
Ending balance, December 31, 2016 allocated to
loans collectively evaluated for impairment
Loans receivable:
Ending balance, December 31, 2016
Ending balance, December 31, 2016 of loans
$
$
$
$
$
$
$
911
(4)
-
90
997
1,593
(298)
-
784
2,079
184
-
-
60
244
342
(7)
-
125
460
66
(204)
19
312
193
454
(119)
-
462
797
3,550
(632)
19
1,833
4,770
$
$
$
$
$
$
$
$
-
$
-
$
-
$
-
$
8
$
-
$
8
$
997
$
2,079
$
244
$
460
$
185
$
797
$
4,762
$
113,262
$
214,927
$
20,540
$
49,018
$
14,800
$
54,706
$
467,253
individually evaluated for impairment
$
221
$
-
$
-
$
340
$
96
$
-
$
657
Ending balance, December 31, 2016 of loans
collectively evaluated for impairment
$
113,041
$
214,927
$
20,540
$
48,678
$
14,704
$
54,706
$
466,596
Residential
Mortgage Commercial Real Estate
(1-4 Family) Real Estate Construction
Home
Equity
(In Thousands)
Consumer
Commercial
Total
Allowance for loan losses:
Beginning balance, January 1, 2015
Charge-offs
Recoveries
Provision
Ending balance, December 31, 2015
Ending balance, December 31, 2015 allocated to
loans individually evaluated for impairment
Ending balance, December 31, 2015 allocated to
loans collectively evaluated for impairment
Loans receivable:
Ending balance, December 31, 2015
Ending balance, December 31, 2015 of loans
$
$
$
$
$
$
$
684
(137)
-
364
911
1,098
-
-
495
1,593
35
-
-
149
184
270
-
1
71
342
46
(61)
18
63
66
317
(25)
1
161
454
2,450
(223)
20
1,303
3,550
$
$
$
$
$
$
$
$
-
$
-
$
-
$
7
$
11
$
30
$
48
$
911
$
1,593
$
184
$
335
$
55
$
424
$
3,502
$
118,133
$
167,930
$
22,958
$
45,345
$
14,641
$
39,072
$
408,079
individually evaluated for impairment
$
730
$
667
$
-
$
207
$
145
$
327
$
2,076
Ending balance, December 31, 2015 of loans
collectively evaluated for impairment
$
117,403
$
167,263
$
22,958
$
45,138
$
14,496
$
38,745
$
406,003
-25-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
Internal classification of the loan portfolio was as follows:
December 31, 2016
Residential
Mortgage
(1-4 Family)
Commercial
Real Estate
Real Estate
Construction
Home
Equity
(In Thousands)
Consumer
Commercial
Total
Credit risk profile based on payment activity
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
Performing
Restructured loans
Nonperforming
Total
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
Performing
Restructured loans
Nonperforming
Total
$
112,524
-
738
-
-
113,262
112,585
-
677
113,262
$
$
$
$
214,476
-
451
-
-
214,927
$
20,084
456
-
-
-
20,540
$
$
214,923
-
4
214,927
20,540
-
-
20,540
$
$
$
48,643
-
375
-
-
49,018
48,643
43
332
49,018
$
$
$
14,697
-
95
-
8
14,800
14,704
-
96
14,800
$
$
$
$
54,470
-
236
-
-
54,706
$
$
$
464,894
456
1,895
-
8
467,253
$
$
54,706
-
-
54,706
$
466,101
43
1,109
467,253
$
December 31, 2015
Residential
Mortgage
(1-4 Family)
Commercial
Real Estate
Real Estate
Construction
Home
Equity
(In Thousands)
Consumer
Commercial
Total
$
116,711
-
1,422
-
-
118,133
117,182
-
951
118,133
$
$
$
$
167,263
-
667
-
-
167,930
$
22,176
-
782
-
-
22,958
$
$
167,259
-
671
167,930
22,711
-
247
22,958
$
$
$
45,100
-
156
82
7
45,345
45,138
46
161
45,345
$
$
$
14,486
-
140
4
11
14,641
14,496
-
145
14,641
$
$
$
$
38,675
-
367
-
30
39,072
$
$
$
404,411
-
3,534
86
48
408,079
$
$
38,745
-
327
39,072
$
405,531
46
2,502
408,079
$
$
$
$
$
$
$
Credit risk profile based on payment activity
-26-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
The Company utilizes an 8 point internal loan rating system, largely based on regulatory
classifications, as follows:
Loans Rated Pass – these are loans in categories 1 – 5 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 in category 6 have potential weaknesses and are
watched closely by management. 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 in category 7 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 in category 8 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 are not part of the 8 point rating
system. They are of such small 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 5: Loans – continued
On an annual basis, or more often if needed, the Company formally reviews the ratings of all
commercial real estate, real estate construction and commercial business loans that have a
principal balance of $750,000 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.
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
$
221
-
-
340
88
-
$
221
-
-
390
135
-
-
$
-
-
-
-
-
$
476
334
-
270
111
148
With a related allowance:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total:
-
-
-
-
8
-
-
-
-
-
8
-
-
-
-
-
8
-
-
-
-
3
10
15
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
221
-
-
340
96
-
657
$
221
-
-
390
143
-
754
$
-
-
-
-
8
-
$
8
476
334
-
273
121
163
1,367
$
-28-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
December 31, 2015
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In Thousands)
With no related allowance:
$
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
With a related allowance:
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total:
730
667
-
200
134
297
-
-
-
7
11
30
$
$
730
667
-
234
134
297
-
-
-
7
11
30
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
730
667
-
207
145
327
2,076
$
730
667
-
241
145
327
2,110
$
$
-
-
-
-
-
-
-
-
-
7
11
30
-
-
-
7
11
30
48
$
690
334
-
264
91
263
411
-
-
3
9
15
1,101
334
-
267
100
278
2,080
$
Interest income recognized on impaired loans for the years ended December 31, 2016 and 2015
is considered insignificant.
-29-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
The following tables include information regarding delinquencies within the loan portfolio.
December 31, 2016
30-89 Days
Past Due
90 Days
and
Greater
Total
Past Due
Current
(In Thousands)
Total
Loans
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
$
$
$
975
513
-
365
169
249
2,271
$
677
4
-
332
96
-
1,109
$
1,652
517
-
697
265
249
3,380
111,610
214,410
20,540
48,321
14,535
54,457
463,873
$
113,262
214,927
20,540
49,018
14,800
54,706
467,253
$
$
$
$
December 31, 2015
30-89 Days
Past Due
90 Days
and
Greater
Total
Past Due
Current
(In Thousands)
Total
Loans
$
$
$
$
1,163
177
662
319
184
173
2,678
951
671
247
161
145
327
2,502
2,114
848
909
480
329
500
5,180
116,019
167,082
22,049
44,865
14,312
38,572
402,899
$
118,133
167,930
22,958
45,345
14,641
39,072
408,079
$
$
$
$
$
Recorded
Investment
>90 Days and
Still Accruing
$
$
456
4
-
35
-
-
495
Recorded
Investment
>90 Days and
Still Accruing
$
$
221
4
247
-
-
-
472
Interest income not accrued on these loans and cash interest income was immaterial for the years
ended December 31, 2016 and 2015. The allowance for loan losses on non-accrual loans as of
December 31, 2016 and 2015 was $8,000 and $48,000, respectively. Impaired loans with a
carrying value of $657,000 were reduced by specific valuation allowance allocations totaling
$8,000 to a total reported fair value of $649,000. Impaired loans with a carrying value of
$2,076,000 were reduced by specific valuation allowance allocations totaling $48,000 to a total
reported fair value of $2,028,000.
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.
-30-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: Loans – continued
Loans receivable (including loans sold and serviced for others) from directors and senior officers
and their related parties were as follows:
Balance at January 1, 2015
Principal additions
Principal payments
Balance at December 31, 2015
Principal additions
Principal payments
Balance at December 31, 2016
(In Thousands)
7,435
1,073
(6,132)
2,376
726
(688)
2,414
$
$
$
Principal payments for 2015 include $5,849,000 related to a previously affiliated entity loan. See
Note 19: Related Party Transactions for further information.
December 31,
2016
2015
(In Thousands)
Loans serviced, for the benefit of others,
for directors, senior officers and
their related parties
$
1,327
$
1,220
Years Ended
December 31,
2016
2015
(In Thousands)
Interest income from loans owned
for directors, senior officers and
their related parties
$
45
$
14
NOTE 6: Troubled Debt Restructurings
The Company adopted the amendments in Accounting Standards Update No. 2011-02 (ASC
Topic 310) 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 Subtopic 450-20).
Upon identifying the reassessed receivables as troubled debt restructurings, the Company also
identified them as impaired under the guidance in ASC Subtopic 310-10-35. The amendments in
the guidance require prospective application of the impairment measurement for those
receivables newly identified as impaired.
-31-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: Troubled Debt Restructurings – continued
As of December 31, 2016, 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 ASC Subtopic 310-10-35 was $43,000 (ASC Subtopic 310-40-65-
1(b)), and there was no allowance for credit losses associated with these receivables, on the basis
of a current evaluation of loss (ASC Subtopic 310-40-65-1(b)). There was $34,000 charged-off
at the time of restructure related to these receivables.
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.
The following tables present troubled debt restructurings.
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
Accrual
Status
$
-
-
-
43
-
-
$
43
December 31, 2016
Non-Accrual
Status
(In Thousands)
$
-
-
-
-
-
-
-
$
Total
Modification
$
$
-
-
-
-
-
43
43
-32-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: Troubled Debt Restructurings - continued
Residential mortgage (1-4 family)
Commercial real estate
Real estate construction
Home equity
Consumer
Commercial
Total
Accrual
Status
-
$
-
-
46
-
-
$
46
December 31, 2015
Non-Accrual
Status
(In Thousands)
$
-
-
-
-
-
-
-
$
Total
Modification
$
$
-
-
-
-
-
46
46
During the year ended December 31, 2016, there were no new restructured loans.
There were no loans modified as a troubled debt restructured loan within the previous 12 months
for which there was a payment default during the year ended December 31, 2016. 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 December 31, 2016 and 2015, the Company had no commitments to lend additional funds
to loan customers whose terms had been modified in trouble debt restructures.
NOTE 7: Foreclosed Assets
Foreclosed assets are presented net of an allowance for losses. A summary of the balance of
foreclosed assets is presented below:
Residential mortgage (1-4 family)
Commercial real estate
Consumer
Total foreclosed assets
December 31,
2016
2015
(In Thousands)
202
603
20
825
$
$
-
595
-
595
$
$
Expenses applicable to foreclosed assets included the following:
Years Ended
December 31,
2016
2015
(In Thousands)
$
6
(33)
(27)
$
(13)
(23)
(36)
Net gain (loss) on sale
Operating expenses net of rental income
$
Expenses related to foreclosed assets, net
$
-33-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: Mortgage Servicing Rights
The Company is servicing loans for the benefit of others totaling approximately $808,898,000
and $693,343,000 at December 31, 2016 and 2015, 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 $4,775,000 and $4,171,000 at December 31,
2016 and 2015, respectively.
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
Mortgage servicing rights, net
$
$
Years Ended
December 31,
2016
2015
(In Thousands)
4,968
2,134
(1,249)
5,853
-
-
-
5,853
$
$
4,115
1,652
(799)
4,968
-
-
-
4,968
The fair values of these rights were $6,741,000 and $6,452,000 at December 31, 2016 and 2015,
respectively. The fair value of servicing rights was determined using discount rates ranging from
13.00% to 15.00%, prepayment speeds ranging from 104.00% to 277.00% PSA, depending on
stratification of the specific loan. The fair value was also adjusted for the effect of potential past
dues and foreclosures. Individual mortgage servicing rights values were capped at a maximum of
1.00% for private investors and at a maximum of 1.25% for agency investors.
NOTE 9: Premises and Equipment
The cost and accumulated depreciation of premises and equipment was as follows:
December 31,
2016
2015
Land
Buildings and improvements
Furniture and equipment
Construction in progress
Accumulated depreciation
Premises and equipment, net
$
$
(In Thousands)
4,086
$
20,832
6,300
111
31,329
(11,936)
19,393
3,803
19,055
6,035
230
29,123
(10,906)
18,217
$
Depreciation expense was $1,058,000 and $1,231,000 for the years ended December 31, 2016
and 2015, respectively.
-34-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: 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
December 31,
2016
2015
(In Thousands)
7,034
$
7,034
$
The components of other intangible assets were as follows:
December 31,
2016
2015
Core deposit intangible
Accumulated amortization
Core deposit intangible, net
$
$
(In Thousands)
1,031
$
(647)
384
$
1,031
(517)
514
Core deposit intangible assets are amortized on an accelerated basis over their estimated life of
10 years. Amortization expense related to intangible assets was $130,000 and $149,000 for the
years ended December 31, 2016 and 2015. The estimated aggregate future amortization expense
for core deposit intangible assets remaining as of December 31, 2016 was as follows:
Years ended December 31:
2017
2018
2019
2020
2021
Thereafter
Total
NOTE 11: Deposits
Deposits are summarized as follows:
(In Thousands)
$
111
92
73
55
36
17
384
$
December 31,
2016
2015
Noninterest checking
Interest bearing checking
Savings
Money market
Time certificates of deposits
Total
Balance
82,877
93,163
82,266
89,211
165,278
512,795
$
$
Weighted
Average
Rate
Balance
(Dollars in Thousands)
77,031
87,350
71,474
94,880
152,447
483,182
0.00% $
0.03%
0.04%
0.11%
0.84%
0.30% $
Weighted
Average
Rate
0.00%
0.03%
0.04%
0.12%
0.92%
0.32%
Time certificates of deposit include $15,596,000 and $7,071,000 related to fixed rate brokered
CDs at December 31, 2016 and 2015, respectively.
-35-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: Deposits – continued
At December 31, 2016 the Company held $111,049,000 in deposit accounts that met or exceeded
the FDIC requirements of $250,000 and greater.
Time certificates of deposits with balances of $250,000 and greater was $45,363,000 and
$24,443,000 at December 31, 2016 and 2015, respectively.
At December 31, 2016, 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 was as follows:
Checking
Savings
Money market
Time certificates of deposits
Total
$
$
(In Thousands)
$
116,561
32,039
8,182
4,546
3,950
165,278
$
Years Ended
December 31,
2016
2015
(In Thousands)
$
27
30
101
1,360
1,518
$
27
30
107
1,293
1,457
At December 31, 2016 and 2015, the Company reclassified $51,000 and $75,000, respectively,
in overdrawn deposits as loans.
Directors’ and senior officers’ deposit accounts at December 31, 2016 and 2015 were $1,390,000
and $983,000, respectively.
NOTE 12: Advances from the Federal Home Loan Bank and Other Borrowings
At December 31, 2016, advances from the FHLB of Des Moines and other borrowings mature as
follows:
Within one year
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total
(In Thousands)
$
55,406
12,767
10,649
3,446
145
-
82,413
$
-36-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: Advances from the Federal Home Loan Bank and Other Borrowings – continued
Federal Home Loan Bank Advances
The FHLB advances include both fixed and amortizing advances. The fixed 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 loan portfolio. At
December 31, 2016 and 2015, 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 December 31, 2016, was 35.00% of total
Bank assets as determined by FHLB, or approximately $234,217,000. The balance of advances
was $81,548,000 and $68,261,000 at December 31, 2016 and 2015, respectively.
Other Borrowings
The Bank had no structured repurchase agreements with PNC Financial Service Group, Inc.
(“PNC”) at December 31, 2016 and 2015.
At December 31, 2016 and 2015, the Bank’s subsidiary had an $865,000 borrowing related to
New Markets Tax Credits. The borrowing is interest only at 1.00% 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
December 31, 2016 and 2015.
The Bank has a $10,000,000 Federal funds line of credit with Zions Bank. The balance was $0 as
of December 31, 2016 and 2015, respectively.
The Bank has a $7,000,000 Federal funds line of credit with Stockman Bank. The balance was
$0 and $3,590,000 as of December 31, 2016 and 2015, respectively.
During 2016, the Bank established a $10,000,000 Federal funds line of credit with PCBB. The
balance was $0 as of December 31, 2016.
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 December 31,
2016 and 2015. The credit facility account had $0 balance as of December 31, 2016 and 2015.
All Borrowings Outstanding
For all borrowings outstanding the weighted average interest rate for advances at December 31,
2016 and 2015 was 1.10% and 1.05%, respectively. The weighted average amount outstanding
was $78,894,000 and $51,367,000 for 2016 and 2015, respectively.
The maximum amount outstanding at any month-end was $92,436,000 and $72,716,000 for 2016
and 2015, respectively.
-37-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: Subordinated Debentures
Subordinated debentures consisted of the following:
December 31,
2016
2015
Unamortized
Debt
Issuance
Costs
Principal
Amount
Principal
Amount
(In Thousands)
Subordinated debentures:
Variable at 3-Month Libor plus 1.42%, due 2035
Fixed at 6.75%, due 2025
Total
$
5,155
10,000
15,155
$
$
$
-
(185)
(185)
$
5,155
10,000
15,155
$
Unamortized
Debt
Issuance
Costs
$
$
-
(206)
(206)
In June 2015, the Company completed the issuance of $10,000,000 in aggregate principal
amount of subordinated notes due in 2025 in a private placement transaction to an institutional
accredited investor. The notes will bear interest at an annual fixed rate of 6.75% and interest will
be paid quarterly through maturity date or earlier redemption. The subordinated debentures
qualify as Tier 2 capital for regulatory capital purposes.
In September 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 2010 then became variable at 3-Month LIBOR plus 1.42%, making the rate
2.418% and 2.033% as of December 31, 2016 and 2015, 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 2035 unless the Company elects and obtains regulatory
approval to accelerate the maturity date. The subordinated debentures qualify as Tier 1 capital
for regulatory capital purposes.
For 2016 and 2015, interest expense on the subordinated debentures was $785,000 and
$448,000, respectively.
-38-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: 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 $473,000 and $559,000 for the years
ended December 31, 2016 and 2015, respectively. The future payments of all lease obligations
are as follows:
Years ended December 31:
2017
2018
2019
2020
2021
Thereafter
Total
(In Thousands)
$
427
393
375
332
242
93
1,862
$
NOTE 15: Accumulated Other Comprehensive Income (Loss)
The following table includes information regarding the activity in accumulated other
comprehensive income (loss):
Unrealized
Gains (Losses)
on Derivatives
Designated as
Cash Flow Hedges
Unrealized
(Losses) Gains
on Investment
Securities
Available for Sale
(In Thousands)
Total
$
294
$
(509)
$
(215)
2,046
(1,907)
(57)
82
376
2,861
(2,938)
31
(46)
330
$
$
$
$
883
(234)
(264)
385
(124)
(792)
(249)
424
(617)
(741)
$
$
2,929
(2,141)
(321)
467
252
2,069
(3,187)
455
(663)
(411)
Balance, January 1, 2015
Other comprehensive income,
before reclassifications and income taxes
Amounts reclassified from accumulated other
comprehensive income (loss), before income taxes
Income tax expense
Total other comprehensive income
Balance, December 31, 2015
Other comprehensive income (loss),
before reclassifications and income taxes
Amounts reclassified from accumulated other
comprehensive income (loss), before income taxes
Income tax benefit
Total other comprehensive loss
Balance, December 31, 2016
-39-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: Income Taxes
The components of the Company’s income tax provision (benefit) were as follows:
Current
U.S. federal
Montana
Deferred
U.S. federal
Montana
Total
Years Ended
December 31,
2016
2015
(In Thousands)
$
$
$
1,369
450
1,819
(13)
(7)
(20)
1,799
$
424
83
507
(426)
82
(344)
163
The nature and components of deferred tax assets and liabilities were as follows:
Deferred tax assets:
Loans receivable
Deferred loan fees
Deferred compensation
Employee benefits
Unrealized losses on
securities available-for-sale
Acquisition costs
New Market Tax Credits carry forward
Alternative Minimum Tax carry forward
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Federal Home Loan Bank stock
Mortgage servicing rights
Unrealized gains on hedging
Goodwill
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2016
2015
(In Thousands)
$
$
1,805
500
786
419
510
580
624
466
245
5,935
821
551
1,230
228
776
364
3,970
1,965
$
$
1,204
381
698
321
86
633
633
445
267
4,668
931
529
595
259
585
279
3,178
1,490
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.
-40-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: Income Taxes – continued
A reconciliation of the Company’s effective income tax provision (benefit) to the statutory
federal income tax rate was as follows:
Years Ended
December 31,
2016
2015
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
$
Amount
2,357
468
(458)
(235)
(456)
123
1,799
% of
Pretax
Income
Amount
(Dollars in Thousands)
$
34.00%
6.75%
-6.61%
-3.39%
-6.58%
1.79%
25.96%
$
933
185
(440)
(174)
(418)
77
163
% of
Pretax
Income
34.00%
6.75%
-16.03%
-6.33%
-15.24%
2.79%
5.94%
The Company has equity investments in Certified Development Entities which have received
allocations of New Markets Tax Credits. Administered by the Community Development
Financial Institutions Fund of the U.S. Department of the Treasury, the program is aimed at
low-income
stimulating economic and community development and
communities. The federal income tax credits received are expected to be $2,964,000 and will be
claimed over a seven-year credit allowance period. The cumulative federal tax credit benefits
were $1,824,000 as of December 31, 2016. Due to not having sufficient taxable income only
$1,200,000 of the federal tax credit benefits were utilized as of December 31, 2016. The
remaining federal tax credit benefits of $624,000 are recorded as deferred tax assets and will be
used in future periods.
job creation
in
-41-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: Supplemental Cash Flow Information
Years Ended
December 31,
2016
2015
(In Thousands)
Supplemental cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
Non-cash investing and financing activities:
(Decrease) increase in market
value of securities available-for-sale
Mortgage servicing rights recognized
Loans transferred to real estate and
other assets acquired in foreclosure
Treasury shares reissued for compensation
Employee Stock Ownership Plan shares released
$
$
3,129
1,640
(1,041)
2,134
577
350
230
2,442
845
649
1,652
58
193
185
NOTE 18: Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are 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 Company’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Prompt corrective action provisions are not applicable to bank holding companies.
Beginning January 1, 2015, community banking organizations became subject to a new
regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III).
The new rule establishes a new regulatory capital framework that incorporates revisions to the
Basel capital framework, strengthens the definition of regulatory capital, increases risk-based
capital requirements, and amends the methodologies for determining risk-weighted assets. These
changes are expected to increase the amount of capital required by community banking
organizations. Basel III includes a multiyear transition period from January 1, 2015 through
December 31, 2019.
Management believes that, as of December 31, 2016, the Company and the Bank would meet all
capital adequacy requirements under the Basel III Capital rules on a fully phased-in basis as if
such requirements were currently in effect; however, final rules are subject to regulatory
discretion and could result in the need for additional capital levels in the future.
Quantitative measures established by regulation to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital to risk-weighted assets and Tier 1 capital to total assets (all as defined in the
regulations). Management believes, as of December 31, 2016 and 2015, that the Company and
the Bank met all capital adequacy requirements to which they are subject.
-42-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: Regulatory Capital Requirements – continued
As of December 31, 2016, the most recent notification from the FRB categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table below. There are no conditions or events since the
notification that management believes have changed the Banks’s category. The Bank’s actual
capital amounts and ratios as of December 31, 2016 are presented in the table below:
Actual
Amount
Ratio
Minimum
Capital
Requirement
Amount
(Dollars in Thousands)
Ratio
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$
72,145
65,630
15.36 %
14.05
$
37,566
37,379
8.00 % $
8.00
N/A
46,723
N/A %
10.00
57,375
60,860
12.22
13.03
28,174
28,034
6.00
6.00
N/A
37,379
N/A
8.00
52,724
60,860
11.23
13.03
21,131
21,025
4.50
4.50
N/A
30,370
N/A
6.50
December 31, 2016:
Total risk-based capital
to risk weighted assets
Consolidated
Bank
Tier I capital to
risk weighted assets
Consolidated
Bank
Common equity tier I capital to
risk weighted assets
Consolidated
Bank
Tier 1 capital to
adjusted total average assets
Consolidated
Bank
57,375
60,860
8.60
9.23
26,683
26,364
4.00
4.00
N/A
32,954
N/A
5.00
-43-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: Regulatory Capital Requirements – continued
The Bank’s actual capital amounts and ratios as of December 31, 2015 are presented in the table
below:
Actual
Amount
Ratio
Minimum
Capital
Requirement
Amount
(Dollars in Thousands)
Ratio
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$
66,725
60,957
15.39 %
14.09
$
34,685
34,607
8.00 % $
8.00
N/A
43,259
N/A %
10.00
53,175
57,407
12.26
13.27
26,014
25,955
6.00
6.00
N/A
34,607
N/A
8.00
48,112
57,407
11.10
13.27
19,511
19,466
4.50
4.50
N/A
28,118
N/A
6.50
December 31, 2015:
Total risk-based capital
to risk weighted assets
Consolidated
Bank
Tier I capital to
risk weighted assets
Consolidated
Bank
Common equity tier I capital to
risk weighted assets
Consolidated
Bank
Tier 1 capital to
adjusted total average assets
Consolidated
Bank
53,175
57,407
9.22
9.36
23,063
24,530
4.00
4.00
N/A
30,662
N/A
5.00
A reconciliation of the Bank’s capital determined by GAAP to capital defined for regulatory
purposes is as follows:
Capital determined by GAAP
Unrealized loss on securities available-for-sale
Unrealized gain on forward delivery commitments
Goodwill and core deposit intangibles, net of
associated deferred tax liabilities
Disallowed deferred tax assets
Tier I capital
Allowance for loan losses
Total risk-based capital
December 31,
2016
2015
(In Thousands)
$
$
$
67,610
724
(330)
(6,490)
(654)
60,860
4,770
65,630
$
64,726
142
(376)
(6,654)
(431)
57,407
3,550
60,957
-44-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: Regulatory Capital Requirements – continued
Dividend Limitations
Under State of Montana banking regulation, member banks such as the Bank generally may
declare annual cash dividends up to an amount equal to the previous two years’ net earnings.
Dividends in excess of such amount require approval of the Division of Banking. The Bank paid
dividends of $2,400,000 and $1,240,000 during the years ended December 31, 2016 and 2015,
respectively, to Eagle. Eagle paid quarterly dividends of $0.0775 per share to its shareholders for
the first two quarters of 2016 and $0.08 for the last two quarters of 2016. Eagle paid quarterly
dividends of $0.075 per share to its shareholders for the first two quarters of 2015 and $0.0775
for the last two quarters of 2015.
Liquidation Rights
Eagle Bancorp Montana, Inc. holds a liquidation account for the benefit of certain depositors of
the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is
designed to provide payments to these depositors of their liquidation interests in the event of a
liquidation of Eagle and the Bank, or the Bank alone. In the unlikely event that Eagle and the
Bank were to liquidate in the future, all claims of creditors, including those of depositors, would
be paid first, followed by distribution to depositors as of November 30, 2008 (who continue to be
the Bank’s depositors) of the liquidation account maintained by Eagle. Also, in a complete
liquidation of both entities, or of just the Bank, when Eagle has insufficient assets to fund the
liquidation account distribution due to depositors and the Bank has positive net worth, the Bank
would immediately pay amounts necessary to fund Eagle’s remaining obligations under the
liquidation account. If Eagle is completely liquidated or sold apart from a sale or liquidation of
the Bank, then the rights of such depositors in the liquidation account maintained by Eagle
would be surrendered and treated as a liquidation account in the Bank, the “bank liquidation
account” and these depositors shall have an equivalent interest in the bank liquidation account
and the same rights and terms as the liquidation account.
After two years from the date of conversion and upon the written request of the Office of the
Comptroller of the Currency (“OCC”), 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 OCC, 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.
-45-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Related Party Transactions
In the normal course of lending, the Bank provided a commercial line of credit to an affiliated
entity that is partially owned by a one of the Company’s directors. The commercial line of credit
had a balance of $0 as of December 31, 2016 and 2015.
In addition, the Bank has contracted with a subsidiary of another company which was previously
partially owned by one of the Company’s directors. The director retired from the affiliated entity
at the end of 2013. In 2007, the Bank made a construction loan, in the normal course of lending,
to this same affiliated entity for the construction of an office building. In 2008, the construction
was completed and the loan was refinanced into $7,500,000 permanent financing. Also in 2008,
80.00%, or $6,000,000 was sold to the Montana Board of Investments. As of December 31, 2014
this loan’s principal balance was $5,849,000 ($1,170,000 net of participation sold). The loan is
no longer considered a related party transaction due to the director’s retirement from the
affiliated entity. See the disclosure for loans receivable from directors and senior officers and
their related parties in Note 5: Loans for further information.
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 15.00% of qualified employees’ salaries, is determined by the Board. Profit sharing
expense was $451,000 and $452,000 for the years ended December 31, 2016 and 2015,
respectively.
The Company’s profit sharing plan includes a 401(k) feature. At the discretion of the Board, the
Company may match up to 50.00% of participants’ contributions up to a maximum of 4.00% of
participants’ salaries. For the years ended December 31, 2016 and 2015, the Company’s match
totaled $203,000 and $162,000, 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 December 31, 2016 and 2015, the total expense was $361,000 and $293,000, respectively.
The Company has recorded a liability for the deferred compensation plan of $1,682,000 and
$1,423,000 at December 31, 2016 and 2015, respectively, which are included in accrued
expenses and other liabilities in the consolidated statements of financial condition.
-46-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20: Employee Benefits – continued
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 8.00%. The ESOP uses
these contributions, and any dividends received by the ESOP on unallocated shares, to make
principal and interest payments on the loan.
Shares purchased by the ESOP are held in a suspense account by the plan trustee until allocated
to participant accounts. Shares released from the suspense account are allocated to participants
on the basis of their relative compensation in the year of allocation. Participants become vested
in the allocated shares over a period not to exceed seven years. Any forfeited shares are allocated
to other participants in the same proportion as contributions.
Total ESOP expenses of $189,000 and $168,000 were recognized for the years ended December
31, 2016 and 2015, respectively. Shares totaling 16,616 were released and allocated to
participants during the years ended December 31, 2016 and 2015. The cost of the 80,828 ESOP
shares ($809,000 at December 31, 2016) 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 $1,705,000 at December 31, 2016.
Stock Incentive Plan
The Company adopted the stock incentive plan on November 1, 2011 and the original number of
shares of restricted stock for issuance under the plan was 98,571. 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 November
2011. The plan was amended during the year ended December 31, 2015 to increase the number
of shares of restricted stock for issuance under the plan from 98,571 to 168,571. Shares of
restricted stock vest in equal installments over five years beginning one year from the grant date.
-47-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20: Employee Benefits – continued
Stock Incentive Plan – continued
The following table shows the activity of the awards granted:
Unvested awards as of January 1, 2015
Awards granted
Awards vested
Awards forfeited
Unvested awards as of December 31, 2015
Awards granted
Awards vested
Awards forfeited
Unvested awards as of December 31, 2016
Number of
Shares
37,256
74,000
(17,548)
-
93,708
2,900
(31,945)
(395)
64,268
$478,000 and $232,000 was recognized as expense during the years ended December 31, 2016
and 2015, respectively, and is included in salaries and employee benefits in the consolidated
statements of income. As of December 31, 2016, 64,268 shares of restricted stock remain
unvested, for which the Company estimates to recognize expense of approximately $1,166,000
by November 2021.
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 Bank 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.
In response to marketplace demands, the Bank 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 Bank 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 Bank’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 Bank 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 Bank’s experience has been that substantially
all loan commitments are completed or terminated by the borrower within 3 to 12 months.
-48-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21: Financial Instruments and Off-Balance-Sheet Activities – continued
The Bank has remaining available balances for lines of credit representing credit risk of
approximately $86,259,000 and $78,554,000 at December 31, 2016 and 2015, respectively. The
Bank had credit cards issued representing credit risk of approximately $1,239,000 at December
31, 2015, of which approximately $96,000 had been drawn at December 31, 2015. As of
December 31, 2016, the Bank no longer issues credit cards. The Bank has letters of credits
issued representing credit risk of approximately $3,165,000 and $3,124,000 at December 31,
2016 and 2015, respectively.
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 Bank 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 Bank 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 Bank 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
$19,738,000 and $24,378,000 at December 31, 2016 and 2015, respectively. Fixed rate
commitments are extended at rates ranging from 2.88% to 5.00% and 2.88% to 5.13%at
December 31, 2016 and 2015, 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.
NOTE 22: Derivatives and Hedging Activities
Interest Rate Swap Agreements
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 (ASC
Subtopic 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 designated the interest rate swap on this fixed-rate loan as a fair value hedge.
The Company was exposed to credit-related losses in the event of nonperformance by the
counterparties to this agreement. The Company controlled the credit risk of its financial contracts
through credit approvals, limits and monitoring procedures, and did not expect any
counterparties to fail their obligations. The Company deals only with primary dealers.
-49-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: Derivatives and Hedging Activities – continued
Interest Rate Swap Agreements – continued
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 specified the terms of the hedged item and the interest rate swap. The
documentation also indicated the derivative was hedging a fixed-rate item, the hedge exposure
was to the changes in the fair value of the hedged item, and the strategy was 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 had an original maturity of 20 years and was not callable. This loan
was hedged with a “pay fixed rate, receive variable rate” swap with a similar notional amount,
maturity and fixed rate coupons. The swap was not callable. The loan had an outstanding
principal balance of $10,641,000 and the interest rate swap had a notional value of $10,673,000
at December 31, 2014.
At December 31, 2014, the interest rate swap on the fixed-rate loan was ineffective. The Bank
recorded a loss of $317,000 in noninterest income during the quarter ended December 31, 2014
related to the ineffectiveness. The interest rate swap was terminated during the quarter ended
March 31, 2015. The Bank recorded a loss of $93,000 in noninterest income during the quarter
ended March 31, 2015 related to the swap termination. The loan fair value adjustment of
$138,000 at March 31, 2015 will be amortized over the remaining life of the loan which matures
September 1, 2030. The remaining balance was $123,000 and $132,000 at December 31, 2016
and 2015, respectively.
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
on the items hedged are deferred and recognized in accumulated 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 December 31, 2016 and 2015, the Company had entered into commitments to deliver
approximately $17,808,000 and $18,208,000, respectively, in loans to various investors, all at
fixed interest rates ranging from 1.87% to 4.63% and 2.25% to 5.13% at December 31, 2016 and
2015, respectively. The Company had approximately $558,000 and $635,000 of gains deferred
as a result of the forward delivery commitments entered into as of December 31, 2016 and 2015,
respectively.
-50-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: Derivatives and Hedging Activities – continued
Forward Delivery Commitments – continued
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 December 31,
2016.
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.
-51-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
The fair value hierarchy is as follows:
§ Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement date.
§ Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are observable for the asset
or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit
risks and default rates) or inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
§ Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that
market participants would use in pricing the assets or liabilities.
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.
-52-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
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.
The following table summarizes financial assets and 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:
Financial assets:
Available-for-sale securities
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs - government-backed
CMOs - government-backed
Loans held-for-sale
Financial assets:
Available-for-sale securities
U.S. government and agency
Municipal obligations
Corporate obligations
MBSs - government-backed
CMOs - government-backed
Loans held-for-sale
Level 1
Inputs
December 31, 2016
Level 2
Inputs
Level 3
Inputs
(In Thousands)
$
$
-
-
-
-
-
-
Level 1
Inputs
-
-
-
-
-
-
$
$
$
5,608
67,664
9,307
29,512
16,345
18,230
-
-
-
-
-
-
December 31, 2015
Level 2
Inputs
Level 3
Inputs
(In Thousands)
$
10,615
67,069
9,450
32,735
25,869
18,702
-
-
-
-
-
-
$
$
Total Fair
Value
5,608
67,664
9,307
29,512
16,345
18,230
Total Fair
Value
10,615
67,069
9,450
32,735
25,869
18,702
-53-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
Certain financial assets and 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 tables summarizes financial assets and 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:
Level 1
Inputs
Impaired loans
Repossessed assets
$
$
-
-
December 31, 2016
Level 2
Inputs
Level 3
Inputs
(In Thousands)
$
-
-
$
649
825
Total Fair
Value
649
825
As of December 31, 2016, certain impaired loans were remeasured and reported at fair value
through a specific valuation allowance allocation of the allowance for possible loan losses based
on the fair value of the underlying collateral. Impaired loans with a carrying value of $657,000
were reduced by specific valuation allowance allocations totaling $8,000 to a total reported fair
value of $649,000 based on collateral valuations utilizing Level 3 valuation inputs.
Level 1
Inputs
December 31, 2015
Level 2
Inputs
Level 3
Inputs
Impaired loans
Repossessed assets
$
$
-
-
(In Thousands)
$
-
-
2,028
595
Total Fair
Value
$
2,028
595
As of December 31, 2015, certain impaired loans were remeasured and reported at fair value
through a specific valuation allowance allocation of the allowance for possible loan losses based
on the fair value of the underlying collateral. Impaired loans with a carrying value of $2,076,000
were reduced by specific valuation allowance allocations totaling $48,000 to a total reported fair
value of $2,028,000 based on collateral valuations utilizing Level 3 valuation inputs.
-54-
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
Fair Value at
December 31,
2016
(Dollars in Thousands)
2015
Principal
Valuation
Technique
Significant
Unobservable
Inputs
Range of
Significant Input
Values
Impaired loans
$
649
$
2,028
Repossessed assets
$
825
$
595
Appraisal of
collateral (1)
Appraisal
adjustments
Liquidation
Appraisal of
collateral (1) (3) 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.
-55-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
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 December 31, 2016 and 2015, 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
December 31, 2016
Level 3
Inputs
(In Thousands)
Total
Fair Value
- $
-
-
-
- $
-
-
464,797
$
7,318
4,012
871
464,797
-
6,741
2,123
6,741
Carrying
Amount
7,318
4,012
871
460,742
2,123
5,853
-
-
-
264,640
-
-
-
-
-
-
-
-
-
14,095
14,095
-
-
165,129
-
82,462
14,291
-
-
-
264,640
82,877
165,129
4,291
82,462
14,291
-
-
-
264,640
82,877
165,278
4,291
82,413
15,155
-
-
-
$
Financial assets:
Cash and cash equivalents
Federal Home Loan Bank stock
Federal Reserve Bank stock
Loans receivable, net
Accrued interest and dividends
receivable
Mortgage servicing rights
Cash surrender value of
life insurance
Financial liabilities:
Non-maturing interest bearing deposits
Noninterest bearing deposits
Time certificates of deposit
Accrued expenses and other liabilities
Federal Home Loan Bank advances
and other borrowings
Subordinated debentures
Off-balance-sheet instruments
Forward delivery commitments
Commitments to extend credit
Rate lock commitments
$
7,318
4,012
871
-
2,123
-
14,095
-
82,877
-
4,291
-
-
-
-
-
-56-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
Level 1
Inputs
Level 2
Inputs
December 31, 2015
Level 3
Inputs
(In Thousands)
Total
Fair Value
$
Financial assets:
Cash and cash equivalents
Federal Home Loan Bank stock
Federal Reserve Bank stock
Loans receivable, net
Accrued interest and dividends
receivable
Mortgage servicing rights
Cash surrender value of
life insurance
Financial liabilities:
Non-maturing interest bearing deposits
Noninterest bearing deposits
Time certificates of deposit
Accrued expenses and other liabilities
Federal Home Loan Bank advances
and other borrowings
Subordinated debentures
Off-balance-sheet instruments
Forward delivery commitments
Commitments to extend credit
Rate lock commitments
$
7,438
3,397
887
-
2,278
-
12,514
-
77,031
-
4,050
-
-
-
-
-
-
-
-
253,704
-
-
-
-
-
-
-
-
- $
-
-
-
- $
-
-
408,414
$
7,438
3,397
887
408,414
-
6,452
2,278
6,452
Carrying
Amount
7,438
3,397
887
401,706
2,278
4,968
-
12,514
12,514
-
-
152,691
-
72,811
14,306
-
-
-
253,704
77,031
152,691
4,050
72,811
14,306
-
-
-
253,704
77,031
152,447
4,050
72,716
15,155
-
-
-
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.
Stock in the FHLB and FRB – The fair value of stock approximates redemption value.
Loans Receivable – Fair values are estimated by stratifying the loan portfolio into groups of
loans with similar financial characteristics. Loans are segregated by type such as real estate,
commercial, and consumer, with each category further segmented into fixed and adjustable rate
interest terms. For mortgage loans, the Company uses the secondary market rates in effect for
loans that have similar characteristics. The fair value of other fixed rate loans is calculated by
discounting scheduled cash flows through the anticipated maturities adjusted for prepayment
estimates. Adjustable interest rate loans are assumed to approximate fair value because they
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.
-57-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: Fair Value Disclosures – continued
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 13.00% to 15.00%, prepayment speeds ranging from 104.00% to 277.00%
PSA, depending on stratification of the specific right. The fair value was also adjusted for the
effect of potential past dues and foreclosures. Individual mortgage servicing rights values were
capped at a maximum of 1.00% for private investors and at a maximum of 1.25% for agency
investors.
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 and 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 December 31, 2016 and 2015, 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.
-58-
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 the Parent Company, Eagle Bancorp
Montana, Inc.:
Eagle Bancorp Montana, Inc.
Condensed Statements of Financial Condition
December 31,
2016
2015
(In Thousands)
Assets:
953
Cash and cash equivalents
Securities available-for-sale
3,727
Investment in Eagle Bancorp Statutory Trust I 155
67,609
Investment in Opportunity Bank of Montana
2,003
Other assets
74,447
Total assets
$
$
Liabilities and Shareholders's Equity:
Accounts payable and accrued expenses
21
Long-term subordinated debt 14,970
59,456
74,447
Total liabilities and shareholders' equity
Shareholders' equity
$
$
$
$
$
$
243
3,810
155
64,726
1,469
70,403
4
14,949
55,450
70,403
Eagle Bancorp Montana, Inc.
Condensed Statements of Income
Interest income
Interest expense
Noninterest income
Noninterest expense
Loss before income taxes
Income tax benefit
Loss before equity in undistributed
earnings of Opportunity Bank of Montana
Equity in undistributed earnings
of Opportunity Bank of Montana
Net income
Years Ended
December 31,
2016
2015
(In Thousands)
$
98
(785)
-
(515)
(1,202)
(423)
(779)
99
(448)
14
(593)
(928)
(374)
(554)
5,911
5,132
$
3,134
2,580
$
$
-59-
EAGLE BANCORP MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24: Condensed Parent Company Financial Statements – continued
Eagle Bancorp Montana, Inc.
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 Opportunity Bank of Montana
Other adjustments, net
Net cash used in operating activities
Cash Flows from Investing Activities:
Cash contributions from Opportunity Bank of Montana
Cash distributions to Opportunity Bank of Montana
Activity in available-for-sale securities:
Sales
Maturities, principal payments and calls
Purchases
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Employee Stock Ownership Plan payments and dividends
Proceeds from issuance of subordinated debentures
Payments for debt issuance costs
Payments to purchase treasury stock
Treasury shares reissued for compensation
Dividends paid
Net cash (used in) provided by financing activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents, beginning of period
Years Ended
December 31,
2016
2015
(In Thousands)
$
5,132
$
2,580
(5,911)
(415)
(1,194)
2,400
-
-
420
(405)
2,415
182
-
-
-
500
(1,193)
(511)
710
243
(3,134)
(204)
(758)
1,240
(8,000)
790
330
(1,194)
(6,834)
174
10,000
(206)
(1,320)
204
(1,164)
7,688
96
147
243
Cash and Cash Equivalents, end of period
$
953
$
-60-
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 consolidated results of operations:
Year Ended December 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
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 income (loss)
Basic earnings per common share
Diluted earnings per common share
Interest and dividend income
Interest expense
Net interest income
Loan loss provision
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
Other comprehensive income (loss)
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
$
$
$
$
$
$
$
$
(Dollars in Thousands, Except Per Share Data)
5,618
$
750
4,868
450
4,418
2,896
6,548
766
119
647
5,731
788
4,943
459
4,484
3,806
6,686
1,604
340
1,264
6,208
787
5,421
472
4,949
4,689
7,159
2,479
707
1,772
6,354
793
5,561
452
5,109
4,599
7,626
2,082
633
1,449
$
$
$
668
$
0.17 $
0.17 $
1,461
$
0.34 $
0.32 $
(496)
$
0.46 $
0.46 $
(2,296)
0.39
0.37
Year Ended December 31, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
(Dollars in Thousands, Except Per Share Data)
4,724
$
501
4,223
322
3,901
2,882
6,361
422
36
386
5,015
526
4,489
328
4,161
3,275
6,472
964
172
792
5,154
721
4,433
310
4,123
2,912
6,492
543
22
521
5,573
707
4,866
343
4,523
2,692
6,401
814
(67)
881
$
$
$
795
$
0.10 $
0.10 $
(1,666)
$
0.21 $
0.21 $
975
$
0.14 $
0.14 $
363
0.23
0.22
NOTE 26: Subsequent Events
On February 13, 2017, Eagle completed the issuance, through a private placement, of
$10,000,000 aggregate principal amount of 5.75% fixed senior unsecured notes due February 15,
2022. The Company estimates that the net cash proceeds from the sale of the notes will be
approximately $9,800,000. The Company intends to use the net proceeds from the offering for
general corporate purposes, including but not limited to, contribution of capital to the Bank, to
support both organic growth as well as opportunistic acquisitions, should appropriate
opportunities arise.
-61-
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SHAREHO LD ER INFOR MATI ON
STOCK LISTING
Symbol: EBMT
NASDAQ Global
SHAREHOLDER SERVICES AGENT
COMPUTERSHARE INVESTOR SERVICES
480 Washington Boulevard, 29th Floor
Jersey City, NJ 07310
1.800.368.5948
CORPORATE HEADQUARTERS
1400 Prospect Avenue
Helena, MT 59601
406.442.3080
INVESTOR INFORMATION
SHAREHOLDER CONTACT
Copies of reports filed with the Securities
and Exchange Commission are available
without charge online at www.sec.gov or the
Investor Relations section of our website at:
www.opportunitybank.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
DAVIS, KINARD & CO., P.C.
400 Pine Street, Suite 600
Abilene, TX 79601
325.672.4000
CHANTELLE NASH,
CORPORATE SECRETARY
Opportunity Bank of Montana
P.O. Box 4999
Helena, MT 59604-4999
406.442.3080 | Fax: 406.457.4013
cnash@oppbank.com
CORPORATE COUNSEL
NIXON PEABODY, LLP
401 9th Street, N.W.,
Suite 900
Washington, DC 20004
202.585.8000
www.nixonpeabody.com
EAGLE BANCORP MT, INC.